For most house buyers, obtaining a home loan is the only option to realize their home-ownership dreams. While most purchasers focus on interest rates when selecting a loan, there are additional elements to consider so that you can increase your loan approval prospects at a reasonable cost and ensuring consistent repayment of loans. In this blog article, we will look at how to choose a home loan and some of the important points to consider while getting a home loan.
Create a corpus for margin money:
According to RBI norms, banks and housing finance companies (HFCs) may fund up to 75-90% of your house’s value through home loans. This portion of the house’s cost funded is known as the LTV ratio (Loan-To-Value). The RBI has capped the LTV ratio for housing loans up to Rs. 30 lakh at 90%. Home loans between Rs. 30 lakh and Rs. 75 lakh are limited at 80%, while loans over Rs. 75 lakh are capped at 75%. The remaining amount of the house value must be funded by the borrower himself in the form of margin contribution or down payment. To clarify, consider you get an approval of 80% of the property cost as home loan. The remaining 20% has to be funded by the borrower. This 20% is known as the margin money or down payment.
The final LTV ratio would also rely on the lenders’ credit risk standards. Thus, one should seek to accumulate a financial corpus of at least 20-25% of the your target property’s total cost. A bigger down payment would lower the interest rate and increase the likelihood of loan acceptance by the banker. Certain lenders provide reduced interest rates to clients who select for lower LTV ratios.
Loan Tenures:
Home loan tenures typically range from 10 to 30 years. While a shorter duration reduces interest costs, it also increases EMIs. Furthermore, lenders prefer to lend to people whose total EMIs, including those for the currently requested house loans, are between 50 and 60 percent of their total monthly income. Applicants that surpass this ratio have a decreased likelihood of loan approval. To determine if total EMIs will fall under the aforementioned limit, utilize house loan EMI calculators available online. If not, applicants might choose a longer loan term and/or a larger down payment to boost home loan eligibility. If your spouse is also employed, then applicant can also get a joint home loan with your spouse, so that you may secure a better chance of loan approval, as joint increased income will make your loan eligibility chances more.
Have a good Credit score:
Credit score is one of the primary criteria utilized by lenders when analyzing loan applications. Applicants with a solid credit history and a good credit score are more likely to get approved for a loan. Many lenders also provide cheaper loan rates to people with higher credit scores. One should preferably have a credit score of 750 or above. The initial step in developing a solid credit score is to obtain credit reports periodically. Following that, if there are any anomalies in your credit report, contact the credit bureau to get them resolved.
To consistently improve credit score, it is also necessary to follow good credit habits such as settling credit card bills/EMIs on time, reviewing guaranteed or joint loans, and avoiding numerous loan/credit card requests over a short period of time. If you have never taken out a loan before, start to build a credit score by applying for a credit card and maintaining it prudently. If you are unlikely to do so owing to qualifying restrictions, consider secured credit cards to help increase your credit score.
Compare loan offers:
Interest rates, terms, LTV ratios, and even loan amounts given by different lenders might vary greatly based on their credit risk policy. This emphasizes the need of comparing loan offers from as many lenders as you can before making a final decision of taking out a home loan.
Begin the procedure by contacting lenders with whom you have existing savings accounts or deposits or loans or credit cards. Some lenders offer cheaper interest rates to current customers with strong credit histories. Then, use online financial markets to evaluate loan offers from different lenders depending on your credit profile. Choose the lender that provides the best offer in terms of overall borrowing cost and EMI affordability.
Emergency fund:
Failure to pay back home loan EMIs amid financial problems might result in costly fines and a negative influence on one’s credit score. The easiest approach to prevent this is to save at least six months’ amount of house loan EMIs in an emergency fund. This will provide liquidity during financial emergencies, as well as prevent the loan from becoming a Non-Performing Asset (NPA) for the bank, avoiding your name on the bank’s default (non-payer) list.
