LOAN GUIDE WEIGH YOUR HOME LOAN OPTIONS

Acquiring a home loan is a crucial part of the home buying process. Therefore, prior knowledge of home loans so that you choose the one best suited to you is a must. The following points we believe will help you to get a better insight into the dynamics of home loan selection process.

1. What is a Home Loan?

Home loan is a loan disbursed by a bank or financial institution (lender) to an individual specifically for buying a residential property. Here, the lender holds the title of property until the loan is paid back in full along with interest.

2. What is the tenure of a home loan?

Home loans are long term borrowing instruments with a minimum tenure of 5 years and a maximum tenure of 30 years. The tenure offered to you for your personal loan depends on the loan amount that is sanctioned to you by the lender along with other factors.

3. What is the Eligibility Criteria for a Home Loan?

Anyone — whether self employed or salaried individuals/professionals — with a regular source of income can apply for home loans. One must be at least 21 years old when the loan period begins and should not exceed an age of 65 years when the loan ends or at the time of superannuation. This is the generic home loan eligibility criteria and specifics such as the minimum and maximum age limits, minimum income level, etc. may differ from one lender to another.

4. How should I apply for a home loan on Web ? Will the Builder facilitate?

When you log on to the home loan section of any Bank, yiu can apply for home loan in minutes by following a few key steps:

  • Find out the various lenders who would be interested in providing you with a home loan based on loan amount, income level and related criteria provided by you.
  • Compare the home loan offers based on factors such as interest rates, processing fees and other relevant factors.
  • Just choose and click to apply for the home loan with the specific provider with the click of a button.
  • Subsequently your prospective lender will get in touch with you to get supporting documents and complete other formalities.
  • The Builders will also facilitate for a smoother transition.

5. What do banks consider when granting a home loan?

Once repayment capacity determines your eligibility to apply for home loan, lenders consider the following factors:

  • Income level of the applicant
  • Age of the applicant
  • Qualification (stability and occupation continuity)
  • Resident status (maximum limit for an Indian resident differs from that of a non-resident)
  • Spouse's income (household income is taken into account when there is a co-applicant)
  • No. of dependants (it is a measure of repayment capacity)
  • Credit history and score (past repayment track record)
  • Status of existing loans

6. Can I apply for a joint loan with my friend?

No. A lender would only allow you to apply for a joint home loan if the application is co-signed by one or more members of your immediate family. Thus, your friend does not qualify.

7. Who can be joint borrowers in case of a home loan?

Immediate family members such as your parents, spouse and children are allowed to be joint borrowers in case of a home loan.

8. What is the maximum number of joint borrowers for a home loan?

The maximum number of joint borrowers in case of a home loan is fixed at 6. However, only family members such as parents, siblings and spouse can be co-borrowers for a home loan in India. Additionally, having a co-borrower who has a robust credit history and good credit score is preferable as compared to one with a low credit score.

9. What is floating rate home loan? What are the current rates?

Floating rates are at 8.65%. If the interest rate on the loan varies periodically over the loan tenure, then it is called a floating rate home loan. Lenders have their own base rate which determines the rate of interest charged on a home loan. The base rates of banks are revised from time to time based on RBI directives as well as other factors, which leads to an increase or decrease in the EMI amount payable. RBI cannot decide interest rates anymore, it will be decided by the markets hereafter.

10. What is a fixed rate home loan? Is it available?

Fixed rates are higher by .75% to 1% .Fixed rate home loans are offered at a predetermined interest rate during the loan period and these remain unchanged during the loan period irrespective of market conditions. This can be a huge benefit when market volatility starts affecting interest rates. For instance, if the RBI increases interest rates on loans, then people with fixed rate home loan will not be affected by any increase or decrease in the market interest rates and the EMI amount will remain unchanged. More over we do not have fixed rates anymore as on (20.12.2018)

11. How is the MCLR method going to affect my current home loan?

As per recently updated RBI rules, banks are required to use the MCLR (Marginal cost of lending rate) method to determine the interest rate on home loans. In case of a floating rate home loan, the banks are now required to change the interest rate either yearly or every six months. In case you have a fixed rate home loan, you can get in touch with your bank to get information regarding conversion of your fixed rate home loan to the new MCLR-based floating interest rate. At present, introduction of the new MCLR regime has led to a reduction in applicable home loan interest rates.

12. Can I switch from a floating rate home loan to a fixed rate?

Yes. A few lenders do offer you the option of switching from a floating rate to a fixed rate home loan and the other way around. However, this is not applicable to all home loans and there are a few charges involved in implementing this conversion. Get in touch with your lender to get details regarding the procedure and requirements.

13. How do I repay my home loan?

There are different ways to pay off your loan such as issuing post-dated cheques for the tenure of the home loan, getting the amount deducted automatically from your salary or by issuing standard instructions to the lender for ECS (Electronic Clearing System) wherein the EMI is automatically deducted from your bank every month.

14. Should I apply for a home loan with a public or private bank?

Before zeroing in on a home loan, it is best to compare the various interest rates that would be applicable to you. When you apply for a home loan through Paisabazaar, you get the opportunity to apply for a home loan through both private and public-sector banks. Also take into account, the fact that banks charge various processing and other related fees when you apply for a home loan and you should also consider these, when applying for a home loan.

15. Is prepayment of home loan allowed?

Yes, one can repay the loan amount before completion of the scheduled loan tenure by making a lump sum payment towards paying off the loan. In such cases, the bank may decide to apply some penalties in the range 2-3% of the principal amount outstanding. Some banks and NMFC (non-banking financial companies) do not charge any penalty on making prepayment of a home loan.

16. What are the key charges associated with a home loan process?

  • Processing Fee- When applying for a loan, a fee is paid to the lender known as processing fee. The amount paid could be either a percentage of the loan amount or a fixed amount that is paid in lieu of carrying out the loan sanction formalities.
  • Commitment Fee- It is essential to avail the loan within a stipulated time period after it is processed and sanctioned otherwise some financial institutions levy a commitment fee. By paying the commitment fee, you are assured that you can access the loan at the interest rate and for the tenure that was initially agreed on. Most banks no longer charge this fee.
  • Pre-payment Charges- Banks/ financial institutions might charge a penalty if the entire loan amount is paid off before completion of the loan tenure. The penalty amount also known as foreclosure/pre-payment charges could be a maximum of 5% of the loan amount that is paid off before the completion of loan tenure.
  • Miscellaneous charges- Documentation, stamp duty, credit bureau report issuance charges and consultant charges are generally considered as miscellaneous charges by few lenders.

17. What documents do I need to submit with my home loan application?

The documents that need to be submitted may vary from one lender to the other. Some of the necessary documents to be submitted include the following-

  • Completed loan application form
  • Passport size photographs
  • Identity proof – PAN card/Passport/ DL/ Voters ID
  • Residence proof- telephone or electricity bill/ passport/ voter ID / property tax receipt
  • Bank statement for at least past 6 months and salary certificates/ latest acknowledged ITR
  • Copy of plan approved for the proposed construction/extension
  • Cost estimation/ valuation report from Bank's (or finance company) authorised surveyor/evaluator
  • Allotment letter of housing board/ NOC of the society/Builder etc. as well as any other land use certificate/other

18. Is there any tax benefit available on home loans?

The tax benefit on home loan is divided into two sections-

  • Tax exemption on repayment of the home loan principal: This is the deduction allowed under Tax Section 80C with a maximum annual tax deduction of Rs, 150,000 under the section
  • Tax benefit on the interest rate for home loan- Under Section 24 of the Income Tax Act, you can avail the tax benefit on the amount of interest paid on a home loan to the maximum limit of Rs. 2 lakhs for a self occupied property.

Tax benefit for Joint Borrowers: In case of joint home loans, each of the co-borrowers is eligible to receive a total of Rs. 3.5 lakhs (1.5 lakhs under section 80C + 2 lakhs under section 24) as tax exemption. Hence, if a married couple co-signs for a home loan, they can claim a total tax exemption of Rs. 7 lakhs on their home loan.

19. What is a top up loan?

If you have an existing home loan and have made timely repayments towards the existing home loan, you may get the option of borrowing an additional loan equal to the amount you have paid off on your current home loan. This is termed as a top up loan. The interest rates on a top up loan are less than a personal loan and it requires little or no paperwork to process this loan and the money can be used for a range of expenses.

20. Can I have a co-applicant when I sign up for a home loan?

Yes. You can have a family member like your spouse or your parents co-sign with your when you apply for a home loan. Having a co-signor for your home loan improves your chances of being approved for a larger home loan amount. A co-signor is specially recommended if the primary applicant has a low credit score or has had problems when applying/paying off a loan in the past.

21. Is having a good credit record important in case of a home loan?

A home loan is a long term loan (5 to 30 years tenure), hence lenders want to ensure that they will get their money back in the long term. Therefore, the loan sanctioning authority will definitely check your credit history before sanctioning a home loan to you. By having a good credit record/history you would be classified as a low risk borrower and you may be able to get preferred (low) interest rates and waivers on various bank fees on the basis of your credit history.

22. I have low credit score. Can I still apply for a home loan?

In case you have a poor credit score, you will find it difficult to get a home loan. However, you can improve your chances by getting a co-borrower. The co-borrower needs to be a family member like your spouse or parents. Ideally, you should choose a co-borrower who has a regular source of income and good credit history to bolter your chances of a successful application.

23. What is pre-EMI Interest?

When banks sanction you a home loan, the EMI payments may not start immediately. In such a situation, the bank is liable to charge a pre-EMI interest on your loan. This interest is payable monthly from the time the loan is disbursed till the time the EMI payments start off. The pre-EMI interest amount is lower than the home loan EMI as the principal payment portion is excluded for pre-EMI interest payments.

24. What is the margin on a home loan?

The margin on a home loan refers to the percentage of the cost of the home that is not covered by the lender providing you with the home loan. On an average, lenders implement a 20% margin on home loans i.e. the home loan amount sanctioned to you will be 80% of the actual cost of the property. The remaining 20% of the home loan cost will have to be borne by you. Though the 20% margin is the industry average, lenders may increase or decrease their home loan margins on a case by case basis.

25. What costs are not covered by a home loan?

Apart from the margin, some other costs will have to borne by you. Some of the key expenses in this regard include the initial down payment, stamp duty costs, registration costs and transfer charges among others.

26. What is an amortization schedule?

Amortization is a table with details of interest payment and periodic principal of a loan along with the amount outstanding after each payment and the decrease of loan balance till zero.

27. What are the different types of home loan?

There are various types of home loans depending upon your specific requirement. Some of the key ones are as follows:

Land purchase loans: These loans are granted to individuals for the purchase of land on which they intend to build a house.

Home purchase loans: These are the most common type of home loans that is granted to individuals and they are granted for the purchase of an apartment.

Home construction loan: This type of loan is granted to individuals for the construction of a house on a plot of land that is already owned by the applicant.

Home Expansion/Extension Loan: This loan is specifically granted to individuals who want to expand their current home to include a new construction such as an additional floor, room, bathroom, etc.

Home Improvement Loan: Existing home owners who lack sufficient funds to renovate their existing home can apply for this loan to upgrade their home with a new paint job, electrical wiring, water proofing, etc.

Home conversion loans: Using this type of home loan, an existing home owner can add to their existing loan so that they can purchase a new house. This type of loan is only applicable to existing home owners.

NRI Home Loans: These home loans are specifically designed to provide non-resident Indians with financing so that they can purchase a home in India.

28. If I have a current home loan and want to move to a new house, what option do I have?

You best option is to apply for a home conversion loan. Using this type of loan, you can add to your existing home loan and purchase the new one without having to opt for a second home loan.

29. What is Home loan pre-approval?

Home loan pre-approval is a facility provided by banks and NBFCs to their customers, which allow those interested in purchasing a house with the particulars regarding their eligibility even before they have decided on a property to purchase.

30. How long is the home loan pre-approval valid?

You best option is to apply for a home conversion loan. Using this type of loan, you can add to your existing home loan and purchase the new one without having to opt for a second home loan..

31. How do home loan requirements vary for an apartment and a plot of land?

When you take a home loan for an apartment, you technically apply for a home purchase loan. This type of loan is the most common one that is provided to individuals and is eligible for tax benefits under section 24 and section 80C. In case you want to purchase a plot of land for building your house at a later date, you have to apply for a land purchase loan and there is currently no tax exemption benefit for this type of loan.

32. What are Computed interest rates for RS.10 Lakhs?

Computed here are EMI s for a RS. 10 lakhs loan at 8.65% per anum as on 10.12.2108 for 10,15 & 20 year periods .

  • 10 Yrs EMI - Rs.12,470/-
  • 15 Yrs EMI - Rs.9,930/-
  • 20 Yrs EMI - Rs.8,770/-

TOTAL INTEREST OUTFLOW

  • 10 Yrs - Rs.4,97,000/-
  • 15 Yrs - Rs.7,88,000/-
  • 20 Yrs - Rs.11,05,610/-

Of course longer tenures does help in reducing the equated monthly installments (EMI) . Experts advice borrowers to aim at fully repaying the loan before they stop working so that the retirement income is not dented by repayment obligations. Therefore , the lesser number of years you have to retire , the shorter should be your loan tenure.

33. What are the top home loan providers in India?

Due to the huge demand of home loans, banks and NBFCs across India provide home loans to their customers. Some of the leading banks who provide home loans to individuals include ICICI Bank, Axis Bank, State Bank of India and associates, Bank of Baroda, RBL Bank, Indian Bank, Karnataka Bank, KVB Bank, LIC Bank, PNB Bank, HSBC Bank, Allahabad Bank, HDFC Bank and many others. Very few NBFCs in India that provide home loans in India.

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