Buying a first home is a lifelong dream of many. However, before you apply for a home loan, it is important to understand the whole process and clear your doubts. Here are answers to the most commonly asked questions on home loans to ensure a hassle-free credit procurement and repayment process.
COVID-19 has made people realise the importance of homeownership. The emotional and financial security that an owned property provides has propelled many people to consider purchasing a home. However, buying a home is a complex process and requires significant investment. A lot of people, for this reason, depend on home loans, through which they can finance 80-85 percent of the property cost. However, getting a huge loan amount has several other nuances linked to it. For instance, it is imperative to consider the eligibility criteria, loan tenure, interest levied and the Equated Monthly Instalments (EMIs). These elements are extremely crucial as they may considerably influence your monthly budget.
While a home loan does come with certain benefits, there are several ambiguous facts and matters that make people think twice before they opt for one. Here are some Frequently Asked Questions (FAQs) about home loans.
1. For what purposes can an applicant take a home loan?
First-time home loan borrowers can take a loan to purchase a new home or renovate and repair the current home. However, different banks have different policies for sanctioning home loans to second-time borrowers.
2. How to choose a bank for a home loan?
Finalising the financial institution is a significant decision to make. However, certain factors that you must consider are the interest rates, processing fees, pre-payment charges, loan tenure, eligibility criteria and transfer charges. Make sure you compare the charges of different banks and select the one which levies the lowest.
3. What are the repayment methods?
In most cases, banks offer multiple options to repay the borrowed amount. Electronic Clearing System (ECS), issuing post-dated cheques from salary account and a direct deduction of instalment by employer remain the standard modes of payment.
4. What is the eligibility criteria followed by banks?
Banks check the CIBIL score and details of the property under question. The ideal CIBIL score for a home loan should be 750. Additionally, other factors like the applicant's monthly income, number of dependents, age, qualification, stability of occupation, and savings, also matter.
5. What happens when a bank rejects the home loan but the applicant has paid the token money to the dealer?
Banks perform a thorough verification and consider several eligibility factors before disbursing the loan. In case the applicant fails to meet their criteria, they reject the application.
Vikas Lamba, Proprietor, Suresh Properties, says that banks are rigid in sanctioning home loans. They keep a tab on all the considerations and create a report on the applicant's profile. However, if the loan application gets rejected and the buyer has paid the token money to the seller, the latter has to return the amount in full. No extra amount has to be paid by the buyer.
6. Can an applicant get a 100 percent loan?
As per the guidelines issued by the Reserve Bank of India (RBI), no lender can disburse a 100 percent loan to any applicant. In most cases, banks can sanction up to 80 percent of the total value of the property.
7. What are the documents required for loan approval?
To sanction a home loan, banks require authentic documents of the property under question along with the applicant’s documents, including identity proof, salary slips, Form 16, residence proof, and bank statements.
8. What are the interest rates options provided by banks?
Floating rates and fixed rates are the two different home loan interest rates offered by banks. Floating rate home loans come with variable interest rates that fluctuate in accordance to the market. As the interest rate is variable, Equated Monthly Instalments (EMI) tend to change every time the interest rate changes.
On the other hand, fixed-rate home loans have the same interest rate for the entire loan tenure or until the disburser's specific period. In this case, the EMI remains constant. Among the two, experts suggest that picking the former benefits the borrower as institutions often reduce the interest rate to stay competitive.
9. Does loan tenure affect its cost?
The cost of a home loan is directly proportional to the loan tenure. With longer tenure, the EMI amount decreases; however, the interest paid goes up. Shorter tenure means higher monthly payment but lesser interest amount. Having a short tenure significantly reduces the overall loan cost.
10. Does an applicant need to submit collateral?
Banks retain the purchased property as collateral against the loan. However, when the applicant’s CIBIL score is low, banks may also ask for a guarantor and additional collateral like papers of other properties, gold, life insurance policies, and shareholdings.
11. Is it mandatory for the applicant to go for home insurance?
There is no such policy or regulation which mandates the applicant to attain home insurance. However, taking a home loan insurance provides cover against support to the applicant's family members.
Vignesh P, Vice President of Marketing, CASAGRAND, shares, "Home loan insurance may come in handy in case of an uncertain situation. When the borrower faces a challenge in repaying the home loan due to a sudden loss of job or any other uncertain situation, the whole responsibility falls on the head of the family/nominee. In such situations, home loan insurance plays a vital role. It lowers the EMI burden and relieves the borrower from the financial strain."
12. Can the applicant repay the loan ahead of schedule?
Several banks offer pre-payment options to applicants at minimal or no extra cost. An applicant can prepay a lump sum, full or part of their loan amount, but the applicant should confirm the pre-payment charges from the bank beforehand to avoid hassles in the future.
13. What are switch over charges?
Sometimes other banks may reduce their home loan interest rates, and the borrower may want to avail this benefit. The applicant can close their loan account from their existing bank and avail the loan from the bank offering the lower interest rate by paying transfer charges. Even though the bank may get these charges, they end up losing interest money. Thus, to retain the borrowers, banks may propose a switchover from a higher interest rate to a lower one. The applicant has to pay the switch overcharge, which is a nominal amount.
14. Can there be two applicants for a single loan?
Yes. When the applicant's monthly income is less, banks may give the provision to have co-applicants for the same loan. However, the co-applicant can only be a spouse, children or parents, and the co-owner has to be a co-applicant.
15. While planning to buy a home, what should the buyer prefer; saving money and buying property afterwards or taking a home loan at present?
According to Amit Goenka, MD & CEO, Nisus Finance, "There are two ways of financing your home. You can either pay in cash or get a home loan. If the person borrowing today had set aside Rs 2,000 per month around 12 years ago in a diversified equity mutual fund, he would have easily created a corpus of Rs 50 lakh by 2021. On the other hand, if one takes a loan of Rs 50 lakh to buy a house at a 9.50 percent rate of interest for 20 years, the EMI works out to Rs 46,607. When paying this for 20 years, the total outflow on the loan amount would be approximately Rs 1.12 crore. Planning well in advance and saving money is essential to procure a home without the hassle of loans."
Eradicating doubts before taking a huge financial responsibility as a home loan is crucial. One must conduct thorough research regarding interest rates, application charges, and pre-payment charges from different financial institutions to secure a home loan without burning a hole in your pocket.
