Home loans are most often a long-term commitment. One must think properly before deciding to go for a home loan. There are multiple factors that one should keep in mind while applying for a home loan. While borrowers mostly focus on the EMI amount when taking the loan, they forget many essential things to get the loan approved. The dream of buying own house blinds the borrower as they accept the bank agent's arguments with ease.
One thing that you must keep in mind before buying a home is that you must take a copy of the property chain papers from at least 13 years back. A property chain paper lets you see who all had been the owners of the property. Also, you can check any dispute related to that property with your lawyer's help with the papers. Once you are satisfied and take a loan, ensure to keep a copy of registry papers and 'List of Documents (LOD)' from the borrowing bank. The property chain, LOD, and registry papers will also come in handy when you go for a balance transfer to get a lower rate, said experts.
Let's tell you some other key points you should keep in mind while taking a home loan:
1. Exploring All Options: Don't get settled for the first lender you talk to. Though most of the banks have almost similar interest rates, your good credit score may come in handy in getting you a lower interest rate. Even a slight difference in interest rates can significantly impact the overall cost of the loan.
2. EMI: Calculate your Equated Monthly Installments (EMI) to ensure it fits within your monthly budget without straining your finances.
3. Loan Tenure: Decide on the loan tenure based on your repayment capacity. Longer tenures result in lower EMI but higher interest payments over the loan term.
"Don’t settle for the first lender you find, instead take the time to compare rates and other terms of various lenders before reaching a decision. Additionally, your repayment is significantly influenced by the tenure of your loan, so opt for a tenure that aligns with your repayment capacity. While shorter tenures may have advantages, it's essential to only opt for them if your financial situation permits," said Rajeev Das, CEO, I-Loans.
4. Credit Score: Maintain a good credit score as it plays a crucial role in loan approval and interest rate determination. Ensure timely payment of existing loans and bills to improve your creditworthiness.
"It is also important to note that the interest rate you’ll get on your loan depends on your credit score. So, if your credit score is low, it’s better to work on improving it before you apply for a home loan as even a slight difference in the interest rate can significantly impact the overall cost of borrowing," said Rahul Kalyani, Sr. Vice President - Partnerships, LoanTap.
5. Processing Fees and Other Charges: Be aware of processing fees, administrative charges, legal fee, documentation charge, prepayment penalties, and other hidden costs associated with the loan. Factor these into your cost calculations. Banks often charge around Rs 3,000 as legal fee and around Rs 5,000-6,000 as documentation/affidavit charges.
6. Loan-to-Value Ratio (LTV): Understand the maximum LTV ratio offered by lenders, which determines the percentage of the property's value that can be financed through the loan.
7. Prepayment and Foreclosure Terms: Check the prepayment and foreclosure terms of the loan. Some lenders may charge penalties for early repayment or foreclosure, while others may allow it without any charges.
8. Loan Insurance: Consider taking home loan insurance to protect your family from the burden of repayment in case of your untimely demise or disability.
9. Legal and Technical Due Diligence: Conduct legal and technical due diligence on the property to ensure it has clear titles and no encumbrances.
10. Future Financial Plans: Consider your future financial goals and obligations while selecting the loan tenure and EMI amount. Ensure that the loan doesn't hinder your ability to achieve other financial objectives like kids' education expenses or your plan to buy a vehicle.
In addition, if you want to finish your home loan quickly, try to pay an additional amount to the bank besides your EMI to reduce the principal amount. In the initial years, most of your EMI payments go towards interest. Suppose you are paying an EMI of Rs 25,000, your annual payment in the first year will be Rs 3,00,000. Of this, around Rs 50,000 would be towards principal while around Rs 2,50,000 would be towards interest. Thus, paying an additional monthly amount even as low as Rs 5,000 per month will help reduce your principal amount significantly.
