A home loan sounds like an easy way to make your dream home a reality but the journey between getting a home loan sanctioned and signing on the dotted line is anything but easy.
It is important to make sure that you choose the right home loan so that you do not face any hassles down the line.
Here are 7 tips that will help you take this mammoth task from complicated and cumbersome to smooth and seamless:
Do Your Homework
These days it seems like banks are all out and eager to lend money but it is not the case.
You need to perform a thorough research even if you find that the interest rates are low and the scheme is attractive.
Educate yourself about all the applicable terms and conditions of the agreement and prepare beforehand.
Before you finalize your personal loan or home loan options and negotiate the rate, make sure you have all your doubts cleared by the sales person even if it is as small as a particular clause in the loan agreement.
Know Your Eligibility
The loan amount that is sanctioned by the banks typically depends on the borrower’s income, credit card dues, and past record of loan repayments.
Before taking up a loan, you should be absolutely clear on the amount that you can spare from your stated income to repay the loan, every month.
Usually banks limit the EMIs at 40-50% of the stated income and sanctions loans up to 80% of the property’s total cost but again that is not always sacrosanct.
Check Your Score
To check your credit score, you would need to refer to the CIBIL score which should ideally be 750 or more if you want a lesser interest rate on your loan.
This score is given to you on the basis of credit card bill payments, how you have paid your previous loans, your bank account statements, your existing liabilities, and the number of times you have applied for loans till date.
If you are paying a processing fee to at least 3 different banks just to know your maximum loan limit, then the Credit Information Bureau (India) Limited considers you to be credit hungry which can actually go against you.
So, decide your repayment capacity in advance and make sure that your credit history is clean. If you have made all your payments in time, you can also negotiate on the interest rate.
Evaluate the EMIs
To arrive at the EMI that you will be able to afford, you need to consider your current income, your expenditures, your age, and other liabilities along with the number of dependants you have.
If your source of income is stable and your earnings are not erratic, you can easily make an approximate calculation of the EMI you can pay every month.
Do not take any decision in haste as even a single non payment penalty can prove to be troublesome. Consider every parameter and make a wise decision.
Negotiate the Interest Rates
If you have a clear credit history, use it to your advantage and negotiate the interest rate as every bank wants a high credit score and you have it.
Also, purchasing the loan at the end of the month when banks have their monthly targets and don’t want to lose business, will give you the bargaining power.
When it comes to home loans, the bank always has an upper hand but that does not mean you cannot haggle.
Consider the Loan Tenure
RBI’s monetary policy has always been hawkish for home loans and so the rise in the base rates means a direct rise in the floating home loan rate which means the borrower is required to pay a higher EMI.
If you cannot afford a higher EMI and want the bank to readjust the loan tenure and bring down the EMI, you must also understand that this temporary relief is going to cost you more in the long run as you end up paying more with a longer tenure.
So keep the tenure short unless you are in a desperate situation.
Read the Agreement Carefully and Know all the Extra Charges
Read all loan related documents carefully before signing. Yes, it may seem like a lot of work to do in one go, but you can take your time.
So, make sure you get complete information about all the additional charges like loan processing fee, administrative charges and service charges.
All of these charges usually take up a percentage of your sanctioned loan amount so making any modifications to any of these charges may come to you at a cost later on.
Finally, taking a loan from one bank does not mean you stick it to it till you are done. If at any point in time you get a better deal from another lender, you can always switch.
A home loan application comes with its own share of cost and complications so keep these 7 key points in mind and clear out every doubt beforehand so you can be confident that your dream home does not accompany any hassles.
Shiv Nanda is a financial analyst who currently lives in Bangalore and works with MoneyTap, India’s first app-based credit-line. Shiv eats, breathes and sleeps finance, to the dismay of friends who’ve endured unsolicited advice on their investment choices, budgeting skills, or lack thereof.
Luckily for them, Shiv has diverted this energy toward writing about various financial topics online. He loves it when people actually ask him for advice, so email him your questions at firstname.lastname@example.org. He’ll try not to get carried away with the answers!