All you must know about availing a home loan

By LODHA 07 May 2020

Home Loan is by far the most common type of loan that’s availed. It facilitates you to own your dream home. Over the years, the process of availing a home loan has become fairly simple and overall, owing to government policies the home loan have also become less expensive.

If you can show that you are capable of paying back the loan and can produce all the requisite documents to show for it, you should be able to get the loan sanctioned in no time. You will have to mortgage one of your properties to the bank as a security deposit. If you fail to pay back the loan, the bank will have the legal authority to take possession of your property.

For what purpose can you avail a home loan?

It is a common misconception that a home loan can only be taken out when one wants to purchase a home. Even when you are doing something as ordinary as renovating your existing residence, a home loan can help you out aplenty.

Following are few of the reasons to avail a home loan -
•    Home purchase loans are the ones you take out to buy a new home
•    Home improvement loans allow you to borrow money to renovate or repair damages to your home
•    Home construction loans are used when you are building your new home from scratch.
•    Home extension loans let you obtain money to add a new room to your already existing home, or to expand it in some other way.
•    Land purchase loans are for when you want to buy land for your new home or any other purpose.
•    Top-up home loans allow you to borrow some money on top of the existing principal.

What are the types of home loan?
When you avail a home loan, you can opt for either fixed or floating rate of interest for repayment. Let’s understand the difference between the two.

Fixed rate of interest
When you opt for a fixed rate of interest, then your rate of interest won’t fluctuate as per market. It will remain fixed till the end of the loan tenure. The disadvantage is that you won’t be able to take benefit of reduced rate of interest in case of changes in the market rate.

External-benchmark linked rate
Recently, as per the directive from RBI, the lending banks have moved to external-benchmark linked floating rate of interest. The advantage is that the end consumers can get immediate benefit of any rate cut announced by RBI. The down side being, any increase in the rate will also be applied. The rate of interest is typically reset every quarter.

How can you obtain a home loan?
Before you apply for a home loan, you must determine the loan amount that you are eligible for. This will depend upon your disposable monthly income- that is, the money that remains in surplus after your total monthly expenditure.
If you want to estimate the amount that you can borrow from the lending bank, it is roughly 80 – 90% of the value of your property. The first 10 - 20% is to be given as a down payment for you to get the loan. This requires a bit of financial planning since you need to have this amount of money in hand if you wish to get the loan.

To get a home loan, various documents are required like-
1.    Income proof document
2.    Bank account statements for past six months
3.    Income tax return documents for previous two years
4.    Property related documents
5.    Personal identification documents

You can either choose to take a home loan from a bank or a non-banking housing finance company (NBFC).
•    If you have good credit score – based on your borrowing and repayment history and stable finances, then you will have no issues getting a loan from any bank. Higher credit score will get you attractive interest rates. You can check your credit score here.

•    NBFCs have a quick documentation process and do not require an exorbitant credit score. But they have higher interest rates.

You can also opt for pre-approved home loan. This is provided by financial institutions basis your income, ability to repay and credit worthiness. The advantage of having a pre-approved loan is that it will give you clear direction to plan your finances and look for properties that are within budget. Additionally, having a pre-approved loan quickens the process from sanction to loan disbursal, subject to all the conditions being met. Usually, the validity of the pre-approved loan is 6 months, post which you will have to get it reappraised at a nominal cost.

How to increase your loan eligibility?
Banks can determine the home loan amount that you can get by analysing the income which you take home. If you are feeling curious, you can use some of the automatic home loan calculators on the internet to check how much money you can borrow.

There are several ways in which you can improve your loan eligibility:
•    Usually, taking a joint loan i.e. applying for a loan jointly with another earning member of your family will ensure you get a higher loan amount.
•    Age is also a determining factor when it comes to getting a higher loan amount. Banks are willing to lend relatively higher loan with longer tenure to younger people, as they have more employable years.
•    Make sure your old debts are paid off.
•    Improve your CIBIL, or simply, your credit score. The higher your credit score, the more likely you are to receive the loan at attractive rate of interest.
•    Add one more source of income to back up your existing one.

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