If you talk of the symbols of financial accomplishment in India, one event is probably the most appreciated.
This event is truly a milestone in anyone’s life.
What is it?
Buying a home.
A home of your own is an expression of success, a signal to your social circle that you have really arrived.
Buying a home gives you a sense of pride, happiness, and fulfillment that you hardly get from staying in a rented apartment.
And it is not only about you.
But also your family — your spouse, your children feel secure and proud.
But most of us do not have the financial resources to buy a home from our own savings.
That is why taking a home loan is a necessity while buying a home.
However, it is important to know about home loans and how to get the best out of them.
Today, we will look at all the aspects of home loans so that we have all the information about them.
Let’s dive right in.
What are Home Loans?
Home loans are considered mortgage loans because the loan is taken by pledging an immovable property. The collateral for the loan is the property itself.
Residential and commercial properties are accepted as collateral. Lenders accept under-construction property, fully constructed property, and freehold residential and commercial property as collateral.
The borrower gets back the property title after repayment.
Home loans generally have a tenure of 15-30 years. The loan amount is 70-90% of the property value, and you must make an initial payment (also called down payment) for the remaining amount.
Home loans are paid back through Equated Monthly Installments (EMIs).
Documentation is hassle-free and you can apply for a loan even before selecting the property.
Types of Home Loans in India
Home purchase loan
Generally called a home loan, this is the most common. You can choose from housing finance companies, public, and private sector banks.
Home construction loan
This type of loan is suitable for anyone who already owns the land and is planning to build a house on it.
Home improvement loan
You can take such a loan to cover the expenses for repairs and renovations such as interior decor, roof waterproofing, electrical system upgrade, etc.
Home extension loan
If you own a home and want to extend it with additional rooms or floors then this type of loan is helpful.
Composite home loan
Such a loan helps the borrower finance both the purchase of land and the construction of a house on it, all within one loan.
How Do They Work?
The interest on a home loan is usually floating, and it is paid each month along with payment to the loan’s principal.
As the homeowner gradually pays off the principal, the interest is calculated on a reduced base, allowing future mortgage payments to go further than merely covering interest costs.
In the initial period, EMIs typically constitute more of the interest amount and in the later period, EMIs comprise more of the principal amount.
However, because the lender really maintains the title for the duration of the mortgage, if the borrower is unable to make payments, the lender has the right to foreclose on the house. This option, however, is the last resort of the lenders to realize the payment.
What is the Eligibility to Apply for a Home Loan?
Housing finance companies and banks have a set of eligibility conditions for home loans. One of the most important factors banks look at is the borrowers’ credit history, captured in their CIBIL scores. A high credit score is appreciated and banks often offer a somewhat reduced interest rate.
Banks consider several factors to determine the repayment capacity of the borrower:
- Employment status
- A minimum period of service, business, or self-employment
- Age
- Annual salary (a minimum annual earning is stipulated)
- Assets, liabilities, and continuity of service/business
- Residency status (Resident Indian/Non-Resident Indian)
- CIBIL score
CIBIL Score and Its Implications
A CIBIL score is a numerical representation of your ability to repay credit. It is a three-digit number that falls in the range of 300-900. A score closer to 900 can get you better deals on loans. The majority of lenders like banks and non-banking finance companies (NBFCs) prefer a CIBIL score of 750 and above.
Your credit score is calculated by an algorithm that takes into account several factors. Each factor gets a different weightage in the calculation.
The factors that determine your CIBIL Score are:
- Your loan-repayment history (35% weightage)
- Loans outstanding (30%)
- Your experience with debt: the time frame for which you have re-payed your loans (15%)
- The type of loans you have taken or currently have (10%)
- Your credit mix-ratio of secured to unsecured loans (10%)
It is one of the most important factors when it comes to your loan approval. A high CIBIL Score is an assurance for lenders that you are a responsible borrower with a good track record of making timely repayments.
When to Apply for Home Loans
You should apply for a home loan if certain conditions are fulfilled. Home loans are long-term commitments, and adequate prudence must be maintained.
Also, remember that in addition to the cost of the property, there are other fringe costs you have to bear, including stamp duty and registration charges.
Let’s see what these conditions are:
- You must not have other significant loans.
Before applying for a home loan, it is prudent to repay all other loans, especially high-interest credit card loans. Also, banks will question your financial status and most probably end up sanctioning a lower amount than you apply for.
By repaying all other loans, your credit score will be high and banks will sanction a higher amount at lower interest rates.
- You must have adequate savings for the down payment.
Banks typically sanction a loan that is not more than 90% of the cost of the property. However, the sanctioned amount depends on various factors.
It will be preferable to pay as much down payment as possible so that the EMI burden is as low as possible.
Garner adequate savings before you apply for a home loan so that you can as much down payment as possible.
- You must have a long, stable source of income.
As home loans are long-term financial commitments, a stable source of adequate income will work as a cushion to your financial health.
You will be eligible for a higher home loan value if your number of years of service and monthly salary is on the higher side. Always remember that the EMI you pay should never be more than 40% of your monthly income.
- Before applying for a home loan, check if the due diligence is done.
Financial institutions carry out due diligence for the property to ensure there are no legal hassles in the future.
How to Apply for a Home Loan?
The borrower must apply for approval for a mortgage with complete details of his financial history. Banks study these documents to make sure the borrower is financially sound to repay the loan. This step is quite easy and banks consider this information to pre-qualify the applicant.
To pre-approval of your application, your complete details of financial status, outstanding debt, income, assets, and all other relevant information need to be submitted to the bank. They will conduct a thorough investigation to ascertain your current creditworthiness. They will also indicate to you the amount the bank is most likely to sanction.
The final step, of course, is the approval of both the borrower and the property after thorough due diligence including the valuation of the property.
The borrower must make a down payment before disbursal of the loan.
The best idea is to take the help of a professional consultant for guidance as the entire process has multiple steps.
What Documents are Required?
- Identity proof (PAN card, Aadhaar, Passport, Voter ID, etc.)
- The address is (Copy of passport, Voter ID, Utility bills, etc.)
- Age (Birth certificate, Class 10 mark sheet, etc.)
- Income (Salary slips and Income Tax Return copies)
- Current loan agreements (if any)
- All property documents
Inclusion of a Co-Borrower
The inclusion of a co-borrower in your home loan application is likely to ensure higher loan eligibility. The joint applicants are also entitled to receive income tax benefits.
Immediate family members, such as parents, spouse, children, and/or siblings can be the co-borrowers for a joint home loan. The co-applicant should either be salaried, a professional, or a self-employed individual.
Reasons for Rejections
Financial institutions, as part of their prudential lending norms, may reject a home loan application for variety of reasons.
The borrower should be careful of the following factors before applying for home loans.
- Credit score. A poor credit score is a major reason for banks to reject home loan applications. Any CIBIL score below 700 will automatically get your home loan application rejected.
- The borrower’s age and the years of future earning are major determinants of home loan approval. An applicant above 55 years has limited time for repayment and the EMI is substantially high in absence of a considerable down payment amount. Such cases can invite rejection.
- Banks and housing finance companies take into account the profile of the employer and the applicant. Applicants working in reputed companies ensure job stability, and banks are most likely to approve their applications.
- The fixed obligation to income ratio (FOIR) is basically the proportion of income that goes towards servicing existing loan repayments, and other fixed obligations like family expenses, insurance premiums, etc. Banks prefer the borrower’s EMI obligation must be within a certain limit to avoid financial stress.
- Besides the above, if the borrower is a guarantor of another’s loan, his application can get rejected if it is considerably high. Standing as a guarantor for someone will also hit your credit eligibility. Your loan eligibility will be decreased by the outstanding amount guaranteed by you.
Income Tax Benefits of Home Loans
There are significant income tax benefits for home loan borrowers.
A home loan must be taken for the purchase/construction of a house. If it is taken for the construction of a house, then it must be completed within five years from the end of the financial year in which the loan was taken.
If you are paying EMI for the housing loan, it has two components –
- Interest payment
- Principal repayment
The interest portion of the EMI paid for the year can be claimed as a deduction from your total income up to a maximum of Rs 2 lakh under Section 24.
From the assessment year 2018-19 onwards, the maximum deduction for interest paid on self-occupied house property is Rs 2 lakh.
For let-out property, there is no upper limit for claiming interest.
Besides claiming the deduction for principal repayment, a deduction for stamp duty and registration charges can also be claimed under Section 80C but within the overall limit of Rs 1.5 lakh.
Benefits of Current Low Interest Rate Regime
For the last few years, interest rates are the lowest in decades and this is a boon to homebuyers. Even if the interest rate has marginally up recently after inflation raised its ugly head, it has not made any serious hike in home loan EMIs.
The good news is that inflation seems to be moderating and it is expected that interest rate hikes by the RBI can take a pause or be mild at best.
This is a golden opportunity for the homebuyers to buy their chosen homes by taking low-interest home loans.
Their home loan eligibility is likely to be somewhat higher because the EMIs are not very high. Moreover, moderate EMIs will be benign to their finances.
Will You Go For It Now?
Yes, if you are planning to buy a home, you should not let go of this benign interest opportunity.
Even if the interest rates are tolerable, construction raw material prices are increasing and home prices are inching up.
There has been an average upward impact of about 8% on home prices in Kolkata in the last year.
Before home prices go up substantially, buy your dream home by taking advantage of the low-interest regime.
