Determine Your Eligibility for a Home Loan

Let’s say you’ve been planning your dream home purchase for a long time. You now have a family income that can help you realise this dream. Now the task of searching around to find the best Home Loans, and starting the application process, begins.

Finding the best Home Loan

Ask your friends and colleagues for suggestions. Go to comparison sites and search for a Home Loan that matches your criteria. Narrow down the list by fine tuning the search. When you have a choice of lenders, read reviews on them.

Reviews from previous customers can give you good idea of the charges you have to pay, the speed with which the lender processes the application, and the time taken to disburse the amount. Reviews will also give you a good idea about the bank’s customer service, whether they were quick in passing on any lowered interest rate to their customers, and how willing they were to negotiate.

What to look for in a Home Loan

The Interest rate is the main factor to look for. However, that is just part of the story. The details include processing charges, legal fees for reviewing deeds and agreements, part prepayment charges, full prepayment charges, late payment penalties, and other additional costs.

You have to submit the Know Your Customer documents (KYC). These include documents needed for ID Proof, address proof, and age proof. You also need to provide income proof and furnish all the documents related to the property you’re buying.

Before you apply

Remember, financing institutions provide around 80% or less of the cost of the house you are buying. You are expected to put down around 20% or more as down payment towards the purchase. So, choose a house based on how much you can afford as down payment. If you can afford it, make a bigger down payment to reduce the loan amount.

You can use a Home Loan EMI calculator to find out for yourself how likely you are to get a loan for your circumstances. Do this before you apply for the loan, so that you don’t ask for too large an amount. Using the calculator, find out how much the EMI on the optimal loan amount would be for different tenures and interest rates.

Processing your Home Loan

The lender will review and verify the information given. They will also look at your financial status. They will take into account the applicant’s income, the family net income, the monthly expenditure, any other loans that you may be repaying and so on. They will determine whether you would be able to keep up with the EMIs on the loan amount that you’ve asked for.

The lender will also review your credit record to check whether you’ve been on time with your previous loan EMIs, and whether you have cleared your old loans and debts.

Negotiate the terms

The bank will send you a loan offer that mentions the loan amount, interest rate, fixed or floating interest, the tenure, and other charges. Sit down and discuss the loan terms with bank officials. If you have a good credit rating, you may have a higher chance of negotiating for better rates and even try to get the bank to waive processing fees.

Work out a good Home Loan Repayment schedule that you can keep up with. Look for loans that allow a certain number of part-repayments per year without charges. This will help you close the loan before term, reducing the interest you pay.

Save enough funds for the downpayment, making sure you have good savings and investments. Ensure that you have a good credit score before you apply for a Home Loan.

This will increase the chances of getting the best home loan and good loan terms. Always choose the shortest loan tenure you can afford: the longer the term, the higher the cost of the loan.

Few Factors also Impact Your Home Loan EMI

If you have to avail of a home loan, you would carefully consider the interest rate, the principal loan amount, and the loan tenure. But when it comes to calculating your Equated Monthly Instalment, or EMI, don’t presume a fixed rate of interest or a fixed tenure or a fixed amount.

A number of factors can change. Understanding them is crucial when taking your EMI into financial consideration.

  • Rate of Interest

The EMI primarily depends upon the interest rate being charged on the loan amount. So should interest rates begin to fluctuate in the economy, it would naturally have an impact on your EMI. The interest rate on your loan is subject to changes based on the Reserve Bank of India’s, or RBI’s, bank rates. The exception being if you have opted for a fixed rate loan. In such a case, the fluctuations in the interest rate scenario in the country will have no impact on you.

Having said that, there are very few banks which offer fixed rate loans. What is popular is fixed-cum-floating rate loans which let the borrower split the loan repayment into two portions, using fixed and floating interest rates.

  • Loan TENURE

As the loan tenure increases, the EMI decreases. This is because the borrower has a longer time frame to repay the loan.

If you negotiate a new loan term (tenure) with your lender or switch to a new lender under a new tenure, the EMI amount would be impacted.

For a lesser EMI, opt for a longer tenure. If you can afford a larger EMI, then go for a shorter tenure. Having said that, exercise caution. A lot of people make the mistake of taking short-tenure loans in the hope and eagerness to finish it off as soon as possible. This is usually an overconfident move; EMIs eat up a considerable portion of your monthly budget, and most people find it hard to pay a large EMI on top of monthly expenses. If (say) your interest rates increase, your existing EMIs could get worse, landing you in a financial crisis.

  • Income of the Borrower

Your gross income is important, as are your monthly spending habits. Both help a lender determine your capability of servicing the home loan.

Having a high income does qualify you for high EMIs, but tread carefully. Always make sure you’re prepared for unforeseen emergencies like medical bills or increased school fees for your children.

  • Age of the Borrower

Most lenders – banks and non-banking financial companies, or NBFCs, prefer the loan being closed before retirement. So if you are in your late 20s or early 30s, you can expect to get a home loan with a long repayment period. This means you get lower and and, consequently, easily-payable EMIs.

  • Partial Pre-Payment Schemes

A partial prepayment facility allows you to repay your loan ahead of schedule via lump sum payments. This is a great option since making such payments will reduce the outstanding principal and thereby decrease the overall interest payments as well.

You can even repay your remaining loan amount at one go. However, banks usually charge you 1-3% of the remaining principal as a “prepayment penalty.” Some lenders waive this amount if the lump sum payment is more than 25% of the outstanding repayment amount in a year.

This penalty value also varies depending on the source of funds. If you pay out of your own pocket, the penalty is lesser than when you borrow from another source. Some institutions may waive the charge entirely.

  • Loans with Flexible Schemes

Certain banks and NBFCs offer this option through what are called step-up and step-down loans.

A step-up loan initially has low EMIs that progressively grow with time. This scheme is also called a “balloon replacement.”

A step-down loan is one that starts with high EMIs and reduces as years go by.

Step-up loans are ideal for those starting out in their career; step-down loans are good for those nearing retirement but currently earning substantially well.

  • Method of EMI Calculation

Although minor, the method your lender uses to calculate monthly instalments has an effect on the EMI amount. Banks use a computerised home loan payment calculator that calculate on an annual, monthly or daily reducing basis.

So even with the same principal loan amount, the EMI varies depending on the method the lender uses to calculate it.

Calculating Home Loan EMI

Mathematically, your home loan instalment can be calculated as:

EMI = P x r x (1 + r)n/((1 + r)n – 1),

where ‘P’ is the loan amount,

r’ the interest rate, and

n’ the tenure in months.

If you (say) took a home loan of Rs.10 lakh at 10% ROI (Rate of Interest) over the period of 1 year, you’d pay an EMI of Rs.8,792.

Looking at this, it’s easy to understand that higher the loan amount and interest rate, higher your EMI will be. You can also use online home loan EMI calculator for calculating EMI. When your loan tenure increases, however, your EMI amounts become smaller.

Even with the same principal loan amount, your EMI amount varies depending on the method your lender uses to calculate it.

These are the various factors that control the amount you repay every month for your home loan. By studying these and carefully tailoring your loan, you can ensure that your monthly EMI load doesn’t overwhelm you.

By keeping these pieces of your home loan in check, you can avoid going to pieces during every monthly budget.

Author Bio:- Arwind Sharma is a financial advisor with an experience of more than 7 years. He has worked for topmost financial firms in India and has been a visiting faculty at many reputed institutes in India. Currently based in Pune, Arwind Sharma is a name to reckon with when it comes to financial management for big brands. A post-graduate in business economics, he is an alumni of Princeton University, USA. During his free time, Arwind teaches children from marginalised sections of society and also work on his blog on photography.

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