Home Loan

Home Loan Definition

Home Loans are a type of credit offered by banks, NBFCs and HFCs for the purchase of a new house or land, construction of a new house or some kind of repair or renovation for your home.

What is a Home Loan?

Owning a home is a great pride for Indians. As they say, ‘Home is where the soul is!’. There is always a part of their monthly savings for house purchasing proceeds. Banks and financial institutions provide different home loan products in order to assist them in their dream of owning a home.

Your home loan needs may not be the same as the next person next to you. While you may be looking for a home loan to purchase a brand-new apartment, someone may be looking to renovate their ancestral property and someone else looking to create the extra space they’ve long desired. Therefore, banks and NBFCs offer highly customized home loan products to suit every need and requirement.

What are the various kinds of home loans?

In India, most banks provide the following types of home loan

Home Purchase Loans

Commonly known as a home loan or housing loan are provided for buying houses or apartments. Banks usually offer 80 to 85% of the market value of the property as a loan. They are available for various tenure periods and with fixed and floating interest rates. This can be used for purchasing new homes or old homes which have entered the real estate market as resale.

Plot Loans

This type of loan is provided for the purchase of land or an empty plot for residential activity, construction or investment purpose. This loan cannot be used for buying any agricultural plot of land. Unlike home loans where the loan amount provided is about 80 to 85% of the price of the property, land purchase loans are offered only up to 70% of the cost of the land.

Home Construction Loan

Home construction loans are provided for the sole purpose of constructing a home on an already available piece of land. The land can be an empty plot or demolishing an existing house and building a new one in its place. The loan amount provided for this is normally 85% to 90% of the construction cost.

Home Improvement Loans

These loans help the borrower with all home renovation or improvement work. They are extended towards all construction and renovation work. This could include paint job, new flooring work, plumbing or exterior elevation works are all covered under home improvement loans.

Home expansion loans

These are loans provided to the borrower for expanding their existing home. This includes expanding a single room, adding additional rooms to building a new floor above the existing house. These projects could vary from Rs. 20,000 to more than Rs.10 lakhs based on the project.

Will I qualify for a home loan? What do lenders look for?

Lenders look at several factors while determining the state of your housing loan application. They include the following indicators:

• Your credit score: Lenders usually need a minimum credit score of 750 before processing your application. A credit score of 750 or higher assures lenders that you are a responsible borrower with a solid repayment history.
• Your credit report: Lenders scrutinize an applicant's credit score and background. In order to see if you have a record of making payments on time and in full for a long period, they review your payment history over the years. They will also look into any existing written-off accounts to see if you have defaulted on any debt obligations. Even if your current credit score is sufficient, all of these measures of bad credit conduct are warning flags for lenders. To see how you would manage extra debt payments on your current and expected future salary, they will also look at your existing loan commitments.
• Employment status and salary: Lenders want to know that you'll have a consistent monthly income to pay off your EMIs over the duration of the loan. A home loan can last for decades, so lenders want to know if you'll be able to sustain stable jobs and income during that period.
• Clean title deed and full property documentation: While this provision is not related to your particular credit condition, banks want to guarantee that in the case of a loan default, there will be no complications with the collateral (the home). For that, they would make sure that all the legal papers surrounding the property are in order.

How much home loan amount can I get?

Home loan amounts range from Rs.10 lakhs to Rs.5 crores. Based on your eligibility, you can get up to 85% of the home purchase amount as the loan amount.

What is the repayment tenure for a home loan?

Home loans are long term loans, sometimes going for a few decades. You can get repayment tenures of up to 30 years on your home loan. This repayment period is based on your age.

Home Loan Interest Rate

There are two basic types of home loan interest rates and you need to study all the interest rate options carefully before deciding which one to choose:

Fixed-rate: An interest rate is fixed for the entire tenure of your loan and you should pay a fixed EMI for the entire duration of the loan.

Floating rate: The interest rate you pay varies during your loan tenure, depending on external market conditions. You would choose this option if you are confident that interest rates will go down during your loan period.

There is also the option of a partially fixed and partially floating rate. You need to learn about all kinds of housing loan interest rate options or consult a professional to see which option suits your needs the best.

In order to land the lowest home loans interest, you need to have an impeccable credit history.

What is EMI?

EMI stands for Equated Monthly Installment. It is the amount you need to pay monthly to repay your entire loan. If your loan period is 20 years, then you will be paying an EMI every month for 20 years.

EMI consists of principal plus interest due, spread over the entire tenure of your loan. If your EMI burden is too high, you can reduce it by lengthening the tenure of the loan. However, if you extend the tenure of your loan, you will be paying out more in interest amount since your repayment obligation is over a longer period.

You can use a home loan EMI calculator to find out how much your monthly outgo will be.

What are the documents required for a home loan?

The documents required for a home loan could include (among others): all the legal documents pertaining to the home that is to be purchased like the title deed, all the necessary legal approvals etc.; identity proof, residence proof, age proof, salary slip of the past few months; past income tax returns; and bank statements. The documents required will vary based on the lender requirements.

What are the other costs incurred in addition to the actual property cost?

Buying a home can create a significant outflow in addition to the actual cost of the property. There are two kinds of expenses associated with a housing loan:

At the time of purchase: You need to keep in mind that you will have to pay registration charges, stamp duty and transfer charges.

At the time of loan disbursal: Banks may charge various fees including processing and application fees. It is useful to remember that some of these bank fees can be negotiated. However, the good news is that there is no longer a pre-payment penalty for paying off your housing loan before the end of your loan period.

Is it possible to get home loans with bad credit?

It is very difficult to get home loans with bad credit. Lenders do not want to risk giving loans to customers who do not have a good credit repayment record. However, each lender has a different set of requirements and criteria for lending. So it is possible that even if multiple lenders reject you, you might have a small chance to qualify with another lender who has different requirements.

Generally, if you have a credit score of less than 750, it is difficult to get approved for a loan. Even if you’re sanctioned a home loan, the interest rates may not be favourable. Borrowers with a low credit score are likely to be charged steep interest rates, increasing the overall loan burden. The borrower must consider credit improvement schemes if he/she is having a poor credit score and wishes to go for a home loan soon.

What are the disadvantages of applying for a home loan with bad credit?

If your loan application is rejected by multiple lenders because of your poor credit record, each rejection will incrementally affect your existing poor credit score. Even if your application is approved, despite your poor credit record, you might be given a higher home loan interest rate, shorter repayment period, or a smaller loan amount which might not be enough for the home that you are considering. You need to concentrate on improving your credit score to at least 750 before applying for the home loan that is best for you.

How do I choose the best home loan?

The best home loan is easily the one that suits your budget and doesn’t restrict your cash flow. The best way of choosing a home loan provider is to do research on the various offers available in the market and decide which one is the best home loan in terms of interest rates, fees, and other features and benefits. You can refer to legal or technical experts for advice or counselling on specific areas that you might not understand or might not be familiar with. Above all, do not hurry on a home loan decision since your choice can have consequences stretching to decades.

How to apply for a home loan?

You can check your eligibility and apply for a home loan by signing up with CreditMantri. It is quick, simple and above all, free.

CreditMantri matches your credit and demographic profile to the lender's lending criteria and presents you a shortlist of only those lenders willing to lend to you based on your unique credit profile. In effect, we pre-screen your application to make sure you are likely to qualify as per the lender’s credit criteria. Hence the chances of your loan application getting approved is higher.

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