Buying our own house is one of the greatest dreams every single one of us wants to achieve in our life. And for most of us, it will be one of the biggest financial and emotional investments. So, if you don’t have enough cash in your pocket, a home loan will allow you to purchase your dream home. But before you go to a financial institution to apply for a home loan, you must understand the most important aspects of it. This will help you to make an informed decision, so you can secure the best deal possible. In this article, we will describe the things you must know before you take a house loan. Let’s dig in.
Before you apply for a home loan, you should check if you qualify for it. Each bank has different eligibility criteria for its potential borrowers. The bank will analyze your overall income and the repayment capability to check if you are eligible for a housing loan. The lenders will also assess your eligibility based on your age, the number of family members, your financial standing, qualification, credit score, the stability of your profession, and repayment ability.
Types of Interest Rates:
You can choose from three different types of interest rates. They are:
1) Fixed Rate Loan:
In this type of loan, you get a fixed interest rate at the time of borrowing the loan amount. The interest rate stays the same throughout your mortgage’s tenure. This interest rate often depends on the credit score of the borrower. If you have a good credit score, you can easily secure a low interest home loan.
2) Floating Rate Loans:
The interest rate of this kind of loan depends on the benchmark rate of the lender. The interest rate will change proportionally with the change in the benchmark rate of the bank you borrowed the loan from.
3) Combination Loans:
Some banks offer combination loans where a part of the loan principal has a fixed interest rate, and the other part comes with a floating interest rate.
Get Your Housing Loan Pre-approved:
You should get your home loan pre-approved from the bank before choosing your house. Getting a pre-approval allows you to know your exact budget and help you focus on the correct properties. A pre-approval will also help you get a better deal while negotiating the purchase and seal the deal as quickly as possible. You can also get good property recommendations from your lender according to your requirements.
The Total Cost of Your Home Loan:
You should always assess the total cost of house loans from different banks to get the best home loan deal. The mortgage costs usually include processing fees, interest payments, prepayment penalties, administrative fees, and more.
If you’re getting a home loan with floating interest rates, it generally shouldn’t have any prepayment charges. You can also pay a nominal fee to reduce the total cost of the loan.
However, you should always check your loan application and the borrowing terms carefully to make sure there are no hidden charges. Every lender should disclose the fees and charges related to the loan on its website. Still, it never hurts to be careful.
The Loan Amount:
Banks, NBFCs, and other financial institutions generally sanction a loan amount according to the market value of your preferred properties. The loan amount usually ranges from 75 to 90 percent of the market value of your preferred property. However, if you have a co-applicant (your spouse, parents, or any other family member), the bank will consider his/her income to increase the loan amount.
EMI and Pre-EMI:
EMI is the money you are required to pay every month to the bank you have taken the loan from. Usually, EMI is the sum of the principal amount you need to repay and the interest on the remaining loan amount you must pay every month, depending on the tenure of the loan.
On the other hand, banks can also use the concept of pre-EMI if a house is still under construction. In this case, the bank releases the loan amount in installments, which depends on the installment amount you need to pay your developer. Here, you only need to start paying a monthly amount depending on interest on the released loan amount, which is called pre-EMI.
Of course, you can start paying the principal amount when you want. In this case, you start paying EMI on your total loan amount.
The Required Documents:
We can divide the documents required to apply for a house loan into the following categories:
1) KYC Documents:
The lender needs the KYC documents as proof of your identity and address. The documents you need to submit as a part of your KYC verification usually include your Aadhaar card, passport, voter ID card, PAN card, etc.
2) Property Documents:
Property documents include title deeds, agreement of sale, etc. The bank puts special emphasis on these documents to decide on an appropriate loan amount.
3) Income/Credit Documents:
The banks need income or credit documents to see if you are eligible to get a home loan. If you have a salaried job, you can present the salary slips for the last three months. If you’re self-employed, you might need to submit the income tax return for the last three years.
Banks can extend the tenure of your home loan for up to 30 years, depending on your eligibility. The longer the tenure, the lower amount of money you need to pay as EMI. However, this also means you will be paying more overall interest at the end of the loan’s tenure. To get the cheapest home loan without putting a hole in your pocket, try to balance the EMI and the tenure of the mortgage. This way, although you would be paying more in monthly installments, you would pay less interest on the loan at the end of its tenure.
Defaulting on the Home Loan:
You should always pay your EMIs regularly. If you happen to miss over three EMIs in a row, the lender has the authority to take action against you without court intervention, according to the SARFAESI Act, 2002. So, if you’re suffering from a financial bottleneck, you should talk to your lender and renegotiate the home loan terms.
You should always get proper insurance coverage on your housing loan. This way, if something unfortunate happens to you, the liability of the outstanding loan amount will not fall on your family. Instead, the insurance company will repay the remaining loan amount.
Purchasing a new house is a big financial decision. Therefore, you must take the points mentioned in this guide into consideration before you apply for a home loan. You should also perform thorough research on different lenders and compare their offers to select the perfect bank suitable for your financial needs.