One of the biggest investment decisions that most of us take in our lifetime is “Buying a Property”.
Those who have a considerable amount of savings, use it for purchasing the property and those who do not have enough savings, plan to take the help of the financing institutions to make the scale of investment more manageable for them. But, taking a home loan is easier said than done. Though it may seem that all banks are eager to lend, the truth is that getting a loan sanctioned is a very tedious task. So, like any other financial product, it is important to be acquainted with how home loan works, to avoid any surprises that might occur in future. Below, are some of the most important things you should consider before you sign on the dotted line of the loan document.
Below, are some of the most important things you should consider before you sign on the dotted line of the loan document
1. Factors influencing the Eligibility Criteria
There are varied factors that can influence your loan eligibility criteria. The significant ones are-
a) A steady source of income- All home loan lenders will try and ensure that the borrower has a steady source of income for a considerable period of time. This means that if you have changed many jobs in the recent past and/or you do not possess at least a year’s salary slip as your income proof, your home loan application might be put on hold. Banks might even consider the monthly incentives/annual bonuses you get from the company (that has been stable over a period of time) while checking for your source of income.
b) Credit history- Credit history of the loan seeker matters a lot. Banks maintain a database of borrowers and verify if they have paid their EMIS regularly in the past. Make sure to check your credit ranking on CIBIL website to check for any mistake that may affect your credit score. If you are a first time loan seeker, chances of your loan getting sanctioned is high. But, if there is any repayment default in the past, you might not get the loan in the first place.
c) Attributes of the property- Before approving a home loan, banks conduct a property visit for inspecting-
1. The age of the property.
2. The market value of the property.
3. The Approvals, Encumbrance and the completion certificates of the Project.
Also, the banks would check whether the property is free from dispute or not. Usually, government or the nationalized banks do not approve the home loans for builder floors/flats who have any default history. It has been seen that the housing projects or the townships by the renowned builders get approved easily.
d) Affiliation with the bank- Your home loan eligibility also depends on your relationship with the bank in the past. Individuals with an operational account for the last few years in the bank might gain an added advantage if they apply for a home loan with the same bank.
e) The value of the property- The value of the property is also considered by the banks before sanctioning the home loan, as the banks usually restrict the loan amount at 70-80% value of the property.
2. The loan type
Before you decide to take a home loan you must know that there are two types of home loans based on the interest rate, that is “Fixed Interest Loan” and “Floating Interest Loan”.
If you choose Fixed Interest Loan, it means that you will be repaying the home loan in fixed equal instalments throughout the loan term. Unlike it, if you opt for a home loan with a Floating Interest Loan, it means that you will be subjected to a base rate and a floating element will be added.
The major feature of a Fixed Interest Loan is that it is unaffected by market fluctuations. If you are very particular about budgeting and prefer to plan out your repayment schedule with a fixed monthly amount, this type of interest rate would interest you more as it gives a sense of certainty. In Floating Interest Loan, your EMI might fluctuate due to changing rate of interest. These loans are usually cheaper than Fixed Interest Loan. Further, even if the Floating Interest Loan rate rises above the Fixed Interest Loan rate at a period of time, it is temporary, and not for the entire tenure of the loan.
While deciding between Fixed Interest Loan and Floating Interest Loan it is necessary to know that Fixed Interest Loan are usually 1-2.5 percentage points higher than the Floating Interest Loan and even if due to some reason the interest rate decreases in the business environment, this loan does not get the benefit of reduced rates. On the other hand with the Floating Interest Loan , the monthly instalments are uneven and so for the borrowers, preparing a monthly budget is not always probable. Further, consumers acquire benefit by choosing a Floating Interest Loan only as long as the interest rate does not go beyond 11.5%.
So if you prefer to plan well ahead when it comes to your finances and not leave anything to chance, a Fixed Interest Loan would be better suited to your needs. But, before availing the Fixed Interest Loan you must cross-check with their bank whether the interest rates are fixed for the entire tenure or only for some years. As per experts, fixed rates are a better option if the interest rates are conducive to rising in the near future.
3.The fine print
Ones you finalise to opt for Home Loan, you will be required to enter into a home loan agreement with the bank. So what is this agreement?
A home loan agreement is basically a legal document/ a contract between a borrower and a lender which regulates the mutual promises made by each party. This agreement is also perplexing at times. Thus, you must read it carefully before you sign on it. Why?
There can be quite a few hidden details to be read “between the lines”. Like, you may think that ‘default’ is only if you do not pay the EMI. But there are certain banks who might define default as, when the borrower expires, gets a divorce, or is/are engaged in criminal offences. Certain banks even have a security clause, due to which they demand additional security along with your loan amount in case the property prices fall. If you fail to pay up, you’ll be marked as a defaulter. Before you sign on the fine print you must be extremely careful about the add-on charges and the penalties. Add-on charges are charged by the Banks as administrative and service charges or processing fees. Banks also have a clause of penalty in the agreement which usually bounds the taker to pay a good amount of penalty in case of non payment of EMI or as otherwise stated in the agreement. These charges are over and above the EMI.
Other necessary points
You must know that if you have taken a loan from a bank that does not mean that you have to stick with it forever. In extreme situations or if you are getting a considerably better deal from another lender, you can always switch your loan.
If you have been thinking of taking longer tenure loans, then you must understand that longer tenure mostly means a costlier loan. For example: If the loan tenure is of 20 years, the customer lands up paying more than 2 times the amount of loan taken.
Do not forget to read all the details in the agreement before you sign it. As, ones an agreement is signed, it bounds you legally to all the terms and conditions agreed with the bank.
We hope, considering all the above points, before taking a Home Loan, will help you take a right decision.Happy Buying