InvestorQ : What all do I need to know before I take a home loan?
Kunal Verma made post

What all do I need to know before I take a home loan?

Manisha Mehta answered.
3 years ago

Congratulations in advance for your new home. It is an important step in every individual’s life and I hope you find immense happiness in your home.

It is good that you are inquisitive to know everything that’s involved in taking a home. After all, the devil is in the details, right?

You must keep in mind that you should ask your customer service executive ALL your doubts and queries, even the ones you might have assumed to be a certain way or things that you took for granted.

You need to be sure that your home loan aligns with your current financial needs and your future financial plan perfectly. This is important as it goes a long way in saving your hard-earned money.

Other than comparing all home loan options, here are few more important things you must know before you sign the dotted line:

1. Home loan eligibility factors: Financial institutions usually limit EMIs to 40-50% of your, the borrower's salary. Here, salary only means the basic component as well as your dearness allowance.

Do note: though reimbursements are a part of one’s salary, you will not get a home loan based on your reimbursement amount.

2. Second loan: If you already have a loan on your name, then your eligibility automatically reduces. A few banks even have established rules on the number of dependents you have and how many dependents they are comfortable while lending to you. Higher the number of dependents implies a lower repayment capacity.

3.Not just finances:Banks and other non-banking financial companies (NBFCs) don’t just look at how stable you are financially. They also prefer individuals with certain profiles such as an individual with a fixed source of income, or salary, is preferred over an individual who is self-employed and doesn’t have consistent earnings.

The applicant’s age also matters a lot as it highlights the total earning years they have ahead of them and this in turn, determines one's re-payment capacity during the loan tenure. The reason for this is that loan tenures usually don't go beyond one’s retirement age. The exception to this rule is when a younger co-applicant is involved in the process.

4. Co-applicant: In order to curb any possible ownership dispute later in the future, banks and NBFCs have certain rules in place. Hence, if you want to involve another applicant in your loan process, do ensure that the person is not a minor and should not be above a certain age.

The advantage of having a co-applicant when applying for a home loan is that it helps in getting a higher loan, as the income of the co-borrower is clubbed along with yours. The value of the property is then considered before sanctioning the loan. Banks usually cap the loan amount at 70-80% of the total property value, although it varies across banks.

5. Loan type: You can choose from two broad types of loans based on the interest rate- floating and fixed. In case of fixed rate loan, the interest rate stays fixed and doesn't change with market fluctuations; in this type of loan the rate of interest is capped at 1-2.5% higher than floating rate home loan. In contrast, floating interest loan rate varies as per the market conditions.

It might seem like a fixed interest rate is more attractive in a high-interest phase, experts advice borrowers otherwise for various reasons:

- Fixed nature of the interest itself is a drawback when considered for a higher loan amount as rates are bound to come down even if they are high currently. In such a situation, imagine repaying the same amount every time, even at a time when rates reduce.

- Fixed rate loans come with 'reset clause' which means that it is subject to revision from time to time. Though the nature of the clause varies across banks, it is usually invoked either after a fixed regular period or a sharp spike in interest rates.

Thus, you might be better off opting for a floating rate loan especially if the economy promises a sharp fall in interest rates in the near future.

6. Devil is in the details: It might seem impossible or too exhaustive a task, but it is of paramount importance that you read your home loan agreement carefully. This is because it could contain quite a few devils for you to find out in order to save yourself from any possible mishap.

An example would be the term ‘default’ that could have so many connotations to it and not just an instance when someone fails to pay the EMI. Some banks define default as when the borrower expires or gets a divorce (in case of a joint-loans), or the borrower is involved in any civil litigation or criminal offence.

Read the document carefully and familiarise yourself with charges and penalties because you are not going to be paying only the interest amount. You will have to pay various other charges such as processing, service or administrative charges. It is important that you consider penalties on pre-payment of the loan and take all of them in account while comparing the deals offered by different lenders.

7. Negotiate the rate of interest: Irrespective of which loan option you select, you must know that you can always negotiate the interest rate that the lender is offering you. While it is true that in such a negotiation, the bank will have the upper hand, but you can bargain your way through to get a better deal.

For example, if you’ve been an old customer of the bank’s or the NBFC’s, use it to your advantage to negotiate a better deal. If you have a good credit score, you can use it to convince the bank authority to improve your loan terms. Furthermore, you could try to purchase the loan at the end of the month as banks have their monthly targets and might be more flexible towards your loan conditions as they do not want to lose business.