Home loan facts: 5 things to know before you sign up

We list the five most important facts that you must do before you formally apply for the home loan.

Are you about to apply for a home loan? We have only three activities to suggest: Research, research and research! Consider the following five points to get you started:

1. Understand what loan eligibility means. Banks and lending institutions offer about 60 times your current income as the home loan amount. You may have a high salary, but that may not automatically translate into a high loan eligibility. The lending institution will consider the prominent components of your pay package, while setting aside the LTA and Medical Allowance. The eligibility is then calculated on the basis of the remainder amount. Use a loan eligibility calculator to find your eligibility.
2. How much EMI is too much? Normally, any EMI that exceeds 30% of your finances is not ideal, and an amount exceeding 50% is a stretch. Your monthly budget must not be strained owing to the EMI payable. Use a home loan EMI calculator to compute how much you will pay the lending institution every month basis the loan amount, tenure and interest charged on it. You can keep manipulating the figures using the home loan calculator to arrive at a figure that suits your budget.
3. A pre-approval is important – here’s why. Normally, people apply for a home loan after they have found a suitable property. This is a good approach, but taking a pre-approval is even better. Taking a loan approval tells the lender that you are a serious buyer who is about to take a loan in the next few months. The loan approval checks your personal eligibility and helps you understand how much your borrowing limits are.
4. An expert must see the property documents. It is always a good idea to appoint a lawyer to study the property documents. This is important to verify the document’s layout, authenticity, chain of agreements (in case of two or more past buyers), permissions (in case of under-construction projects), titles and freehold, etc. Get any lacunae corrected before you apply for the loan – unsuitable properties are not liable for home loans. Rectifications at a later date will result in delays.
5. The interest rate is everything. Ultimately, the interest charged on the loan amount decides the monthly outgo. A lower rate of interest helps you save more money. You can opt for a floating rate of interest if the market rates are expected to slide in the next few months. Another good measure to save money is to repay the loan early, i.e. before the tenure ends.

Benefits of a Home Loan

According to statistics released by the Reserve Bank of India, the housing market has been witnessing a constant rise in prices since the first quarter of the financial year 2010-2011. The Residential Property Price Index (RPPI) saw a stark increase of 61% from the first quarter of the financial year 2010-2011 to the third quarter of the financial year in 2014-2015. With 78% RPPI growth, Jaipur became the city with the highest growth rate, whereas the lowest growth rate of 40% was recorded in Chandigarh and Hyderabad during this period.

The inflation in house prices saw a slight decrease in India since the last quarter of 2014-2015.The annual house price inflation moved slightly upward in developed countries like the US and UK since the last quarter of 2013-2014, while in Asian countries like China, Indonesia and Malaysia, the inflation rates went down during the same period.

This constant rise and fall of rates in the market is making it even tougher for the common man to own his dream house. That's where banks and housing loans come into the picture to help you fulfill your dream without having to worry about the market volatility. Here’s a look at some of the benefits of taking a home loan, especially if you evaluate the amount you apply for using a home loan EMI calculator.

Advantages You Stand to Gain

1. Low Interest Rates Buying your dream home with a loan is a long-term decision, which can have a financial impact on you for over a period of at least 10 years. During this time, the interest rates are bound to go through various up and down cycles. Therefore, it can lead to situations where interest rates fall, allowing you to prepay the whole loan and own that home faster than you expected. For example, the interest rate in 1995 was 18%, as compared to 7.5% in 2015-2016. Banks often provide lower interest rates to new borrowers. So, when there is a rise in your existing home loan rates as the per interest rate cycle, pay 0.5% of the outstanding loan as processing fee and avail the rates offered to new borrowers. 
2. Tax Benefits According to Section 24(b) of the Income Tax Act of 1961, you can claim a tax deduction of up to Rs. 1.5 lakhs towards the total interest payable on a home loan. According to the newly added Section 80C, along with the 80CCE of the Income Tax Act, repayment of the principal amount up to Rs. 1 lakh on your housing loan can be given as a deduction from the gross total income under certain prescribed conditions.

So, when you decide to go ahead with a home loan, make sure to use the home loan EMI calculator to find out the amount you will have to pay every month. This will give you the freedom to plan your financial matters well in advance and avoid any rude shocks later on. 

Bad credit score? Here’s how you can improve it

We present a few tips and tricks to improve your credit score before applying for a home loan.

It is easy enough to get a loan in today’s times, both for professional and personal reasons. But it is not as easy as just applying for a loan and getting the cheque from the lending institution – there is the matter of having a good ‘credit score’ in between.

A credit score is simply a number derived from the applicant’s personal credit history, basis the past credit, new credit taken recently, loans repaid and time taken to do so. This number is often the first thing that banks and financial institutions look for when examining an application for a loan. Most applicants do not know this – they simply assume that a large income and good repayment capacity will get them the loan approval.

The credit score thus helps lenders establish the applicant’s credit worthiness, i.e. if the applicant is a safe one or a risk for the lender. Basis the lender’s interpretation and understanding of the credit score, one’s loan application may be approved or rejected outright. If a ‘risky’ candidate’s application is approved, the rate of interest levied might be a higher one.

But the credit score is studied before you apply for a loan. Fortunately, there are ways to improve your credit score before you make your loan application. The following are a few ways:

• The lender will not ask for past loan history to first time applicants, but will examine current assets that the applicant will put up as collateral. Make sure these assets are of high quality.
• If you still have an unpaid loan, try to repay it as quickly as you can, over and above the EMIs you pay per month.
• Before making your application, use a home loan EMI calculator to find out how much your monthly outgo will be. If you already have some funds in reserve, apply only for the remainder.
• Lenders also study repayment patterns on credit cards. Clean out all credit card debt first.
• Your application might be rejected if you are found to be embroiled in cases of cheating and/or forgery, or if you have ever declared bankruptcy or there have been foreclosures against your name.