FINANCIAL RADIANCE
FINANCIAL RADIANCE
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Almost everyone goes through the process of taking a home loan during their lifetime at least once, mostly more than once. This could be either for self-occupation of the house or as an investment. Whether to rent or buy is a separate discussion by itself and is not in the scope of this blog. Do check these 9 critical items before you start discussing your home loan requirements with the banks. This could save you not only mental pressure and last-minute tensions, but also money.
Once you have identified the property to purchase, you have a fairly good idea of the investment amount. Don’t forget to include other costs like registration fees, home improvement, furnishing etc. Try to identify your own sources of funds as much as possible and then take a loan for the remaining amount. For the first few years, you would be paying a lot of interest in your Equated Monthly Installments (EMI) which can be reduced by taking a lower amount. But this should not be at the cost of your emergency funds and should not make your regular cash flows tight.
Before approaching banks for loans, work on your cash flow statement. Through this self-analysis, you would know your EMI affordability. I have made this exercise much simpler for you. You can download a FREE Toolkit to help you do this assessment.
If you have any credit card outstanding, it is a good idea to pay-off the amount completely. An outstanding balance can reflect negatively on your home loan application. This could also improve your credit score.
As a borrower, we need to pay or margin too (generally 15 to 20% of the loan amount) as a down payment. Few important criteria for banks to determine your home loan eligibility are income, existing loans and EMIs, and the total tenure of the loan. Banks would not want the total EMIs to be beyond 50% (approximately) of the net take-home income. There are a few ways in which you can increase your eligibility:
If the joint borrower (s) are also working, then that income also gets added to calculate the home loan eligibility. Besides, all borrowers are entitled to take tax benefits depending on their borrowing ratio. However, the property should also be held in joint ownership for this benefit.
If you are planning to change your job, it is a good idea to better to postpone that decision. First, take a home loan and then make a job change. Banks do insist on some minimum period in a company, so getting a loan when you are in a new job could be difficult. Also, if you are planning to be self-employed, then getting the loan could be even more difficult, as there may not be regular cash flows every month and banks may consider that to be a risk.
When we apply for the loan, the first thing the bank checks is CIBIL (or an equivalent) score and the report. There are four such agencies in India. Banks are mandated to send the repayment histories of their borrowers to these agencies, based on which they prepare a consolidated report which can be accessed. You are also entitled to receive one free credit score per year from each of these agencies. CIBIL score of 750+ is considered as a good score. If your score is less and you want to improve, then you can find more information in my previous blog on credit score. Once you have this report with you, please have a look and confirm that information is correct. If you know what banks are talking about you, you can be in a better position to negotiate your interest rate with banks. Banks also need good borrowers, so a good credit score gives them comfort. On the other hand, if there are bad remarks on your report and your score, banks can either reject your loan application or forward your case for further checks which also could mean a much higher interest rate.
Take term insurance before taking a home loan. Banks want to take care of their self-interest and want to ensure that they get their money back even in case of unfortunate death of the borrower. They may insist that you take term insurance from them or any other costly life insurance product at the bank to meet their targets. Remember as per IRDAI rules, it is unfair for the bank to force you to take insurance against their home loan and a complaint against it can be made. You can tell them that you are aware of the rules, or you can ask them to give this in writing that they will provide home loans only if you take insurance from them (Bank would soon get the message and stop insisting on the same).
Just like how the bank does due diligence whether to give you a loan or not, similarly, you should also do your research to decide on the best bank suitable to you. Even if you have a long relationship with a bank and the relationship manager has been nice to you, it may still not mean that it is the best bank for you. Check on the interest rates being offered at various banks, ease of documentation, other factors that are important to you before finalising the bank. Doing multiple checks with banks for a loan over a short period does not impact your credit score.
It can be a tedious process to complete all the home loan documentation. Check from the bank and their website on what documentation is needed and start the preparation in advance. This would help you in not getting distracted when you take the loan and can negotiate a better rate.
Hope if you are planning to take a home loan in the future, this blog has provided you a checklist to get better prepared. You can also get in touch with us and we can help you in getting a competitive interest rate.
Happy to get your comments. In one of my future blogs, I plan to write about explaining how EMI works. Also, I would be explaining about various loan deductions you may be aware (or may be not). Keep watching this space for more. To read more such blogs on personal finance, please visit my website or contact us for further information.