- Date : 08/11/2020
- Read: 6 mins
Housing loan is a huge long-term liability, so don’t take one without doing your research.
Buying a house is arguably the biggest financial decision you will make in your lifetime. To meet this goal, you will either have to liquidate a big investment or avail of a home loan. Today, there are plenty of home loan products available in the market, and many lenders are ready to offer the best possible credit terms to aspiring home buyers.
However, a housing loan is a high-value loan that can extend for a decade or two. It is a long-term liability that includes a sizeable interest component. Taking all these factors into consideration, you must ask the right questions before availing of a home loan - and be satisfied with the answers.
Here are some questions you might ask while applying for a home loan:
1. What is my credit score and eligibility?
Even before selecting a particular property, you have to check your credit score and loan eligibility. If you have been paying your credit card bills and clearing existing loans on time, you will have a healthy credit score. This, along with your income, will lead to high loan eligibility. If you are aware of your eligibility, you will be able to choose properties as per your budget and affordability.
2. Can my loan be pre-approved?
You can ask the lender to get your home loan pre-approved based on your eligibility. This will give you a clearer financial picture during your home search. Besides, pre-approvals will allow you to negotiate better as the urgency of booking a particular house is yet to start.
3. How much loan should I apply for?
Housing finance companies and banks generally offer a loan for 75% to 90% of the property value. This will also depend on your loan eligibility. If you want to increase your eligibility, you can include a co-applicant. Refer to an online home loan calculator and choose your preferred equated monthly instalment (EMI). For this, you may have to lower your loan amount and increase the down payment, if possible.
4. What documents are required?
You wouldn’t want your loan processing to be held up due to a lack of documentation. Apart from the identity, income, and address proofs, property documents are also required to avail of a home loan. You should be aware of the documents to be submitted and their retrieval. Safe custody and easy retrieval of property documents are important, particularly if you are not in the same location as the lender.
5. What is the consequence of EMI default?
It is important to be informed about the lender’s policy on EMI defaults. It is in your interest to pay EMIs regularly, as three consecutive defaults allow the lender to take action against you without court intervention. You should find out if the lender is willing to accommodate a loan extension in case the borrower runs into financial difficulties.
6. What should be my loan tenure?
You should keep the EMI burden and interest cost in mind while deciding on the loan tenure. With a longer tenure, the EMI burden would be low, but the total interest would increase considerably. According to a loan calculator, for a loan of Rs 50 lakh at 8% fixed interest, the approximate EMI and interest cost would be:
- 10 years: EMI Rs 60,600, total interest Rs 22.8 lakh
- 20 years: EMI Rs 41,800, total interest Rs 50.4 lakh
- 30 years: EMI Rs 36,700, total interest Rs 82.0 lakh
7. What is the interest rate charged?
While comparing home loans, the rate of interest is always an important deciding factor. Let’s consider an example. For a loan of Rs 50 lakh taken for 20 years at a fixed interest of 8%, the total interest payable would be Rs 50.37 lakh, which is even higher than the principal amount!
The rate of interest can be fixed or floating. With a fixed rate of interest, your EMI will remain constant during the tenure of the loan. However, you will not be able to avail of the benefit of any fall in the interest rate. In the present pandemic situation, the RBI lowered the interest rate significantly. Anyone with a fixed home loan interest rate may not be able to enjoy the benefit. A floating rate of interest, on the other hand, passes on any fluctuations in the interest rate to your loan liability.
It must be noted that the lender may claim to offer fixed interest, but it could be available for a limited period only, or have a reset clause attached in their terms and conditions.
8. What are the processing fees and expenses?
Lenders usually charge a one-time processing fee while approving the loan. You must enquire about the processing fees charged by your shortlisted home loan companies to find out which one has the lowest fees. There may be some additional charges added to the initial cost of the loan, so you need to take this too into account before you make your final choice.
9. Is there a foreclosure charge or a prepayment penalty?
Foreclosing a loan can save you a lot of money that you would otherwise pay as interest. However, banks have charged a penalty for such early settlements in the past. RBI now forbids lenders from charging this on any floating interest term loan. While selecting a loan, find out if the foreclosure norms favour the borrower, particularly in hidden costs. Making a partial prepayment also lowers the liability, and banks have charged a prepayment penalty in the past.
10. What exactly does the loan agreement say?
Apart from the verbal discussions and explanations, you must ask for a copy of the loan agreement. Ask for clarifications regarding any doubts you may have. This exercise is necessary to get a comprehensive knowledge of the lender’s terms and conditions.
Home loans have simplified the way houses are bought. They have helped people to aspire to own a home, even if they don’t have the funds to buy one immediately. However, the choice of a home loan should be backed by sufficient research. If you have the answers to all your home loan doubts and concerns, choosing a suitable home loan becomes easy.