Tuesday, June 10, 2014

5 Things to know before taking a Home Loan

Buying a house is an important step in one's life. Remember the song "Ek Bangla Bane Nyara" by KL Sehgal? I took the plunge some time back and like most of the normal people, I took a home loan to help me in this. Today, I'll share the few things that I checked while taking the home loan - 

1. What is your eligibility?

Home loan amount depends on your income, outstanding loans, credit card dues, previous payment records. Banks like to understand how much can you spare for the EMI. You should also be clear about the amount that you are willing to pay every month as EMI. As a rule of thumb, anything more than 40-50% of your monthly income would be difficult to pay regularly. Call a few banks and check about your maximum eligibility. It usually takes your last few salary slips to know an accurate amount.

Usually banks fund 80% of the property value as loan, rest of it would come from your savings. Thus, the maximum eligibility might not be the sole thing you need to consider.

2. Know your Credit Score (CIBIL)

Check with Credit Information Bureau (India) Limited (CIBIL) to know your credit score. It gives you a credit score on the scale of between 300 and 900 points. The points are given on the basis of your credit card bill payment, bank account statement, existing loans or liabilities, loan repayments and how many times you have applied for loan till date.

People sometimes apply at multiple banks to know their maximum limit. This is considered to negatively impact your CIBIL score and your chances of getting the loan reduces.

While it is a good idea to know this number so that you can use it if needed, I was not asked about it.

3. Loan Tenure and Interest Type

There are banks who provide a Fixed Rate loan as well a Floating Rate. While many of them now just provide a Floating Rate, some of them also combine the two, a Fixed Rate for a the first few years and a Floating Rate afterwards. It helps to have a fixed EMI in the initial years when the interest outflow is high.

The EMI also depends on the tenure. Based on the amount that you plan to let go every month, you should decide the Loan Tenure. A higher tenure means more interest outgo over the complete period, so you need to strike a balance.

4. Choose your lender

Do a detailed research to find a bank or financing company for home loan. Check with at least 4 to 5 banks and companies to know their terms and conditions of offering a loan, interest rate and tenure.

While the interest rate is important, you should also look at other aspects such as the customer service, charges for early termination of the loan and more before deciding the financier. 

It is now a norm to provide the ability to prepay your loan anytime without any additional charges. This would affect you if you want to prepay the loan.

5. Extra Charges

Get complete information about the extra charges that you will have to pay to take a home loan like processing fee, service and administrative fee, etc. These charges are a percentage of your loan amount that is actually sanctioned to you, and not on what you actually take home. Making modification in any of these later may come at a cost. Some banks want you to register the loan agreement at the sub-registrar.


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