Things to keep in mind before taking home loan

Cut in Repo rate by Government and decrease in home loan interest rate by .5 bps by SBI and other banks brought relief in homebuyers.

Those who were not able to purchase a property because of higher EMI, now can afford it. Bundle of offers on EMI’s and down payments by developers in Mumbai, Pune, Bangalore, Delhi, and other cities attracts buyers. 

Homebuyers should keep in mind the following points before rushing for a home loan:

1. Loan Eligibility: 

Homebuyers should do research and understand from banks about how much loan they will get depending on their monthly income. Loan eligibility depends upon repaying capacity which is nothing but your monthly disposable/surplus income.

The bank has to make sure that you’re able to repay the loan on time. The higher the monthly disposable income higher will be the loan amount and higher will be the monthly EMI amount. Typically, a bank assumes that about 50% of your monthly disposable/surplus income is available for repayment. The tenure and interest rate will also determine the loan amount. Further, the banks generally fix an upper age limit for home loan applicants, which could impact one’s eligibility.

2. Maximum borrowing limit:

When buying property, 10-20% is the down payment most of the lenders expect from home buyers to contribute. Rest 80-90% of the property value is financed by lenders. The total financed amount also includes registration, transfer, and stamp duty charges. The amount calculated by the lender is the higher eligible amount but it is not necessary for the buyer to lend that amount. He can opt for the lesser eligible amount and should try to arrange as many funds for a down payment.

3. Co-applicant for a home loan:

Always have a co-applicant when applying for a home loan. If someone is the co-owner of the property in question, it is necessary that he/she also be the co-applicant for the home loan. If you are the sole owner of the property, any member of your immediate family can be your co-applicant.

4. Documents needed for loan approval:

The loan application form gives a checklist of documents to be attached to it, along with a photograph. In addition to all the legal documents related to the purchase of the house, the bank will also ask you to submit your identity and residence proofs, latest salary slip (authenticated by the employer and self-attested by you) and Form 16 or income-tax return (for businessmen/self-employed) and the last 6 months bank statements/balance sheet, as applicable. Some lenders may also require collateral security like the assignment of life insurance policies, pledge of shares, national savings certificates, mutual fund units, bank deposits or other investments.

5. Loan sanctioning and disbursement:

After loan form with supporting documents is submitted by the buyer to the lender. Lender proof checks all the documents and decides whether or not the loan can be sanctioned. The quantum of the loan depends on this. You will receive a sanction letter stating loan amount, tenure and interest rate along with other terms and conditions once the loan is approved by the lender.

6. The disbursement process:

Disbursement of the amount by the lender takes place maximum in 3 parts. In the case of under-construction property, the disbursement takes place progress wise. This is assessed by the lender not necessarily by the developer. In case of ready to move properties disbursement is made in full.

7. Interest rate options:

Home loan rates can be either fixed or flexible. In the former, the interest rate is fixed for the loan’s entire tenure, while in the latter; the rate does not remain fixed.

8. Costs involved other than home loan:

The loan is a tedious and lengthy process, the lender asks for many documents and proofs before lending you money. To process this loan, lender charges processing fee which varies from 0.5% to 1% of the loan amount. Few lenders waive this amount.

9. EMI:

Easy monthly installments include both principal and interest. Repayment by way of EMI starts from the month following the month in which you take the full disbursement.

10. How does my loan outstanding change:

The EMI that one pays every month has a principal component, in addition to the interest that is paid. Ideally, when one is paying the principal each month, the loan outstanding should also reduce each month and one ends up paying the interest only on the reduced loan outstanding. Most banks follow the monthly reducing basis approach.

11. Pre-closure of loan:

You can pay the remaining principal amount and pre-close your loan. There are no charges if the interest rate is floating but charges may apply for the fixed interest rate. 

12. Part prepayment of home loan:

One can pay a certain amount in addition to regular EMI’s to the lender. It directly reduces principal amount and interest is recalculated based on the remaining principal amount.

13. Tax benefits on home loans:

Of the total annual EMIs, the principal component gets tax benefit under Section 80C of the Income Tax Act. Even the partial prepayment amount qualifies for the same, but within the overall limit of Rs 1.5 lakh under Section 80C. Further, if it is a self-occupied property, the interest paid is deductible up to Rs 2 lakh in a year.

14. What all should one consider while taking a home loan?

Choose a lender who offers the lowest EMIs, i.e., you pay substantially less in repayments as compared to others. The lenders offering the longest tenure of, say, 30 years many not always be a good thing. Opt only if one is sure to repay early without prepayment charges.

See if the lender includes the cost of furnishing the house in the project cost. Choose lenders offering daily or monthly reducing balance, unlike the annual reducing balance method used by several financiers/banks.

Disclaimer: The views expressed above are for informational purposes only based on industry reports and related news stories. Propertypistol does not guarantee the accuracy, completeness, or reliability of the information and shall not be held responsible for any action taken based on the published information.