Once you have zeroed in on the property that matches with your preferences of a developer, budget, configuration and location, the next step is to plan on how to fund this investment. In this article, we talk about how to choose the financial institution that will offer the loan to fund your dream home. Bank, housing finance company (HFC) and non-banking finance company (NBFC) all deal with home loans, but how will you decide on the perfect fit for you? Explained below are the different financial institutions that offer home loan and identified are the pointers to evaluate to make an informed choice.
The various financial institutions to choose from
Banks: They are very traditional in nature and are under the control of Reserve Bank of India (RBI). As compared to other loans like personal loan or a vehicle loan, value of a home loan is huge and the borrower is also granted a longer period of time to pay back the same with interest. Owing to this reason, home loans are granted very carefully by the banks. While granting they would definitely do a background check on your current financial stability, your financial worth, the value of the property you are investing in and would finally gauge if you will be able to repay the loan that you are asking of.
A bank also usually grants only up to 85-90% per cent of the property value and the remaining amount has to be managed by the buyer. A case of bad credit score – your borrowing and repayment history, outstanding dues or an instance of bounced cheque will definitely discourage them from granting a home loan to a buyer.
Home Finance Company (HFC): They are a popular home loan lender next to banks because they cover expenses beyond property value. Controlled by the National Housing Bank (NHB), they make way for adding other charges while buying a home like stamp duty and registration charges (cumulatively approx. 6% of market value depending on the locality and type of project), in the loan amount that is not the provision given by scheduled commercial banks. Owing to this, the rate of interest offered by HFC is on the higher side.
Non-Banking Financial Company (NBFC): Governed by the Companies Act, they disburse loans to home buyers once they are deemed fit for the loan. They are similar to HFC and offer higher rate of interest to the home buyers as they disburse loans to even buyers who may have been rejected by the banks or may have a low credit score. Non-salaried people, who do not have a fixed monthly income may find it easier to get a home loan from a NBFC as compared to a bank.
Making the right choice
The factors to consider before zeroing in on a home loan provider is not just limited to the interest rate. Compare at least couple of home loan providers before taking the final decision. The key aspects to help make this decision include:
1) Rate of Interest: Since, the amount taken as home loan is big, the rate of interest plays a crucial role. Check the different vendors and choose the one who offers the lowest, as interest rates with 0.25 % or 0.5% difference also make a great deal of difference in the loan repayment.
2) Terms for repayment: Carefully study the terms of repayment, the tenure of loan and the kind of rate of interest- fixed or floating that you have opted for.
3) Documentation required and time taken to process the loan: Choose a lender who does the paper work diligently, but in limited period of time so that the loan is processed at the earliest. Check the possibility of availing a pre-approved loan, so when you have shortlisted the property you can quickly move toward loan disbursement stage.
4) Processing charges: A home loan attracts processing fees, property valuation fees, paper work and legal fees. Evaluate these charges levied by the various home loan lenders and choose the one with the lowest charge. There is a possibility of negotiating this cost with the lender to either reduce the cost or a complete waive off.
5) Maximum rate cut benefit passed on: When opting for external benchmark linked floating rate of interest, check whether the bank is passing on the maximum benefit of RBIs repo rate cut. Repo rate is essentially a rate at which RBI lends to commercial banks, any reduction in this rate is generally passed on to the customers. It may vary basis the margin charged by the banks.
6) Prepayment charges: If you avail of a home loan that is based on fixed rate of interest, then upon prepayment of home loan one may be charged a penalty of 1-3 percent depending on the loan amount. On the other hand, RBI prohibits lenders from charging a penalty on prepayment on the home loans linked with floating rate of interest.
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