An Ultimate Guide for the First-time Home Loan Borrowers
Buying a house is a significant investment and a major milestone that provides us with a place to call our own. In the long run, property prices generally appreciate, which can increase our wealth over time. However, since owning a house is a big investment, many of us explore borrowing options to make a home purchase. A home loan is an ideal financial solution that can help you achieve your dream of owning a home with manageable monthly payments and a choice of repayment terms that suit your needs.
Nevertheless, for first-time home loan borrowers, certain aspects, such as interest rates, processing fees, down payments, loan agreements, etc., may be bewildering, which can make getting your first home loan to seem like a daunting task. This article serves as an ultimate guide for first-time home loan borrowers to help streamline the home loan process and ensure a smooth borrowing experience.
What Are the Types of Home Loans?
First of all, understand that there are several types of home loans that cater to specific purposes. Here are some of the commonly seen home loans in India:
1. Regular Home Loans:
This is the most common type of home loan in India, where an individual avails of a home loan to buy a newly constructed or pre-built property. While almost all the banks and housing finance companies in India offer this type of loan, the interest rates and loan terms may vary from lender to lender.
2. Land/Plot Purchase Loans:
As the name suggests, this loan is availed to purchase land or a plot where the borrower intends to construct a home. Lenders typically provide up to 85%-90% of the land’s cost, while the remaining 15% needs to be arranged by the applicant.
3. Home Construction Loans:
Banks and HFCs offer these loans to individuals who plan to construct a house on their own land. The application and approval process for a Home Construction Loan can be complicated to understand for a layman.
4. Home Renovation Loans:
These loans are ideal for individuals who cannot gather sufficient funds to renovate their existing homes. The maximum amount that one can borrow for a home renovation depends on several factors, including the applicant’s repayment capacity and debt-to-income ratio.
What Are the Eligibility Criteria for a Home Loan?
Before applying for a loan, it is crucial to have a thorough understanding of the loan basics and eligibility criteria to avoid any surprises. It is advisable to equip yourself with knowledge of banking procedures to prevent any discrepancies from arising at the last minute.
Each bank and NBFC has its own eligibility criteria for home loans. Here are the primary requirements that typically remain constant with all the lenders:
Age – The applicant must be between 21 and 60-65 years old.
Employment Status – The applicant must be either a salaried or self-employed individual with a stable income.
Minimum Income Requirement – The applicant must earn more than the minimum income set by the bank. For example, HDFC Ltd. has minimum salary criteria of Rs 10,000 per month and minimum business income criteria of Rs 2 lakhs per annum.
While these factors make you eligible for a loan, there are many other additional aspects that decide the final application approval, such as the applicant’s repayment capacity, debt-to-income ratio, down payment, present and future income, credit history, credit score, etc.
You Can Enhance Your Home Loan Eligibility By:
- -Including a family member who earns as a co-applicant
- -Making a larger down payment
- -Opting for a structured repayment plan
- -Having a steady income and regular savings
- -Providing information on your additional income sources that are regular, e.g. such as income in the form of rent
- -Fixing any mistakes in your credit score
- -Paying off your ongoing loans and short-term debts
What Are the Documents Required for a Home Loan?
- -Application form
- -Passport size photographs
- -Photo ID proof, such as PAN Card, AADHAR Card, Passport, etc.
- -Current residential proof, such as AADHAR Card, Passport, Driving License, Voter ID, etc.
- -A cheque for the processing fee
For Salaried Individuals:
- -Last three months’ salary slips
- -Form 16
- -Bank statement for the last 6 months
For Business Persons:
- -Proof of business existence
- -Educational certificates
- -Bank statement for last 6 months (both; business account and personal account)
For Professionals – Last three years’ IT returns (self and business; with computation of income), Last three years’ balance sheet, and Profit and Loss statements
For Business Owners – Business profile, Last three years’ IT returns (self and business; with computation of income), Last three years’ balance sheet, and Profit and Loss statements
What Are the Types of Home Loan Interest Rates in India?
The home loan interest rates are based on the Marginal Cost of Lending Rates (MCLR) and the bank’s base rate. While the MCLR is decided by the RBI, the banks set a base rate based on their cost of lending. The banks can quote a home loan interest rate above the base rate considering the borrower’s risk factor. If the RBI makes significant changes to the Repo Rate, banks and financial institutions adjust their base rate accordingly.
There are primarily two types of interest rates available for home loans in India: Fixed Interest Rates and Floating Interest Rates.
Floating Interest Rate: A Floating Interest Rate, also known as a variable interest rate, is linked to the current lending rates and hence, can fluctuate during the loan period. Consequently, your EMIs will change accordingly. Since home loan interest rates have been increasing for a long time, they are expected to stop rising soon. Hence, it makes sense to choose a floating interest rate.
Fixed Interest Rate: A Fixed Interest Rate home loan has a consistent interest rate throughout the loan tenure, which means that your EMIs remain the same. Opting for a fixed interest rate loan is advisable when the interest rate is low, and an upward trend is expected in the future.
What Are the Things to Consider When Applying for a Home Loan for the First Time?
1. Interest Rate:
The home loan interest rate plays a significant role when it comes to determining whether or not to take out a loan and which lender to select. We all are aware that you should conduct thorough research before settling on a lender. In addition, as discussed earlier, you should have knowledge about the various interest rates charged by banks and HFCs.
2. Loan Amount:
Your home loan amount has an impact on various factors, especially the rate of interest. The interest rate typically differs for the loan amount up to 30 lakhs, between 30 and 75 lakhs, or over 75 lakhs. Since a home loan is a long-term financial obligation, it is advisable to choose a loan amount that you can comfortably repay over an extended period.
3. Loan Tenure:
Home loans can typically be availed for a longer duration of up to 30 years, depending on the applicant’s eligibility. Opting for a longer loan tenure can lead to smaller monthly repayments but will result in higher overall interest payments. Alternatively, selecting a shorter loan tenure may result in larger EMIs, which can create a financial burden. It makes sense to choose the appropriate loan tenure to facilitate easier monthly repayments and avoid spending huge sums on interest payments. If the property is still under construction, the loan will be disbursed in stages based on the developer’s instalment schedule. During this time, only the interest amount, known as pre-EMI interest, needs to be paid. However, if you wish to begin repaying the principal amount, you may choose to pay the EMIs.
4. Down Payment:
Let’s say you have applied for a home loan worth Rs 70 lakhs, but the bank only approves Rs 50 lakhs due to your eligibility. In this case, you will be required to pay Rs 20 lakhs on your own. This payment made by you is referred to as a down payment. It is advisable to make the highest possible down payment that is feasible for your budget, as it will reduce the loan amount. A lower loan amount means lower interest payments. While some banks may offer 100% of the property value as a loan based on your eligibility, it is recommended to make a down payment of at least 20% to avoid excessive interest charges and ensure manageable repayment.
5. Processing Fees And Other Charges:
When you apply for a loan, the lender will charge you a processing fee for handling your application. Generally, for a home loan, the processing fee falls between 0.5% to 1% of the loan amount. However, certain lenders offer a flat processing fee regardless of the loan amount. As home loans typically involve large sums of money, even slight variations in the percentage charged for the processing fee can lead to a significant difference in the total fee amount.
For many people, buying a home is a significant financial commitment, and as a result, they are emotionally invested in owning a debt-free property. Individuals often prefer to repay their home loans as soon as possible to reduce the debt burden. This can be achieved through either part-payments, where a lumpsum payment is made towards the principal amount, or foreclosure, where the entire loan amount is repaid before the end of the loan tenure. By making part payments whenever feasible, you can significantly reduce the interest payments and become debt-free sooner. Most banks and housing finance companies do not charge pre-payment or foreclosure fees after a specific period or once a certain percentage of the loan is repaid. However, some lenders do charge a certain amount for pre-payments and have restrictions on the number of pre-payments allowed and the amount that can be prepaid. Therefore, it is essential to understand the pre-payment charges before taking out a loan and select a lender that offers pre-payments with little to no charges.
6. Home Loan Insurance:
Home Loan Insurance Plan or Home Loan Protection Plan offers financial protection against an unpaid home loan amount to your family in the event of your untimely demise. The insurer repays the outstanding loan amount for which the insurance policy was purchased. This ensures that your family is not left with the financial burden of unpaid dues. Many banks and HFCs require borrowers to purchase a Home Loan Insurance Policy to avoid any defaults that may arise in case of an unfortunate event.
Purchasing a house is a significant financial and emotional decision. Hence, before taking a home loan, it is crucial to understand all the aspects of it and take into account the important factors mentioned above so that you select the appropriate loan type and the amount that will not cause financial strain in the future. Additionally, it is advisable to conduct comprehensive research online to find the best deals on interest rates and fees. However, it is also recommended to consult with your primary banker as they may offer the best deals and services. This will help you make an informed decision and ensure that your first house purchase is a positive and financially sound experience.