Despite a sluggish real estate market but skyrocketing property prices, owing a home remains the biggest aspiration for many Indians. The second edition of Aspiration Index survey also established this fact by presenting some startling figures. The target of buying a house scored 92.1 on the Index. For people in the age group of 22-27 years (Early Jobbers), this Aspiration score stood at 90.8; for 28-34 years (Moneymooners), it was 92.5 and for individuals between 35-45 years (Wealth Warriors), the goal scored a whopping 93.1.
Buying a home involves plenty of research, documentation, financial planning and putting together the home buying fund which is often one’s life savings. For many homebuyers, arranging a large amount of money is daunting and often the biggest hurdle to the fulfilment of this aspiration.
This is where home loans come handy and help in achieving home ownership. However, before applying for a home loan, one needs to be aware of the nitty-gritties of borrowing, since a small mistake can have serious ramifications on your finances.
Since opting for a home loan is a long term financial commitment, make sure you keep these points in mind to script a successful home buying story.
Property Cost And How Much You Need To Borrow
How much can you borrow? It is important to note here that lenders usually finance around 80% of the property cost. The other 20% of the property cost is the down payment that you may need to arrange after determining the property price. You can safely add another 10% for the cost of registration, stamp duty, furnishing, brokerage, moving and miscellaneous costs associated with home ownership. What you borrow is also linked to your current disposable income. A co-borrower (such as a working spouse) can help increase your loan eligibility as the lender will consider both your incomes to sanction a bigger loan.
Are You Eligible To Take A Home Loan?
Besides your income, the lender will also evaluate your credit score before lending to you. A credit score reveals an individual’s creditworthiness through his credit history. So before applying for a loan it makes complete sense to check your credit score and see if it is 750 or more. In case it’s not, start working towards improving your credit score by making timely repayments towards existing loans or credit card debt.
Compare The Interest Rates
Once you have decided to take a home loan, the next obvious step should be to do a comparative analysis of interest rates offered by different banks and lenders. Remember, the equated monthly instalment (EMI) that you ought to pay back to your lender every month includes the interest on the outstanding loan amount plus the principal. While understanding this, do consider other charges like the processing fees, late fee penalty, etc. Since a home loan is a long-term financial commitment, have a good understanding of both Marginal Cost of Funds-based Lending Rate (MCLR) and Repo Rate Linked Rates to make an informed choice.
Tenure Of The Loan
It is very important to understand the tenure of your loan as it impacts your EMI. The loan tenure is set after considering a borrower’s age. A borrower can calibrate the tenure as per existing income, his expectation of income growth, and the number of working years left. Usually, a home loan is sanctioned for a maximum duration of 30 years. The longer the tenure, the lower the EMI; the shorter the tenure, the bigger the EMI. However, small EMIs also mean higher interest over the loan tenure. Make your choice based on these parameters. Bite what you can chew. Ideally, all your EMIs combined should be no more than 40% of your disposable income.
Don’t Ignore The Fine Prints And Keep All Documents Handy
While applying for a home loan, pay attention to all the terms and conditions of the agreement. Also keep all important documents like property papers, salary slips, last three year income tax returns (ITRs), identity and address proofs, title deeds. etc handy.
Finally, when you decide on a home loan, ensure you remain regular with your EMIs to avoid becoming a defaulter. It would also make sense to buy term insurance after taking a loan to cover the loan amount in the unfortunate event of the borrower’s demise.
The writer is CEO, BankBazaar.com