Availing a home loan requires a long term financial commitment and applications are approved after a lot of evaluation. Planning and preparing for a home loan is a crucial part of the home loan journey and can help you in availing the optimum home loan deal.
Here are the 5 checkpoints every home loan borrower must clear while planning to avail a loan:
Adequate funds for down payment:
According to the RBI guidelines, lenders are allowed to finance up to 75% to 90% of a property's value through home loans. Therefore, the loan applicant has to contribute a minimum of 10% to 25% of the property's cost as a down payment or margin contribution. The final proportion would be determined based on the lender's risk evaluation of the borrower's credit profile and the ability to make higher contributions.
The borrower should always try to contribute a larger proportion of their own finances due to its twin benefits. This will not only reduce the total interest cost of home loan, but also improve the chances of loan approval. However, in an effort to make larger down payments, the borrower shouldn't overstretch his funds or forego other crucial financial objectives. Doing so, the borrower might be forced to avail more expensive loans in the future, which can adversely impact his financial health.
Improve your credit score:
Many home loan lenders view credit scores of 750 and above as "good." As a result, applicants with such credit ratings have higher chances of getting a home loan approved. Additionally, most lenders offer preferential interest rates to applicants having higher credit scores. Hence, applicants should fetch their credit report before submitting any home loan application. This will help them to take corrective steps to improve their credit score. Applying for a home loan with an improved credit score can increase their chances of home loan approval, at possibly lower interest rates.
Borrowers can avail one free credit report annually from each of the four credit bureaus. Alternatively, they can fetch a free credit report with free monthly updates through online financial marketplaces.
Check your EMI affordability:
Home loan lenders usually prefer to lend to applicants whose total EMIs and other monthly repayment obligations, including that of the proposed home loan, are within 50-60% of their monthly income.
Hence, make sure that your total EMIs are within 50% to 60% of your annual income before applying for a home loan. If not, first think about prepaying or foreclosing some of your ongoing debts to reduce your existing EMI. This will reduce overall FOIR and increase the chances of home loan approval.
Maintain an adequate emergency fund
An emergency fund should ideally amount to at least 6 times of your unavoidable expenses like insurance premiums, EMIs, rent, children's tuition fee, etc. This would allow borrowers to continue with their loan repayments in case of loss of income due to disability or joblessness.
Prospective home loan borrowers can take advantage of various home loan overdraft products like Max Saver, Home Loan Advantage, Maxgain and other variants to ensure liquidity for dealing with unexpected financial emergencies. The interest component of such home loans is calculated after deducting the monthly average balance of a loan-linked savings/current account from the outstanding principal of the loan.
The linked account can be used by the borrowers to deposit excess funds, which may then be withdrawn in accordance with their liquidity or cash flows. As a result, borrowers can lower their interest cost during the time when they have surplus funds and withdraw those additional funds when they are faced with unforeseen circumstances or cash crunches.
Compare amongst various home loan lenders:
The interest rates, tenure, LTV ratio and even the loan amount offered can vary significantly depending on the home loan lender and their risk evaluation of the applicants. Hence, borrowers should aim to compare the loans offered by as many home loan lenders as possible before making the final home loan application.
The most convenient way is to visit online financial marketplaces, where you can compare multiple lenders and choose the most suitable one based on your home loan requirements and eligibility criteria such as credit score, job profile, monthly income, employer's profile, etc.