One of the important decisions in buying a house property involves taking a home loan. Skyrocketing real estate prices have made it inevitable in India for a common man to fund assets like a home through bank loan. It is prudent to be prepared first before applying for a home loan. Preparation here means not just getting familiar about various facets of home loan application. It also implies financial preparation since you would be taking on a liability in the near future. Some amount of proper planning before getting a home loan can help to avoid rude surprises later. Here are some important things you as a borrower should understand before approaching any bank for a home loan:
Assess loan servicing ability: Before the bank evaluates your loan eligibility, try to assess your personal repayment capacity based on your current income. There are many online calculators available which will give you a rough idea as to how much loan you are eligible for and how much EMI you would require to service every month. Even if you are eligible for a higher loan amount, try to keep your borrowings to the minimum. Do not overstretch, thinking your future income will comfortably help to service the loan. Further, try to clear current outstanding dues, if any. As a thumb rule, ensure that your total loan instalments do not exceed 35-40 per cent of your take-home pay. Try to make a big down payment for the house instead.
Review Emergency Fund: You would be required to service EMIs regularly every month once your home loan is disbursed. You cannot afford to default and you will have to ensure there is sufficient balance in your account to take care of them. You should be financially prepared even in the event of some unforeseen situations like job loss, hospitalisation, etc. It is thus prudent to review your emergency fund and upgrade it to factor in the EMIs for at least 6 months.
Get your CIBIL score: Besides your income earning capacity and age, there are other factors which a bank will look into for the loan eligibility process. Every penny borrowed from a bank, loan enquiry made, your loan payment history, everything is being tracked. Subsequently, a credit information report (CIR) is prepared and a credit score is generated for every loan or credit card applicant. All banks use these reports to evaluate your credit worthiness before loan sanction. A score of over 600 is considered decent and greater than 750 is even better for higher chances of loan approval and negotiating better rates. If your credit score is low, the lender may not even consider your application and reject it outright. If you are a frequent borrower or have defaulted in the past, it is better to personally apply for your credit report & get your credit score. It will help to be aware of your credit history and also to avoid any loan rejection shocker.
Do your own research: Due to lack of time, you may want to hire an agent to do your job of bank loan application. But it is prudent to do your own research about the best deals various banks have on offer. The agent may recommend you a bank which pays him high commissions rather than the one which is not lucrative for him but might be for you. Shortlist banks based on certain criteria like fixed or floating interest rates on offer, processing fees, quick efficient service, etc. Once you are done finalising the bank of your choice, leave the documentation work to your agent. You also need to check beforehand whether the shortlisted bank of your choice is present in the builders list of preferred banks. (Some builders offer limited choice of banks to customers because they want to avoid lengthy documentation process or for reasons known to them.)
Review life insurance: While your home loan is being disbursed, review your existing life insurance cover and assess whether it covers the new home loan liability in addition to your financial goals. If it is not sufficient, upgrade your life insurance cover. Ensure that you buy an independent term insurance cover rather than buying the bundled home loan package through the bank. Such home loan protection plans are costlier than the pure term insurance covers. The former is not compulsory to buy contrary to the impression given by the banker and you have the right to refuse. Do not fall for the bank’s shrewd selling tactics.
Read the fine print: Many times, customers blindly sign a pile of loan documents only to discover later that they have been sold a life insurance policy along with home loan. The resultant loan amount disbursed is lower as the lender deducts an upfront interest charge and annual insurance premium. It is better to read the home loan agreement in detail before signing it to avoid unpleasant surprises later. It is prudent to read and clearly understand the various charges, loan amount disbursed, EMI amount, tenure of the loan, type of loan (fixed, floating) in the loan agreement.
Foreclosure plan: Not many borrowers are aware that heavy interest is charged in the initial year of loan tenure by banks. And, some still breed the wrong notion that prepayment penalty or foreclosure charges would be levied. But these have been done away with by the RBI few years back. So, it is wise to repay loan as much as possible in the initial few years. Make a conscious decision to have a loan repayment plan in place the day the first EMI is debited from your account. Regular repayments, however small they may be, will lead to faster clearing of the loan and greater savings for the future. Annual bonuses, if any or sudden windfall income inherited from family should be utilized to repay as much debt as possible. Small baby steps will eventually set the momentum and give you confidence to clear your debts faster. Turning debt free will give you a liberating feeling and inner peace.
To conclude, taking a home loan for a house property is an important decision having a bearing on your long-term finances. Going through the above practical steps will be really worth the time spent to avoid wrong choices in the future.