While a home loan can help you own a house almost immediately, lack of planning or misunderstandings can turn out to be detrimental to your financial health
Buying a home is considered to be a huge milestone which needs a lot of paperwork, planning, and money. When it comes to buying a house, a home loan is the most preferred method of financing. Through a home loan, a home buyer can choose to make a part payment as the down payment and the remaining amount is provided by one of the financing institutions such as banks and non-bank financial institutions. While a home loan can help you own a house almost immediately, lack of planning or misunderstanding can turn out to be detrimental to your financial health. There are various factors which are considered to be important while carrying out a home loan application. These factors determine terms and conditions of the loan which indicates how much you will be paying over a particular period of time.
Home loan application can be overwhelming to most of the first-time home buyers. However, the following factors will help you understand the basics of home loan. These factors play an important role in most types of home loan applications:
Home loan application process - In order to get a home loan, an individual must meet the loan eligibility criteria. After the applicant fills in the application form and submits the necessary documents, the application is reviewed by the financial/lending institution to determine whether the requested credit can be extended to the applicant. Most banks and real estate developers/builders now provide an option to calculate home loan EMIs based on the variable factors.
Comparing home loans - Home loan schemes offered by lending institutions may differ in terms of interest rates, loan tenure, charges such as processing fee, foreclosure charge, etc. There are many websites that allow individuals to compare two or more loans based on many parameters. Based on the borrower’s requirements, lending institutions may allow customisation to the loan scheme. The comparison also allows the borrowers to determine the scheme that best suits their requirements.
Property verification - Many individuals may find the option of a pre-approved home loan to be the best. However, it is essential to verify the property title, builder/developer, etc., before deciding to buy the property. It will not only help you avoid the risk of fraud but also help you understand the credibility of the project. Whether it is ready to move-in property or it is under-construction, ensure you have verified the property title and other documents before making a purchase plan.
Property cost - Before you initiate the loan application, you will need to determine how much down payment you will be paying since most lending institutions only provide up to 80% of the property cost. Additionally, lending institutions also look into the borrower’s income. When you apply for a home loan with a co-owner such as your wife/husband, there are more chances of getting an approval as the total income may indicate a higher earning potential. Depending on the type and rate of interest and the loan tenure, there will be a certain amount of EMI that you will pay towards the loan.
Home loan interest rate - Borrowers can choose to take the loan under the fixed or floating interest rates. Home loans under the fixed interest rate will require a fixed amount of EMI to be paid every month unless there a major change in that market that forces the lending institution to revise the interest rates. As the name suggests, floating interest rate changes frequently based on the market, which also means that the borrower may be required to pay a lower interest rate at multiple occasion during the loan tenure.
Credit score - Assigned by credit bureaus, credit score reflects an individual’s credit/debt repayment capability. Based on how an individual manages his/her credit through credit card and other loan products over a period of time, the bureaus calculate and assign to score to most individuals. Credit score is used by lending institutions to evaluate the loan applications which partially determine whether they get approved or rejected. Before you start the plan to purchase a property with a loan, ensure that you have a healthy credit score. There are various simple methods that can help you build/improve your credit score.
Home loan tenure - Loan tenure or loan term impacts the EMI directly. Home loan with shorter loan tenure may demand a higher EMI. However, choosing a lengthier tenure for lower EMIs will result in paying an overall higher interest amount. While choosing the loan tenure, choose the lowest loan tenure based on your affordability. Additionally, ensure that you go through the pre-closure conditions which can help you close a loan account before the completion of the tenure.
Charges, fees, and penalties - Make sure you go through the terms and conditions to understand various types of charges, fees, and penalties which can increase the cost of the loan. Factors such as processing fee, tax, stamp duty, and foreclosure charge are an important part of the loan which can help you plan it effectively.
Pre-approved home loans - Most lending institutions provide a list of pre-approved housing projects. The projects mentioned under this list are already verified by the lending institution against various parameters such as the builder’s credibility and other factors. Additionally, a pre-approved loan can help you save time which you may be exhausting in search of a perfect home just to realise that your application got rejected.
Home loan factors for lending institutions
Most banks and non-bank financial institutions look into various factors before approving/rejecting a home loan application. Some of the factors are listed below:
●Application - Once the applicant fills in the form, it is reviewed and verified by the lending institutions. Details such as age, occupation, etc., are assessed against the loan eligibility factors to determine if the applicant qualifies for the loan.
●Income - The lending institution will look into the applicant’s income to check the repayment capability. While calculating the income, only the disposable income is taken into consideration. Income such as medical allowance, transport allowance, etc., are taken off the calculation.
●Cosigners - If the loan application is made by co-owners such as husband and wife, there are more chances of getting an approval. Lending institutions prefer co-signed loan applications over applications without a cosigner.
●Property - The lending institution will also assess the value of the property to determine how much credit can be extended.
●Credit report - Credit rating/report is considered to be one of the most important factors that the lending institution looks into while approving/rejecting a home loan application. A healthy credit score will enable the lending institution to extend the credit easily, which is otherwise in case of a bad credit score.