Home Loan

What is a Home Loan?

The term home loan refers to the loan given by a bank or a financial institution either for the purchase of the primary house or for investing in a residence.

In case of a home loan, the borrower of the loan who also happens to be the owner transfers the title to the lender on a condition that the title will be transferred back to the owner on completion of the payment of the principal amount along with the interest amount.

It is mandatory for the borrower to have a collateral security to obtain a home loan. With respect to interest rates, home loans has two types of interest rates namely fixed interest rates and floating interest rates.

Features of Home Loans

Loan Tenure – The tenure availed to repay the loan plays a crucial role as the short terms loans helps the borrower to pay less interest amount but has to end up paying high principal amount.

Interest Rate – The home loan offers the borrower to choose either from the fixed or floating interest rates during the tenure of the loan period.

Under the floating rate of interest, the interest rates move along with the market rates and is subject to RBI’s decision related to the national cash rate. Whereas under the fixed interest rates, the interest rates remains firm and fixed irrespective of market movements. The only backdrop of fixed interest rate is that the borrower may end up paying high interest rates where as others has a chance to pay lesser interest rates based on market interest rates.

Frequency of Loan Repayment – The period chosen by the borrower to repay the loan is an important factor as this has to be done after carefully evaluating the financial plan of the individual. The maximum tenure within an individual has to repay a home loan in India is 30 years.

Purpose of Loan – The borrower can avail home loan from banks or financial institutions either for purchase of a new house from builder or a house meant for resale or for construction of house or for extension of an existing house.

Collateral – Housing Loan is a secured loan and hence collateral or security is a must to avail the loan.

Processing Fees – The processing fee is a one time charge which a bank or a financial institution levies on the borrower at the time of processing of the loan. This fee differs from one bank to another and it either depends on specific percentage of loan amount or it is a fixed amount of money. The processing fee is non – refundable in nature. This particular fee has to be borne by the customers even if the loan is not sanctioned. Some of the banks have introduced zero processing fee home loan for a limited period of time to attract more customers.

Loan Amount -  The total amount of housing loan prominently depends on the income of the borrower, age of the borrower, credit history of the borrower, repayment capacity as well as eligibility of the individual.

Equated Monthly Installments (EMI) – The term equated monthly instalments refers to the fixed payment amount which the borrower has to make on a monthly basis to the lender on a specified date during every month. The EMI is used to pay both the principal amount as well as the interest amount over a period of time, untill the completion of the loan in full. The EMI usually varies on the loan amount as well as its tenure which is chosen by the borrower.

Types of Home Loans in India

Home Purchase Loans

These loans are offered to those borrowers who are looking for the purchase of either a house or a flat.

Plot Loans

This kind of loan is offered to those who are looking to buy a piece of land or plot for construction of a house on it.

New Home Loans

This loan is offered for those individuals who are looking to buy a house or flat for the first time.

Housing Loan for Construction

This kind of loan is offered for those who are willing to construct a house of their own over an existing piece of land.

Home Loan Top Up

It is a kind of facility which is offered by most of the banks and non – banking financial institutions which allows the existing customer to borrow a certain amount over and above the existing home loan.

Renovation Loan

This is a kind of loan which is offered to those borrowers who are planning to renovate or extend their existing house or property.

Balance Transfer Home Loan

This kind of loan is available for the individuals who opt to transfer their remaining balance amount of home loan from one bank to another. This is usually done to avail better interest rates (read as lesser interest rates).

Pre – Approved Home Loan

This kind of housing loan is offered to the eligible borrowers after taking into consideration the borrowers creditworthiness, financial position, income and so on.

Eligibility for Securing Home Loans

For Salaried Employees

Age: The applicant should be in the age group between 18 years – 70 years.
Income: The applicant should have a minimum salary of Rs 1,20,000 per annum.
Tenure of Loan: The tenure of loan can be chosen between 5 years – 30 years.
Employment Status: The applicant should be a salaried employee and should be working for at least 3 years out of which the current employment should account for atleast 1 year.
Credit Rating: The applicant should have a good credit score (CIBIL score) of 750 – 900 points.

For Self Employed Individuals

Age: The applicant should be in the age group between 21 years – 70 years.
Income: The applicant should have a minimum salary of Rs 2,00,000 per annum.
Tenure of Loan: The tenure of loan can be chosen between 5 years – 30 years.
Credit Rating: The applicant should have a good credit score (CIBIL score) of 750 – 900 points.

Required Documents for Home Loans

In case of Salaried Employees

• Proof of Identity: Election ID Card, Driving License, PAN Card, Passport
• Salary Slip for the last 3 months
• Proof of Residence: Utility Bills (Electricity bill, Water bill), Passport
• Bank statement of Salary Account for the latest 3 months
• Duly filled in application form along with recent passport size photograph
• Bank Salary Credit Statement for last 6 months

In case of Self Employed

• Duly filled in application form along with recent passport size photograph
• Proof of Residence: Utility Bills including Electricity bill, Water bill or Passport
• Proof of Identity: Election Identity Card, PAN Card, Driving License, Passport
• Proof of Office Address
• Education Qualification Certificate
• Income Proof of the self-employed: Audited financial report for the last three years, last six months bank statements are required.
• Proof of Business: Certificate of Practice, GST Registration Certificate, Partnership Deed, Shop Act License, MOA & AOA, Qualification Certificate.

Things to look out for while borrowing a Home Loan

It is advised for the borrower to do little groundwork before borrowing a home loan, as this is one of the most important financial decision. One needs to carefully evaluate all the factors before zeroing on the best option while availing a home loan.

Know the Interest Rates – Interest rates play a key role in deciding the home loan, a borrower can either opt for fixed or floating interest rates in case of a home loan. One needs to evaluate carefully before taking a major decision as both have their own share of pros and cons.

CIBIL Score – The CIBIL score or credit score plays a major role in deciding the eligibility for a home loan. Applicants with good credit score are more likely to get the home loan quickly as against those who have a bad credit score.

Read the Documents Carefully – The loan applicant needs to read all the terms and conditions which are associated with the loan carefully before duly signing the same to avoid discrepancies at a later point of time.

Figure out the Financial Status – An individual who is willing to avail housing loan should first understand his/her financial status and then according to should apply for the home loan which is well aligned to match the financial capacity to ensure that the loan repayment sails smoothly during the tenure of the loan. Sometimes, customers commit a mistake by availing huge amount of loans which is too expensive for them and run into trouble. This, in turn, leads to a delay in repayment of a loan which again increases the interest rates and fees.

Know about Fees and Charges – Different banks in India charge different amount as loan processing fee and other kinds of charges over the entire period of the loan. It is essential for an individual (borrower) to understand these charges properly before applying for a home loan as this will save their hard earned money.

Factors that determine the interest rates of a housing loan

The following factors determine the interest rates of the home loan in India

• Prime Lending Rate – It is the interest rate which is charged by the commercial banks on their creditworthy customers. It is mainly determined by the federal fund rates.

• Repo Rate – The term repo rate refers to the rate of interest at which the country’s Central Bank – Reserve Bank of India will lend money to other banks.

• Reverse Repo Rate – The term reverse repo rate refers to the rate at which the Reserve Bank of India borrows money from the commercial banks within the country. It is one of the monetary policy instrument which can be used as a tool to control money supply in the country.

• Cash Reserve Ratio – The term cash reserve ratio refers to the minimum percentage of the total deposits made by the customers which the bank has to hold as a reserve to meet the future uncertainties rather than lending it or investing it.

• Statutory Liquidity Ratio – The Statutory Liquidity Ratio is the reserve which is required for the commercial banks in India to maintain. It can be either in terms of gold or cash or RBI approved securities before providing credit to the customers.

• Benchmark Prime Lending Rate (BPLR) – The term Benchmark Prime Lending Rate refers to the rate at which commercial banks lends money to its customers (in the form of loans). Usually, all the commercial banks in India secure loan from RBI at a lower rate of interest and hence none of them are allowed to lend its customers below the BPLR.

Reasons for Rejection of home loan

• Unstable employment of the applicant.
• Age of the applicant (borrower).
• The applicant earlier had been a defaulter as a tenant.
• The property has not been approved by the concerned authorities despite the builder securing approval.
• The builder has not secured approval from the bank which is offering a home loan.
• Rejections related to valuation of the property.
• Low income of the applicant.
• Improper documentation.
• If the applicant fails to secure no dues certificate from previous lenders.
• If the applicant acts as a guarantor for other loans, then banks view him/her as equally responsible to repay the existing loan and hence may or may not grant a home loan.