Home Buying Guide – Part 09: Complete Tips On Home Loan
Buying a house is one of the greatest dreams of a person of today’s world but it requires huge finances. However, you can still make the dream possible with the help of the complete tips on home loan. Without a housing loan, most of us would not be able to fulfill the dream of acquiring our own house.
Housing loan offers you a chance to buy an asset and simultaneously offers a tax benefit. The Indian Income Tax law provides you benefits in both instances and you will be eligible to claim both your principal and interest amount, which you repay towards your housing loan during the year.
You can take the housing loan for various purposes. You can avail of a home loan not just for the purpose of buying a new house/flat but also for the purchase of a secondary/resale house.
Here are the complete tips on home loan:
Market Research For The Best Home Loan
After the home/flat has been finalized, look for a bank that offers an attractive rate of interest on home loan. Do market research to find out the most competitive home loan interest rates and low processing fees and other such charges. Once you know what each bank has to offer in terms of rates and fees, negotiate with banks for the best deal. Moreover, borrow from a lender that takes the lowest turnaround time for credit appraisal.
Home loan lenders governed by RBI rules are permitted to provide up to 80 percent of the value of the property as the loan amount, subject to your income. Generally, home loans do not cover the stamp duty and registration cost of the property. So, you have to pay around six percent as stamp duty and one percent as registration charges in addition to the cost of the property. These charges vary according to the cities and states. A buyer has to often arrange this additional amount from his own pocket.
However, some HFCs regulated by National Housing Bank, also take into consideration the stamp duty and registration cost of the property.
Appraisal Of The Property
Banks generally offer only 80 percent of the total worth of the property as a loan. However, the amount you could borrow from the bank is also decided only after banks carry out a technical appraisal of the property. Banks do it to estimate the valuation of the property being purchased to ensure that it is of the value that the bank is willing to finance.
If you are looking for a home loan of Rs 60 lakh while it is worth as per bank’s technical valuation of the property is only Rs 50 lakh, you will get only Rs 40 lakh as a loan.
Co-borrower In The Loan Application
You can also take a home loan with a co-applicant as his/ her income will also be considered which will help to enhance your home loan eligibility. It is generally a family member who can be your co-applicant in your home loan application. The banks have reservations in granting loans even between family members and generally prefer lending to spouses as co-borrowers.
Checking Your Home Loan Eligibility
In case you wish to opt for a home loan, enquire at your selected bank about the amount of loan you are eligible for. Before granting a home loan, bank will check your financial position and credit record.
The housing loan eligibility is calculated on the basis of your current net income, current age, outstanding loans and EMIs being paid towards existing loans and your CIBIL rating.
A bank generally prefers to lend to a younger person, earning a stable monthly salary rather than to an older person. For instance, a 50 years old earning Rs 1 lakh a month could be eligible for a lesser home loan amount than 30 years old earning the same amount. The latter has 20 more years to repay the loan. In fact, as housing loan is a long contract, lenders need to be sure of your repayment capability.
The housing loan eligibility depends on the creditworthiness of the individual. Banks check your credit score with a credit bureau (CIBIL). CIBIL provides a credit rating on your previous credit card usage, how you maintained your bank accounts, any check bounces, existing loans, loan repayments, how many times you have applied for a loan or credit card etc. After an applicant fills out the home loan application form and hands it over to the lender, the home loan lender immediately approaches CIBIL for his credit score and report.
If the credit score is low, the lender may reject your application even without any consideration. However, if the applicant has a good credit rating, he stands a better chance of the loan being approved.
Choose From Different Interest Rate Options
A common dilemma for the first time home buyers is to choose between a fixed and floating home loan rates. The type of interest rate you choose will have an impact on the monthly EMIs you pay.
If you opt for a fixed rate, the EMIs don’t vary over the loan tenure. It remains constant during the entire loan tenure and does not change with market fluctuation. It is beneficial when the interest rates are expected to rise in the future.
In case of a floating rate, the interest rate is determined based on the prevailing Marginal Cost-based Lending rates (MCLR). In this scenario, the interest rate is dependent on the market and fluctuates according to the economic situation in the country. It varies with the change in the market scenario and is usually lower than the fixed rates. It is beneficial when interest rates are expected to fall in the future.
If your home loan rate is still linked to the base rate, you should switch to an MCLR based loan. MCLR scores over the base rate and benchmark prime lending rate (BPLR) systems due to its transparency and transmission of policy rates.
Flexi or Hybrid Home Loans Rates
If you are confused about deciding between fixed or floating rates then opt for flexi rates. This is the fusion of fixed and floating rates of interest. Some lenders in the market are offering this type of loan. Under this scheme, the lender charges a fixed interest rate in the initial years, and floating rates thereafter.
This option gives you stability on the EMIs outflows for the first few years, thus provides protection against future fluctuations in interest rates.
However, you are the best judge of your needs and limitations. So, it is advised that you should consider the tips on home loan before deciding on the final home loan interest rates.
Home Loan Under Priority Sector Lending (PSL)
RBI in its latest policy decision decided to revise the housing loan limits for eligibility to qualify for benefits under Priority Sector Lending (PSL).
As per the new policy announcement, home loans up to Rs 35 lakh in metro cities and Rs 25 lakh in other centers will now qualify for benefits under PSL. Loans given under PSL are less expensive than those provided by the banks in their ordinary course.
Besides, they can also avail subsidy benefits of Rs 2.68 lakh from the central government under schemes like Pradhan Mantri Awas Yojna.
Pre-approved Home Loan
Pre-approved home loan gives you a clear idea of the budget within which you will be able to buy a house. For a more accurate figure, you can ask your lender to get you a pre-approved home loan and make you a formal offer of the loan amount you can obtain.
A pre-approved home loan means that the bank or financial institution has carried out their due diligence checks on buyers’ eligibility criteria to determine the loan amount and have made a virtual confirmation of the loan. However, a pre-approved loan has only a limited time-frame to finalize the property, failing which the pre-approval can be canceled.
Tax Benefits On Home Loans
Despite being a huge financial liability, home loans offer us several tax benefits. Under various Sections of the Income Tax Act, a borrower can avail of tax deductions on the principal as well as the interest component of the home loan. A borrower can claim tax deductions of Rs 1.5 lakh under Section 80C of the I-T Act for the repayment of the principal component. Besides, tax deduction on account of interest on housing loan for self occupied property is Rs 2 lakh under section 24 of I-T Act of India.
It is also advisable to check the prepayment penalty and foreclosure charges on the home loan. The Reserve Bank Of India has prohibited banks from levying any foreclosure charges on borrowers if he pays off the loan prior to its tenure for loans taken on floating rate of interest. However, banks still charge a penalty on transfer if you have taken a home loan on a fixed rate of interest.
Home Loan Tenure
Typically, your home loan repayment tenure may last between five and 30 years. However, loans are generally provided to borrowers for a 20-years tenure.
Deciding The EMI
Home loans can be availed for a maximum tenure of 30 years. Loan borrowers often face the dilemma of selecting the suitable tenure. Longer-term loans have a lower Equated Monthly Installment (EMI). However, longer the loan tenure, higher is the interest on the amount borrowed.
The monthly EMI is inversely proportional to loan tenure, i.e. the longer the tenure, the lower the EMI, and the shorter the tenure, the higher the EMI. Similarly, the total interest paid is directly proportional to the loan tenure. The higher the tenure, the higher the total interest paid, and vice-versa.
Home Loan Approval
Make sure you have all the relevant legal papers related to the property to be bought, income proofs according to your professions and personal verification documents on hand before applying for the home loan such as:
• Copy of proof of income such as recent salary slips, Form 16, banking statement for the last 3 to 6 month’s, and ITR for the last 3 years etc.
• Copy of property papers
• Copy of current residential address.
• Copy of age proof
However, you can contact a home loans adviser or visit your nearest branch to avoid any kind of mistake.
Once the bank receives all the relevant documentation, the approval process begins. Read the home loan agreement documents carefully before you sign them. Check the documents to ensure that the terms and the different charges applicable such as processing fees, late payment fees etc. are the same as what you have negotiated and agreed upon. The bank will pay out the loan on the day of registration. Once you have got the home loan, you will be paying a periodical interest as well as the principal amount to the lender.
Buying a house is one of the greatest dreams of a person as it gives a sense of security and a sentimental support. The complete tips on home loan helps you in buying an asset with tax benefits.
Home Buying Guide – Part 09: Complete Tips On Home Loan
Ajay Verma, founder, and writer of The Housing World, a real estate and mortgage news website. He has over fifteen years of rich experience in the above-mentioned industries.