Overview
Getting a home loan is very easy nowadays. Like any other financial product, it is better to get yourself acquainted with how home loans work so that you are not taken aback by nasty surprises.
Here are some pointers that you should consider before signing on a home loan form.
Know your Eligibility Criteria
A simple way to analyse your loan eligibility is by calculating the EMI you might need to pay. Banks usually limit the EMI amount about 40-50% of your salary, that is basic and other allowances. Reimbursement and perks are not included in these criteria. Your eligibility goes down if you have other liabilities, such as other loans. Also, some banks consider the number of dependents you have and they are sensitive towards granting loans to you if you have a number of dependents. This reduces your EMI paying capacity.
Apart from your financial stand, the bank is also concerned with what type of employment you have. For example, if you have a stable job or permanent incomes, there are higher chances of your loan being sanctioned compared to a self-employed person with erratic income.
Check your CIBIL score
The credit worthiness of an individual is very important while getting a loan. Credit Information Bureau (India) Ltd (CIBIL), rates between 700 to 900 score. This scoring is given depending on your credit card usage, cheque bounces, how you use and maintain your bank account, loan repayments, how many times you have applied for credit cards or loans. If you are having a CIBIL score of more than 700, it is likely to get your loan passed easily. All the loan providers check with CIBIL for your score whenever you apply for a loan or credit card. The more time you apply for loan or credit card, CIBIL thinks you are just binging on credit, and thus it affects your CIBIL score.
Loan Tenure
This is a deciding factor, you need to choose between lower EMI and higher interest rate and lesser term, higher EMI and lower interest rate. In case you need a higher loan, more than your EMI affordability, then you need to look for higher tenure. This way the bank may lower your EMI and sanction the higher loan. The drawback is you end up spending more on the interest rate but with an affordable EMI for a month. You can also cut down on your tenure paying years by making pre-payments. Future raise in your income can give you a consolidated lump sum that you can make pre-payments before the tenure ends, as penalties for these are now non-existent.
Interest Type
Nothing gets simplified while opting for a home loan, as choosing the type of Rate of Interest gets very tricky. There are two types of Rate of Interest (ROI) fixed and floating. Fixed ROI means the interest rate will remain fixed for the next 5-10 years or throughout your loan tenure. Whereas Floating ROI means the interest rates can change depending upon the RBI norms, Government policies or market conditions. Fixed ROI is always higher than the Floating ROI. You should look for fixed ROI if you think that the interest rates are already on the lower side and it can only increase from this point onwards, or otherwise floating ROI is what you need to look into. You can change from Fixed ROI to floating ROI during any point of your tenure. Check with your bank for the charges incurred while switching, this may or may not apply to your home loan, but still be sure about it.
Charges and Penalties
There should not be many extra charges except for processing fees, legal verification charges, stamp duty for a home loan and certain switching like changing EMI payment from one bank to another or NBFC. There are penalties incurred if you fail to make a loan payment and added interest is also added in some cases. Make sure you know about all the penalties and charges that can be charged. Ask your bank for this information in writing, never take their word for it. There can be charges for releasing your property papers for photocopying or any other purpose, during the loan tenure.
Insurance against Loan
This is the most important step you must take after your home loan gets sanctioned. Either get a home loan insurance or get yourself insurance that is equal or higher to you the home loan amount. In any unfortunate event, the family will be allowed to stay in the house and the remaining amount of loan will be disbursed by home loan insurance. There are also insurance policies that that will pay the loan amount in case of disability, loss of a job or some critical illness or disease diagnosis. This cost should be considered in overall EMI affordability, as it has to be separately paid other than home loan EMI.
Tax Benefits
It is good to know all the tax benefits and implications that you can receive while paying your home loan. You are entitled to tax exemption on the interest on your home loan in India, up to an amount of Rs, 1,50,000 and up to Rs. 1,00,000 on the principal amount. Just in case, if you plan on selling your property during the first 5 years, the tax saved from interest payments is added to your payment from the sale of the property, which will also be taxed. Points worthy to be remembered.
Do not rush into getting a home loan based on just one factor. Get the quotes from 2 or 3 banks, or NBFC and weigh in the above-mentioned factors. The EMI affordability and interest rates play a crucial role in today’s system. Also, there are banks that give less ROI if the applicant for the loan is a working woman.
