Key Points to Consider before applying for Home Loan

Availing a Home Loan is a long-drawn process that involves considerable documentation. Hence, it is imperative that the Home loan seeker plans in advance before he actually applies for a Home loan. There are various aspects that a loan seeker needs to consider before be applies for a loan. They include the amount that he plans to take as loan, the co-account holder or ‘guarantor’ that he plans to apply for the loan with, the re-payment period intended, the approximate EMI that he would have to pay in future, his Credit history and score based on past credit transactions, whether he would like to avail of fixed or floating rate of interest etc.

·  Loan amount under consideration

This aspect is of utmost importance for a Home loan seeker. It will depend on various considerations such as his financial health, his income, his current and future financial commitments, his liabilities etc. Banks have their own policies with regards to the amount that can be sanctioned. This cannot be more than a percentage of the total value of the residence. Besides, there are other factors as well that come into play when banks decide on the total loan amount that can be sanctioned. They include the income of the loan applicant, his repayment capacity, his credit history and score, the income of the co-account holder/guarantor, if any etc. Even though the bank will be able to gauge the financial health of the applicant based on these criteria, it would not be able to ascertain the future as well as unforeseen expenses that the applicant may have to incur. Hence, it is advisable that the applicant adopts a conservative approach while availing of a home loan. Ideally, the EMI fixed should not be more than 40 per cent of the applicant’s salary.

·  Loan Term

It refers to the period within which the loan amount has to be repaid along with the interest rate fixed by the bank/lender. There is a maximum period beyond which the repayment cannot be extended. It differs from one bank to another. However, the longer the loan term, the higher will be the amount that will have to be paid to the bank by way of interest. It will be fixed by the bank based on the income of the loan applicant, his repayment capacity as well as credit history and liabilities. However, certain banks have the provision by which the loan applicant can repay the entire loan amount before the expiry of the loan term, without having to pay any pre-payment penalty.

·  EMI he intends to pay

The EMI (Equated Monthly Instalments) that the loan seeker has to pay the lender every month towards re-payment of the Home loan is fixed by the lender based on various criteria. It consists of two components namely the interest amount as well as the principal repayment amount. The EMI is fixed by the lender based on various factors like the quantum of the loan amount, the term of the loan as well as the interest rate applicable.

·  Credit history and score

The credit history and score of a loan applicant determines whether he will be eligible for applying for a home loan. It depends on various factors like promptness in repayment of previous loans taken, payment of EMI without any default or delay, promptness in payment of credit card bills etc. However, even if there have been defaults in credit repayments, it can be compensated by being prompt in future or in cause of defaults in payments of EMIs, by paying a lump sum to make up for the default. The applicant can check his credit history and score through the CIBIL (Credit Information Bureau (India) Limited) report, which is accessible online. It is an independent agency that provides banks/lenders with information with regards to the historical credit transactions of the loan applicant. Besides, the applicant also has to submit bank statements for a particular period, Income Tax Returns (ITR) of the past years, Tax Deduction at Source (TDS) certificates as well as other financial disclosures.

·  Interest rate – Fixed or Floating

Many banks give applicants the option of going for a fixed rate of interest for the initial period of the loan. However, given a choice, it is better to avail of fixed rate of interest if the interest rate is relatively lower in the past few quarters. However, in the long term, it is always better to convert to a floating rate of interest as the interest component will be lesser during the latter part of the loan term.