A house is easily one of the most expensive things that you buy in your life. Since most people take a Loan to finance that investment, it pays to learn how the system works, and most importantly- to know whether you can get the full property value covered with the loan itself. Let’s get into it!

Home Loans and Property Value

Here is the thing- most banks don’t cover the complete property value in a home loan. That’s just how it works, and it doesn’t matter how good your credit report looks, you just have to pay a certain portion of the total value from your own pocket. However, that’s decided by the LTV or loan-to-value ratio.

What is LTV Ratio?

LTV ratio is the ratio of the amount of loan that can be offered to the total value of the property in question. Usually, it varies from 75% to 90%, but it’s never 100%.

LTV ratio determines how much percentage of the property value can be financed by a lender. The remaining amount has to be paid by you which is also called “down payment”.

Now, although a high LTV ratio is generally sought after, settling for the higher ratio may not always be the best idea. This is because the higher is the loan amount, the higher is the EMIs which translates to a huge amount that’s paid in interest. On the other hand, if a bank offers a high LTV but you choose a smaller ratio on your own accord, then it means you can save a lot of money you would otherwise pay in the form of interest.

Factors that Affect Loan Eligibility and LTV Ratio

The following are some of the main factors that affect your loan eligibility and the maximum LTV ratio that you can get:

Age

Your age determines how big of a loan you can get, if at all. Generally, lenders favor young professionals over customers of age 50 and above. The reason is simple- a young salaried individual has many decades in front of them to earn more money. They are also likely to get promotions and salary hikes over time. All this makes it easier for them to repay the loans. The people in their 50s and above, on the other hand, will have less number of work years ahead. Thus, they may face a variety of challenges in repaying the loan on time.

Income and Debt

Your income should be high enough to justify the loan amount that you are seeking. If it’s low, then the bank may offer a smaller LTV ratio so that the risk is less on their end. They may also increase the home loan interest rate.

Apart from the income, your existing financial liabilities also affect your loan prospects. Naturally, if already have a huge debt to repay, then a lender won’t feel comfortable adding more to that debt.

Credit Score

Almost every bank and financial institution checks the credit report of every loan applicant. Although it’s the credit score which they are mostly interested in, they also go over other details such as personal information, repayment history which shows whether you have made any late payments in the past, existing loans (if there are any), income status, etc.

Some of the most important aspects of your loan are based on your credit score alone. These include the LTV ratio, home loan interest rate, etc. Thus, it’s really important that you check your report before you submit the application. If you see that your score is poor, then you can work on improving it first and submit the application once it’s high enough.

Bottom Line

As you know, there are additional charges too which aren’t covered in the loan including processing fee, stamp duty and registration charges (levied when purchasing a home), etc. So, make sure that you have a provision for these as well.

The post Do Banks Cover Complete Property Value in a Home Loan? appeared first on Credit Sudhaar Blog.