Buying a home to call our own is often the dream of any individual. Incidentally, it is also one of the major financial decisions. For first-time home buyers, opting for a housing loan is the only way to make their dreams come true.
So, if you are opting for a home loan, you must understand it thoroughly and know all the terms and conditions associated with it. It is a commitment that goes on for decades until you repay the borrowed amount. So in a nutshell, you need to look at certain things before you go for a home loan.
Know your eligibility:
Before you go for a home loan, you need to know the eligibility conditions for obtaining the credit. Lenders, be it banks or Non-banking Financial Companies (NBFCs) look for the individual’s income and repayment capacity. The other conditions include age, residence, job stability, dependents, spouse’s income, and so on.
The credit score is the next vital thing that you need to pay attention to when you go for any kind of loan. It is a score that is an indicator of your creditworthiness. If you have paid your current loan dues on time along with your credit card bills, your credit score remains above 700. If you have any defaults, your credit score will go down. So, if you want to avail a home loan with better interest rates, it is a necessity to have a score of 750 or above. Moreover, if you have a good credit score, you can negotiate the interest rates.
Know the home loan types:
There are two types of home loans, namely the fixed interest rate and floating interest rate. In the fixed interest rate loan, the interest rate remains the same throughout the loan. In the floating interest rate loan, the interest rate fluctuates according to the market. So, the Equated Monthly Instalments (EMIs) keep changing when you opt for a floating interest rate.
Moreover, there is also a misconception, that a fixed interest rate is much better than a floating interest rate loan. But, financial experts are of a different opinion, as home loans are of longer tenure, going for fixed interest rate will raise the total cost of the loan. The interest rates might be higher in the present, but they are bound to come down at a certain point. In that case, the borrower has to repay the same amount even if the rates are down in the market.
Home loan tenure:
Home loan tenure and EMIs have a direct connection. Home loans are products that generally last for 20 or 30 years. If you are opting for a lengthier tenure, the EMI payments might remain less, but the interest you pay for the borrowed amount will be more. Shorter tenure means a lesser interest burden on your EMI payments. Moreover, banks tend to approve faster the applications that go for a shorter EMI tenure. Shorter tenure means higher repayments, but in the later stages, it will help in decreasing the cost of your home loan.
Equated monthly installments:
Equated Monthly Instalments (EMIs) mean the payment you make every month towards your home loan. The EMI’s volume is generally influenced by two factors, i.e., the tenure and the downpayment. If you opt for a longer tenure, your interest burden will increase and vice versa. Likewise, when you go for a higher downpayment, your EMI payment also tends to reduce. Most financial experts advise that your EMI should not exceed 45% of your total income. Nowadays, many online home loan EMI calculators let you estimate your EMI payment.
Processing fees and additional charges:
Processing fees are a charge that is levied by the lender when your home loan application is approved. The processing charge differs according to the policies and procedures of different lenders. Usually, the processing charge is 1% of the home loan amount you have applied. Apart from the processing fees, there are also certain charges involved. Discuss in detail about the other charges involved with the lender beforehand.
It is a usual practice that when you go for a home loan, you need to pay at least 10 or 15 % of the total cost as a down payment. The remaining amount is converted to the home loan, which you will pay later as EMI. In case, you have surplus funds, and you can pay extra towards the down payment and lower your loan amount. Moreover, you can also make pre-payments of your home loan, in case you have surplus cash.
Read the fine print:
Home loans come with a legal agreement and can often be misunderstood. So, you must read the fine print carefully and know all the terms and conditions. In case you get stuck with any of the legal terms, clarify it with your lender immediately. Know about all the add-on charges and penalties mentioned in the document. Also, know the foreclosure charges associated with the home loan.
Before you go for a housing loan, be ready with the list of documents required for applying for the loan. They usually come under three categories:
- Know Your Customer documents- ID and Address proof
- Income Proof- Salary slips for salaried individuals and ITR returns for self-employed individuals
- Property documents- The title deed, Sale agreement with which the lender does his due diligence
Along with these, you would also need to submit other documents as required by the lender.
Go for the right lenders:
Don’t field multiple loan applications at the same time as too many credit inquiries will affect your credit score. Before you submit a home loan application, go online and compare different lenders and see what they offer. Compare interest rates, offers, and schemes delivered by them including their charges. Take advantage of the online calculators and arrive at an estimate of the loan and the EMI payment. Select a lender who satisfies all your criteria and then go for the application process.
Taking these above points into consideration will help you in choosing the best home loan for purchasing your dream home.