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Home / Money / Personal Finance /  Things one should know before you go for home loans

If finding the right apartment to buy seems tricky, understanding what all a home loan entails may be no different. While banks appear keen to lend, there’s much to navigate through before you can zero down on a home loan. That one bank can be quite different from another when we get down to the specifics, adds to the complexity.

Here, we highlight three points for potential home loan borrowers based on information gathered from visits to a few banks.

Role of credit scores

While all banks value a good credit score, how that impacts your loan application can vary across banks.

For example, with the State Bank of India (SBI), your credit score can have a bearing on your home loan rate.

Under its ongoing festive offer till 31 March, the bank is offering home loans at 6.7% per annum to salaried individuals with a credit score of 750 and above. This can go up to 7.00% or higher from April. ‘New to credit’ customers are being offered loans at 6.9% until March-end. These are customers who have never taken a loan or a credit card, and therefore, do not have a credit history based on which a credit score can be calculated.

In the case of IDFC First Bank and Axis Bank, while the potential borrower’s credit score is considered while deciding on extending a loan, it does not impact the interest rate offered.

For example, if you are a ‘new to credit’ customer, IDFC First Bank may not extend you a loan in your individual capacity but may allow you as a co-borrower in a joint loan.

As a salaried individual, you can get a home loan from IDFC First Bank at a starting rate of 6.6%. Axis Bank is offering loans to its ‘Burgundy’ priority customers at 6.7%, other customers at 6.75%, and those without an Axis Bank account, at rates starting from 6.8%. The bank does not take into account the credit scores of its Burgundy customers. (All interest rates mentioned so far are floating rates, that is, repo rate of 4% plus spread).

 

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Loan amount

Banks approve a loan of only up to a certain percentage of the market value of the property that you want to buy. This is referred to as the loan-to-value (LTV) ratio and the amount is lower if the loan crosses certain slabs. For instance, for a loan of up to 30 lakh, SBI allows a maximum LTV of 90% of the property value, for loans greater than 30 lakh and up to 75 lakh, it is 80% and for loans over 75 lakh, it is 75%. So, if you are buying a flat worth 33 lakh, then you can borrow up to 29.7 lakh. A bank will conduct its own valuation exercise to arrive at the property market value. You have to submit a copy of the draft sale agreement, construction agreement and the approved building plan to the bank for this purpose.The price that you have agreed to pay the property developer will not be considered. So, if your property purchase is dependent on the loan getting approved, wait to make any payments to the developer till this exercise is completed.

What also matters is your salary. Banks are typically comfortable with lending an amount such that your EMI does not exceed 50-60% of your take-home pay. This percentage may be tweaked for those earning beyond or below a certain limit.

For instance, a person in his mid-30s with monthly take-home pay of 85,000, may get a loan of up to 90 lakh from SBI and 72 lakh from Axis Bank. For ICICI Bank, this calculation seems to depend on the borrower’s gross salary or gross income, where the latter can also include rental income, if needed.

Processing fees, other charges

There is much variation across banks on processing fees and other charges.

For example, IDFC First Bank charges 0.2-0.3% of the loan amount as processing fees. However, this is waived if you service your EMIs through an account with the bank.

Similarly, Axis Bank charges its customers a flat 10,000 as processing fee; for non-customers, it is 0.5% of the loan amount (inclusive of legal opinion and valuation fees). On the other hand, SBI, according to its website has a processing fee of 0.35% (minimum of 2,000 and maximum of 10,000) for all borrowers. This has been waived under its ongoing festive offer.

None of the banks impose a penalty charge on prepayment or pre-closure of a home loan. Though, these may come with a few conditions. For instance, both at ICICI Bank and Axis Bank, every prepayment must be worth at least two EMIs. Prepayments can be done four and 12 times a year, respectively. SBI does not have any upper or lower limits on the amount and frequency of prepayments. A few banks may also insist on taking a life cover. While this may add to the costs for a borrower, it can ensure that the loans are repaid by the insurance firm in the event of the borrower’s untimely death.

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