Points to Consider Before Taking a Home Loan

By Ashutosh Jha → Last Updated on Tuesday, December 1, 2020
Getting your own home is a big-ticket decision, and you must get the facts right so that you don't make any costly errors. If you can't pay your EMIs, the bank will take possession of your home, and you will lose your hard-earned money.

To help make an informed decision, we share all the information you need about a home loan.

Points to Consider Before Taking a Home Loan

Here are some things you should know before you apply for a bank loan:

CIBIL Score

This score is an indicator of your creditworthiness or ability to repay your debts. If you have a credit card, make sure that you make your payments before the due date. If you clear your dues on time, you will have a high credit score.

There are numerous benefits of having a high CIBIL score. You will get a home loan at competitive rates, get a higher loan amount, get the loan processed faster, and a longer repayment period.

There are a lot of trusted banks that offer credit cards like SBI. Choose the best SBI credit card that meets your requirements and save big. Make your bill payments on time and get additional savings through apps like CRED.

Eligibility Criteria

The home loan the bank or financial institution sanctions will depend on your income. If your income is low, you can get a loan through USDA's Single-Family Housing Guaranteed Loan Program. You just need to choose a house that is located in rural areas. USDA loan is a mortgage financing program that aims to make purchasing a house in rural areas more affordable. Potential buyers can check the USDA loan map Oregon to view those areas eligible for this loan. The other factors that will decide the amount of loan would be your age, financial position, qualification, job stability, the income of your spouse, and the number of dependents.

Types of Loans

There are different categories of home loans, including floating rate loans, fixed-rate loans, or a combination of both. Floating rate loans have varying interest rates that depend on the lender's benchmark rate. When the benchmark rate changes so do the interest rate and are beneficial in a falling interest rate regime.

For fixed-rate loans, the interest rate is decided when the loan is taken. These rates are beneficial in a rising interest rate regime. You can track your monthly expenses better since the EMI amount remains the same.

You can also go for a combination loan where you have a fixed and a floating component. Whether you choose a fixed rate home loan or a variable rate home loan or a combination of both, you need to calculate your monthly EMI. The best way to do this would be free tools like a home loan EMI calculator. You can also use a credit card repayment calculator on how much to pay off.

Approved Properties

You will get loans from the bank or other financial institutions for preapproved projects. So before you apply for a home loan, find out if the concerned project is approved by the bank or not. With a preapproved project, you can shortlist the project that meets your budget.

You can get a list of preapproved projects in your preferred location and make your decision. Going for a preapproved project gives you the dual benefit of assured quality and lesser property-related documents.

Loan to Asset Value

The bank will not fund the entire loan, and usually, you have to pay part of the loan out of pocket. The loan sanctioned by the bank will depend on the loan to asset value, so if the bank pays 80% of the loan amount, the loan to asset value is 80%. You need to make 20% of the amount as a down-payment.

If you want a higher loan, you could make your working spouse, adult child, or parent a co-applicant in the loan. You have to pay your share of the loan and the down-payment. You could check your eligibility for a home loan through the housing loan eligibility calculator.

Consolidated Cost of Home Loan

There are other components in your home loan apart from the principal and interest payment. These include processing fees, prepayment charges, and administrative charges.

As per RBI rules, the lender needs to disclose all charges included in a home loan on their website. There are no prepayment charges in a floating rate loan. You can convert to a lower rate by paying a nominal conversion fee.

EMI and Pre-EMI

EMI or Equated Monthly Instalment comprises the principal and the interest component payable monthly on the outstanding portion of your home loan.

Pre-EMI is applicable for under-construction properties. You can get the loan disbursed as and when the developer asks for it. You need to pay just the Pre-EMI interest in such loans.

Tenure

Your home loan can have a tenure of 30 years, depending on your eligibility. Longer tenure for a specific loan amount reduces your monthly EMI.

Documents Required

You will require certain supporting documents with your home loan. These include your KYC documents, income, and property documents.

KYC documents include your identity and address proof. Acceptable documents are your passport, Aadhar card, landline telephone bill, and more.

There are separate income documents required for salaried and self-employed applicants. Salaried applicants need to provide the last three months' salary slip, and self-employed applicants need to submit tax returns for the last three years.

Property documents required would be the title deed, an agreement to sell, and more. The lender will conduct due diligence to verify the authenticity of the papers. The original documents must be submitted for your home loan.

Loan Protection Insurance

To protect the loan, banks need a term plan to be purchased in the applicant's name. In your absence, your family will face no financial crisis due to the unpaid loan since the term plan will cover it. You can check online portals to find out the best rates for term plans.

Avoid Default

Calculate your current cash flow and determine whether you will be able to take the additional monthly financial burden due to the EMI. Create an emergency fund equal to 3 to 6 month-EMIs to ensure you pay your EMIs on time.

If you default in payment of 3 EMI installments, the bank will take possession of your property and sell it to realize your outstanding dues. Plan your finances to ensure this does not happen.

Get Your Dream Home With a Home Loan

Having your own home is a big step in your life. Make sure that you have planned the purchase after checking your current financial position. Go online to compare the home loan rates offered by different banks and choose the one that fits your budget.

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Ashutosh Jha

Ashutosh Jha is a professional blogger, Blog and IT Consultant. He writes about Blogging, SEO, Making Money, Internet Marketing and Web Design.
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