Purchasing a house is a crucial decision – it is after all a lifetime investment. In a bid to buy their dream house, many people choose to opt for a housing loan without being aware of its various aspects. This is particularly true for amateurs who have no prior knowledge of the financial market, pros and cons of availing such a loan, and the formalities involved. However, to make things easier, this article will guide you through the important points to consider when applying for a home loan.
Things to Consider When Taking a Housing Loan
1. Credit Score
The most important factor to consider is the credit or CIBIL score. This score represents the borrower’s creditworthiness. In simple words, your credit score determines whether or not you are reliable and capable of paying back the borrowed amount based on past records. While credit score varies between 300 and 900, a higher score is desirable as it puts you in a better position in the eyes of the lender. Most lenders consider a score of 725 and above ideal for home loan. Besides, a good score also fetches you better interest rates. To maintain the desired CIBIL score, ensure that you clear your credit card dues and any outstanding loans on time.
2. Rate of Interest
Interest rates on housing loans depend on several factors and typically vary from one lender to another. Therefore, compare different rates offered by lenders in the market to get the best deal. For salaried individuals, the current home loan interest rate stands between 6.65% and 14%. Also, find out if the lender is offering fixed or floating rate of interest. Under fixed rates, the monthly EMIs remain constant over the loan tenor. However, under the floating rates, though the EMIs don’t vary over the home loan tenor, the interest is calculated depending on the MCLR and varies over time. This may prove beneficial as interest rates are often expected to go down in the long term.
3. Home Loan Tenor
Before availing of a housing loan, consider the length of the loan tenor – your monthly EMIs will depend on the chosen period. Banks and lending institutions usually offer an average repayment period up to 20 years. Such flexible tenors provide borrowers with ample time to pay off the amount comfortably. However, you may consider opting for a shorter tenor if you have enough funds in hand. This is recommended because although a shorter tenor increases your monthly instalments, it does reduce the housing loan cost eventually.
4. Home Loan Tax Benefit
Under Section 80C and Section 24 of the Income Tax Act, you can claim home loan tax benefit on the principal amount and the amount paid on the current home loan interest rate, respectively. Furthermore, first time purchasers can avail additional tax benefits under Section 80EE.
5. Processing Fees
This refers to the charge payable to the lender for the processing of the home loan. Usually the processing fee ranges from 0.80% to 1.20%. Get in touch with your lender to settle for the lowest processing charge.
6. Monthly EMIs
Your Equated monthly instalments are payments made every month towards repayment of the borrowed loan. This amount is often determined based on the down payment made at the time of purchase. The higher the down payment, the lower will be the monthly EMIs. Thus, it is recommended that your EMIs do not exceed 45% of your total income. A housing loan EMI calculator can help you determine the desired amount in such cases.
7. Down Payment
When opting for a home loan, lenders typically require you to pay about 15% of the total loan amount as down payment. The remaining amount is then converted into monthly EMIs. A smart thing to do is to increase your down payment if there’s surplus cash in hand since that will help you save up on the payable interest rates in the long run.
8. House Loan Documents
Be sure to carefully go through all the terms and conditions by your chosen lender before signing on the dotted line. You must also keep all the necessary documents (original and photocopy) in place to ensure a smooth application procedure.
9. Prepayment Charges
As per RBI guidelines, borrowers need not pay any prepayment charges, so you can choose to make partial payments as per convenience or provided you have sufficient funds.
10. Foreclosure Norms
Housing loan foreclosure refers to when you repay the outstanding loan amount before the end of the home loan tenure. The sooner you pay, the lesser rate of interest you pay. Lenders usually charge a nominal penalty for making repayments beforehand. However, if you opt for floating interest rates, you need not pay any foreclosure fees. Applying for a housing loan involves multiple factors that need to be taken into account. Run through the points mentioned above to ensure that you are on track. Check with the lender before initiating the paperwork.