With the rising property prices, a major segment of the middle-class homebuyers have to resort to home loans for buying a house. Since banking operations have gone online nowadays, it would not be difficult to apply for a home loan. However, despite the easy availability of tools like EMI calculator, eligibility calculator and document checklists, most of the borrowers do not know how to use these tools to their advantage and select the right home loan for them. Research plays a more important role in home loans than any other loan as home loans are taken for a good 15-20 years, a small mistake could lead to lifelong financial remorse.
So, let us talk about some of the key factors to consider when doing home loan research.
1. Eligibility
Your eligibility for a home loan depends not just on your income but on a lot of other factors. Your occupation, the organization you are employed with, current financial obligations, employment history, age and several other factors come into play when deciding your eligibility. Banks judge your entire credit profile and not just the financial strength. Before you apply for a home loan, consider all these factors to judge whether you would fit into a particular bank’s eligibility criteria.
By setting all these requirements, banks want to judge your repayment capacity and how much of a risk you would be for them. Higher income would make you eligible for a higher loan amount. However, the more financial obligations you have, the lower will your eligibility drop. You can improve your eligibility by bringing a co-applicant with a good income and high credit score.
2. Loan Amount
Banks usually fund up to 80% of the property’s value but the loan amount also depends on your income and some other eligibility factors. Most of the time, the banks would be ready to sanction an amount that would translate to an EMI of 40-50% of the applicant’s basic salary plus dearness allowance. In case you have existing liabilities such as a personal loan or car loan, the EMI of the same will be deducted from your income to arrive at the amount you will have left after servicing all these financial obligations. The loan amount is a factor of all these and you may not get as much funding as you expected. It is advised to keep your credit card bills at the lowest and prepay any other loans, if possible, before you get a home loan. This would improve your chances of getting a higher loan amount.
3. Loan Tenure
When you contact the bank for a home loan, they would offer you a longer tenure and promote it as a method of reducing your EMIs. An important point to note here is that a longer tenure translates into more interest outgo. Although the EMI amount will be smaller, the total amount you would be paying in the form of interest would be considerably high. You can use a home loan EMI Calculator to find out the total interest you would have to pay for multiple loan tenures. This is a good way to be prepared for a discussion with the loan representative of the bank. Also, remember that the interest component is higher during the initial tenure of the loan and the principal component is smaller. So, when the repayment starts, you would be paying majorly the interest for the first 2-3 years.
4. Interest Rate, Fees and Charges
Like any other loan, you should always shop around for a better interest rate on home loan. Do not hesitate to negotiate a better rate, especially if you have had a banking relationship with the lender for quite some time. You should also use your good credit profile to find a lower rate. Banks would not like to lose a good customer so chances are that you can get a competitive rate of interest.
Apart from the interest rate, there are some more fees and charges involved in home loans. The most crucial charges are processing fee, pre-payment charges, conversion charges and late payment charges. You must understand the fee structure of the bank you have approached so that you have a fair idea of what all costs it entails. Also, ask the representative about the pre-payment charges so that if you have a windfall gain, you can use the same to reduce your overall loan burden without having to pay too much for it.
5. The Fine Print
Not just home loans, it is very important to read and understand the terms and conditions related to any financial product. The fine print has a lot of things that could make you regret in future. For example, the definition of ‘default’ may be different with different lenders. While one bank says you ’default’ when you cannot pay three consecutive EMIs, other bank may classify death of the primary applicant, divorce or criminal offence as ‘default’. Similarly, there may be hidden conditions related to pre-payment. All such conditions must be read and understood before signing on the dotted line.
Buying a home is one of the most important decisions of your life; this is why you must not take any chance related to how you finance your dream home. Shop around for the best rates. Just because you have been in a banking relationship with a particular bank does not mean that it offers you the best deal. Do your research to find out what makes a good deal for you. Even after you have taken a home loan, you can transfer the balance to another bank after a few years if you get lower rates and better terms. The home loan will stay with you for about 20 years, so it is in your best interest to understand the product, why it is beneficial for you and how you can make the most of it.
