Buying a home is an important personal finance decision for every individual. Before applying for a home loan and paying your processing fee, make sure you analyze the following aspects:
- Know your maximum loan eligibility: The loan amount to be sanctioned depends on your income and previous track record when it comes to repaying your loans and credit card dues. Home loan lenders generally provide 80 per cent of the value of the property as the loan amount, subject to your income. While assessing the income criteria, they do not consider some of your salary slip heads for calculating your net monthly income. They only consider the income heads which can be used to repay your loan. For example, your LTA and medical allowances are deducted from the monthly net salary you receive. You are expected to spend the amount received under these heads for the specific activities they are being provided for. This is one of the reasons why we generally see a difference in the eligibility amount quoted in the website and actual amount realized once the application is processed.
- Check your CIBIL score: The home loan eligibility depends on the credit worthiness of the individual. Credit Information Bureau (India) Limited (CIBIL) provides a credit score on a scale of 300 to 900 based on your previous credit card usage, how you maintained your bank accounts, any check bounces, existing loans, uninsured existing loans, loan repayments, how many times you have applied for a loan or a credit card. Individuals with a CIBIL score greater than 700 are more likely to get a home loan. All the home loan lenders approach CIBIL for this score whenever you apply for a credit card or any sort of loan. Paying the processing fee to know the maximum limit at more than three or four banks is one of the common mistakes committed by many people. The more times you apply for loan, CIBIL considers it as being credit hungry, so the chances of getting a loan are minimized. CIBIL rating, net salary excluding some variable heads and existing loans and EMIs being paid towards existing loans are the vital components which decide the repayment capacity of the applicant.
- Type of interest rate: The type of interest rate you choose has an impact on the monthly EMIs you pay. It is important that you know the difference between fixed rate home loan and floating rate home loan. If you opt for a fixed rate home loan, the EMIs don't vary over the loan tenure. It is beneficial when the interest rates are expected to rise in the near future. In case of a floating rate home loan, the interest rate is determined based on the prevailing base rates plus a floating rate. The EMIs vary based on the movement of base rates. It is beneficial when interest rates are expected to fall in near future.
- Loan tenure: The EMI is calculated on the basis of the amount of the home loan, home loan interest rate and loan tenure. The monthly EMI is inversely proportional to loan tenure, i.e., the longer the tenure the lower the EMI, and the shorter the tenure, the higher the EMI. Similarly, the total interest paid is directly proportional to the loan tenure. The higher the tenure, the higher the total interest paid, and vice-versa. Know the impact of your EMI payments on your finances before deciding on the loan tenure. Calculate the available surplus under different scenarios and assess the available monthly surplus for each scenario.
- Read the documents carefully before you sign: Don't let the bunch of home loan documents bog you down and just sign on the dotted lines. Check the documents to ensure that the terms are the same as what you negotiated and agreed upon. Read the documents carefully and know the different charges applicable. Importantly, know the processing fee, late payment fee, etc.
Nitin Vyakaranam is the founder and chief executive officer, ArthaYantra, an integrated online personal finance company.
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