Dream home on your mind? If yes, and if you’re planning to avail of a home Loan to fund your purchase, do keep in mind that while banks are indeed agreeable to lend to the right borrower, it can still be an uphill task, especially if you are unsure of what to watch out for.
The first thing that comes to mind is the home loan interest rate, and that is something every home buyer is conscious of. However there are other parameters that count as well, for your home loan purchase. Let us run through a checklist of factors that you should keep in mind then, while availing of a loan.
Type of loan – There are two types of home loans you can avail of, i.e. (a) fixed and (b) floating, both of which are based on the interest rate. A fixed rate loan stays constant and the interest rate does not change even with market fluctuations. Hence throughout the tenure of your loan you will have the same rate of interest going. As a result it is typically higher by 1-2 percentage points higher than what a floating rate loan would be. On the other hand, a floating rate loan changes as per the market conditions, and this consequently affects your EMIs, which will naturally change as per the rate.
If you’re wondering what suits you best, know that if you’re more comfortable with a fixed EMI amount each month, then a fixed rate loan is the one for you. This can be especially comforting if you are on a budget and would not want changes in EMI. When you compare home loans, make sure you have this aspect sorted.
Credit score – With the increasing importance of a credit/cibil score in every individual’s financial life, it becomes necessary to make sure that you have a good or healthy credit score before you go ahead and make a housing loan application. This is because the first piece of information that a lender (or in this case a housing finance company) reviews is the credit score, which is a robust indicator of a person’s creditworthiness. The score helps a lender understand the likelihood of a loan going bad, or the borrower defaulting on it, or simply put the ability as well as the intention of a person to repay the loan they have taken. Remember that a higher credit score will likely help you get loans at the most competitive interest rates. And remember, both your credit health and new home is at stake if you default on payment.
Savings – The pricing of housing especially in large metros and heavily developed urban areas can skyrocket, so here’s the thing – before you check your loan status, it would be prudent to first sit down and check your budget. Keep in mind that ultimately at the end of each month, you need to repay the loan you have taken, and larger the loan amount, correspondingly higher will be your interest burden. Do factor in the down payment as well, because remember that you would need to shell out the money from your own pocket, and that your loan will not cover it. Non-repayment of loans can have a severe impact on your property which is kept as collateral, which is not the case with unsecured personal loans. There is indeed a lot at stake!
Loan eligibility – Let us say your dream house costs Rs. 3.5 crore and you apply for a home loan to make the purchase. When you check the loan status however, the loan has been approved for a significantly lower amount. If this perturbs you, do check with the lender as to the reason. A likely cause is that the loan amount exceeds what is possible considering the income norms. Of course, on the flip side, a housing finance company may extend a larger loan amount than what you require, owing to income criteria. But all said and done, remember not to overextend yourself – EMI repayment can become a burden if it is something you can ill afford, or will need to struggle to make ends meet as a result.
Read the fine print – Remember that availing of a house loan is not merely about EMI repayment. There are other fees, charges and costs involved, which can significantly increase your cost of purchase if you have not gone through the loan application fine print with a keen eye. Take for instance late payment charges for a delay in repayment. All such charges have service tax; cess tax etc. tacked on to them, so every late payment may just cost you dearly. And the loss may extend to loss of property because unlike unsecured products, your home is mortgaged with the lender for the tenure of the loan. It isn’t always about payments, however, but there may be charges associated with servicing the loan at various stages, be it increasing/ reducing the EMI and restructuring the loan, or swapping the current ECS mandate for a new one.
The bottom line
Make sure you know precisely what you are signing up for, when you apply for a housing loan, and make your dream turn into a pleasant reality.
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