Key factors to take into consideration before applying for a home loan

Posted on 31 Oct 2022

Buying a home is a big deal for many people mainly, for end-users. It’s not like that; they woke up one day and decided to buy a property. They consider so many things before finalizing their decision of investing in real-estate like financial ability, city, locations, basic amenities, employment and; the list continues as per their requirements. Still, the monetary factor is the one that exceedingly influences the decision of purchasing a property.

Investing money in real estate is one of the significant decisions as it is a long term fixed investment and pretty hard to liquidate. Liquidity is the reason why many people opt for home loans despite having sufficient money. Taking a home loan is not that difficult because it is one of the cheap borrowings and banks or NBFCs are always willing to provide home loans as it is their core banking profitability.

Yet, there are some key points to remember before taking a home loan to avoid unnecessary confusions and problems in future.

Factors to be considered -

These are some main factors that we should consider before applying for home loans –

• Eligibility Criteria – The foremost is to determine whether you are eligible for taking a home loan or not. If not, then you are required to fulfil the eligibility criteria before applying for a home loan. Eligibility criteria differ from banks to banks. Generally, it includes factors like your income, employment status, value of property, age and CIBIL score. A good CIBIL score increases your chances of getting a loan effortlessly.

•  Options in home loans – Options, differ based on the interest rate on loans. Banks and NBFCs offer two types of home loans which are: 
  1. Floating interest rate home loan – In these loans, interest rates change once in a while, causing fluctuations in EMI proportionally.
  2. Fixed interest rate home loan – Interest rate and EMIs remain the same throughout the tenure of the loan.
  A borrower should go for a floating interest rate as its interest rate is relatively low as compared to fixed interest rate loans. 

• Amount sanctioned by banks or NBFCs– The amount approved by banks on a home loan is depending upon the value of your property. Generally, banks sanction 70 % to 90% amounts as a loan based on your property value. Banks or NBFCs also consider other factors such as eligibility criteria and financial soundness before approving the amount to avoid default on loan in future. 

•  Tenure of the loan – Borrower should consider the period of loan remembering his/her financial stability. Shorter the period of home loan lesser the amount of interest. Although EMI will increase in a short duration; you will be free from the responsibility of loan early and the interest amount will be less. In long tenure, EMI will be less but you end up paying more (due to interest) by the time the loan ends.

•  Cost of the loan –Acquiring home loans includes several costs like processing cost, administrative costs, interest payment etc. There is no prepayment penalty as per the recent guidelines by RBI on floating home loans. Costs of loans differ from banks to banks. Make sure that you have to pay fewer costs and there are no hidden charges included. It is the responsibility of banks to keep transparency.

•  EMI or Pre EMI – EMI means Equated Monthly Installments that you have to pay every month. The amount is fixed by taking principal amount and interest rate in calculation. It includes repayment of principal and interest on the outstanding amount. And the “Pre EMI” is used in case of under-construction property, in this case, banks disburse loans in instalments, as you need to pay to the constructor.

•  Documentation – Read all the terms and conditions carefully before availing home loans. You also need to submit documents related to identity proof, ITR receipt and property papers. Banks conduct due-diligence before approving a loan to make sure that every document is legal. Complete all the documentation processes as asked by banks, before due time.

•  Pre-closure norms – Pre-closure means to repay the remaining principal amount before the period of a loan is over; it includes an amount of interest until the last EMI. In case of fixed home loans, banks charge a penalty on the preclosure home loan. But in floating, interest home loan banks can’t ask for a penalty on pre-closure of loan as per RBI guidelines.

These are the key points that you need to take into consideration before applying for home loans. Every banks and NBFCs have their own rules and regulations which they formulate based on standard guidelines issued by RBI. Hence, it is an advice to do research properly and gather information about different banks.
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