WHEN TO APPLY FOR A HOME LOAN?

You can apply for a loan before or after the selection of the property. In case, you are applying before the property selection then you can avail a pre-approved loan that most of the lenders provide. You can then select a house and the loan amount will be disbursed by the lender. Applying for a loan after the property selection is a more common phenomenon. However, you need to pay a portion of the cost of the property you intend to buy as a down payment. So, apply for a home loan when you have sufficient funds for down-payment.

HOME LOAN LENDERS

Home loans are available mainly from housing finance companies, financial institutions, nationalized banks, cooperative banks and foreign banks.

What aspects must be considered while choosing a lender?

To ensure that you are able to choose the best suitable lender, you must compare the following aspects:

Loan processing fees: Lenders usually charge a processing fee of 0.5 to 1 per cent of the loan amount. This is a non-refundable fee, which is paid upfront along with the loan application and other pre-sanction documents.

Interest rates: These differ from lender to lender. So, compare interest rates of different lending institutions.

Administrative fees: Lenders usually charge administrative fees of about 1 per cent of the loan amount. This fee is paid after sanction along-with post-sanction documents. This fee is also non-refundable and hence should be apportioned over the loan amount to determine the effective cost of the loan.

Loan prepayment fees: In case the borrower prepays the loan, lenders usually charge about 2 per cent of the loan amount prepaid.

Loan Disbursal time: Each financial institution has varied loan disbursal procedure and turnaround time. So, enquire before applying with the lender.

Eligibility Norms: Lending institutions differ in eligibility criteria’s for borrowers. Know the eligibility norms to ensure you fit in to it before applying.

ELIGIBILITY CRITERIA

What are the eligibility criteria in case of a home loan?

Various factors such as the borrower’s age, income, credit records, capital and property approval are considered before the applicant is considered eligible for a home loan.

How to enhance your eligibility?

To enhance your eligibility, you may consider the following:

Adding a co-applicant- You can add your parent, wife, son or daughter who have a steady source of income as a co-applicant in the application. The income of both the applicants will be clubbed while considering the eligibility criteria. Other income sources- You can also include income from other sources such as rent, home business or revenue from farming, etc., while computing your income. Repaying other debts- Repaying debts such as credit card bills or personal loans etc., will improve your repaying capacity thereby enhancing your eligibility criteria. Increasing the home loan tenure- Your EMI amount starts declining as the tenure of the home loan increases. By increasing the home loan tenure, you can improve your eligibility criteria. For example, a person with a monthly income of Rs 25,000 applies for a loan of Rs 10 lakh for a period of 10 years. His EMI at 8 per cent interest will be approximately Rs 12,419. Clearly it is more than half of his monthly income and therefore his application may get rejected. However, if the same person increases the loan tenure to 20 years his EMI will be Rs 8,488 which is well within his repaying capacity.

DOCUMENTATION

Different documents required for loan approval are:

Identity proof- Lenders accept photocopies of Voter ID, PAN card, Passport, Driving License, etc., as identity proof of the applicant.

Residence proof (current residence and permanent residence) - Photocopies of electricity bills, telephone bills, rent receipts etc., can be furnished as proof of address.

Income proof (self and co-applicant)- An applicant has to produce copies of salary slip, bank statements, IT returns etc., of his and co-applicant (if any) as proof of his income.

Employment details- Lenders also want to ascertain the employment details of the applicant. Appointment letter or any other document establishing applicant’s employment details can be furnished.

In addition to these, an applicant may furnish other documents such as rent receipts, other sources of income such as agriculture, home business etc., to improve his loan approval prospects.

CO–APPLICANT FOR A HOME LOAN

A joint-owner of the property has to necessarily be a co-applicant for the loan. However, if the property is in a single name, the main borrower can have a co-applicant for the loan to strengthen his loan proposal. With an income-earning co-applicant, the lender has an additional security. The main borrower can have any family member as the co-applicant.

What are the advantages of adding a co-applicant?

Below mentioned are the advantages of adding a co-applicant:

Higher loan amount- Adding a co-applicant can make you eligible for a higher loan amount. The income of the co-applicant will be clubbed with your income while determining the eligible loan amount.

Tax benefits- As per existing IT regulations, co-applicants too can claim tax benefits for principal and interest amount repaid. The extent of tax exemptions will be in proportion to the loan amount availed in the name of co-applicant.

What are the obligations of a co-applicant?

A co-applicant has to furnish all necessary documents to establish his or her income credentials. The co-applicant is as much liable as the principal applicant in repaying the loan. Any default on the loan may also ruin the credit history of the co-applicant.

TYPES OF HOME LOANS

Home loans for purchase of residential property- Lending institutions provide loans for purchase of residential property. This is one of the common forms of loans availed by borrowers. Home improvement loans- Borrowers can avail loans for making improvements in their homes such as refurnishing, new furniture, expansion, etc. Loans for constructing house on owned land- If you have a plot of land in your name and intend to build a house on it then you can also avail a loan for it. Pre-approved loans- These loans are approved before you have selected the property that you wish to purchase. Based on your financial potential, the lender will approve an amount within which you can buy a house. The loan amount will be disbursed once you decide on a property. Home equity loans- You can also use the equity in your home to avail a loan. Equity is the difference between the current value of your home and the amount you own as debts on it. You can avail home equity loans to meet any of your financial needs. Top up loans- If you already have a home loan and have paid a portion of the loan then you can apply for a top up loan equivalent to or lesser than the amount repaid. Top up loans can be taken for meeting any financial needs.

POPULAR TERMS ASSOCIATED WITH HOME LOANS

Loan amount

Home loan lenders usually grant up to a maximum of 85 per cent of the property value as the loan amount. The amount of loan differs from lender to lender. Besides, the amount of loan sanctioned to an individual will depend on his repayment capacity based on his income and the co-applicant’s income, if any. Other aspects taken into consideration while working out the loan amount is the borrower’s age, number of dependents, qualifications, assets, liabilities, etc. Note: You can rent out the property with prior permission from the lender. However, the expected rent will not be considered as part of your income for loan purposes.

Loan tenure

Maximum loan tenure ranges up to 20 years. However, some lenders grant loans for as long as 30 years. Loan tenures differ depending on the type of loan taken. For instance, in case of a home improvement loan, the tenure will be within 10 years. Tenures for floating interest rate loans [refer below for the explanation of floating interest rate] are generally higher than tenures for fixed interest rate loans. Short-term bridge loans offered to enable an individual to change homes are normally for much shorter tenures (2 – 3 years).

Loan tenure for each individual applicant depends on the borrower’s age. For instance, the lender may have an internal regulation stating that loan tenures should not extend beyond the borrower reaching 65 years of age.

Guarantor for a home loan

Some lenders ask for guarantors to strengthen a borrower’s proposal. The guarantor’s income should exceed that of the borrower to ensure that if the borrower defaults on making payment, the guarantor would have to repay the debt.

Interest rate of a home loan

Lenders offer the borrower the flexibility of adjustable interest rates through the loan tenure. Loan tenures, being long will normally see fluctuations in interest rates. If the borrower believes that interest rates will come down, he can opt for the Floating Interest Rate option. For borrowers who believe that interest rates will rise or don’t want to forecast interest rates, the Fixed Interest Rate option is suitable.

Fixed Interest Rate

Fixed Interest Rate option implies one interest rate payable throughout the loan tenure.

Floating Interest Rate

Floating Interest Rate implies changing interest rates throughout the loan tenure. The lender offers Floating Interest Rates taking a fixed percentage over a benchmark rate. The benchmark rate is usually the Retail Prime Lending Rate (RPLR) of the lender. For instance, if the lender’s RPLR is 10% and the lender offers a Floating Interest Rate option at 2% over RPLR, the borrower’s interest cost will be 12% (10% + 2%). The benchmark rates are usually adjusted every six months.

REPAYMENT OF HOME LOAN

Repayment of the home loan takes place in the form of Equated Monthly Installments (EMIs), which are made up of the principal component of the loan as well as interest component. Thus EMI is essentially the amount that you have to pay every month towards the repayment of your loan.

How is EMI calculated?

EMIs are calculated by the lenders on ‘annual rests’ or ‘monthly rests’.

Annual Rests:Under this method, even though you repay a portion of the principal component of the loan every month, you pay interest for the full year on the principal amount outstanding at the beginning of the year. This implies that you do not get the benefit of monthly principal repayments making the loan costly.

Monthly Rest:Under this method, the lender reduces the principal component repaid every month and calculates interest on the reduced outstanding amount every month thus giving you the benefit of monthly repayments of the principal portion. This makes the cost of the loan lesser.

Repaying a loan diligently

It is important to pay your EMIs every month. Lenders offer various payment modes such as online transfer, check pick-up and drop facility, etc., By opting for these payment modes, you are able to automate the loan repayment and the chances of missing an EMI payment gets reduced drastically.

Inability to meet EMI payment

In case for some reasons, you are unable to pay the EMIs then it is important to talk to the lender and arrive at an alternative repayment plan. Many lending institutions offer a range of repayment options to responsible borrowers.

Prepayment of loan

As a borrower, you can prepay the loan amount in full or part. Lending institutions do impose some charges (varies from lender to lender) for pre-paying of the loans. Whenever you wish to prepay your loan amount, you can contact the lender’s office and complete the formalities and prepay the loan.

SECURITY REQUIREMENT FOR A HOME LOAN

Most lenders don’t ask for additional security as the house purchased through the loan acts as collateral. The lender has the legal right to confiscate the property on non-repayment of loan. However, in case of availing loans for construction of a house, lenders may ask you to keep the land, on which the house is being built, as security.

INSURANCE OF PROPERTY FOR WHICH THE LOAN IS TAKEN

The property, for which the loan is taken, will have to be insured for hazards like fire. The borrower will have to provide the lender evidence of annual premium payments till repayment of the loan.

Who bears the cost of insurance?

The costs of the home insurance in general are borne by the borrowers. In most cases it is part of the costs of the loan. However, some lenders may bear the home insurance costs to make the loan attractive for customers.

Who gets paid in case of a claim?

It depends on the type of home insurance you avail and the loss to your home. If you have insured the content in your home and there are damages to it then the insurance company will reimburse you for the loss. However, if there is death of the borrower then the claim will be directly paid to the lender against the amount owed.

TAX BENEFITS OFFERED BY HOME LOANS

Besides allowing you to buy your dream house today and not tomorrow when you would have sufficient funds, home loans also help you to lower your tax liability, as it offers tax benefits under section 80C and section 24 of the Income Tax Act 1961.

Section 80C

Section 80C gives you a maximum deduction of Rs 1 lakh per financial year from your taxable income on certain payments/investments. Principal repayment in case of a home loan, is one such payment which attracts this benefit.

Section 24

Interest charged on a home loan is deductible up to Rs 1.5 lakh per financial year provided the loan amount is used towards purchase, construction, repair, renewal or reconstruction of your house. (If the loan is taken prior to March 1, 1999, the tax benefit is reduced to Rs 30,000 per financial year).

Additional interest subsidy

Interest subsidy of 1 per cent is available for 1-year on home loans up to Rs 10 lakh, provided the property cost does not exceed Rs 20 lakh.

If your parents or wife or children are co-applicant in the home loan and are joint owners in the property purchased then they too enjoy the tax benefits. The tax benefits are applicable in fraction to the loan in their respective names. Please check with your tax consultant to determine the extent of tax exemptions in your cases.

COST OF THE HOME LOAN

Besides paying interest on the loan, as a borrower, you may need to incur other charges such as:

Loan processing fees

Lenders usually charge a processing fee of 0.5 to 1 per cent of the loan amount. This is a non-refundable fee, which is paid upfront along with the loan application and other pre-sanction documents.

Administrative fees

Lenders usually charge administrative fees of about 1 per cent of the loan amount. This fee is paid after sanction along-with post-sanction documents. This fee is also non-refundable and hence should be apportioned over the loan amount to determine the effective cost of the loan.

Loan prepayment fees

In case the borrower prepays the loan, lenders usually charge about 2 per cent of the loan amount prepaid.

Computing the actual (real) cost of your home loan

The real cost of your loan would be your Effective interest plus upfront processing charges and Administrative fees. The charges should be spread over the loan tenure to determine the real cost of the loan. Effective interest rate is the rate at which your monthly payments are calculated. For e.g. For a 15 year loan of Rs 10 lakh with an effective interest of 12 per cent, processing charges of 0.5 per cent and Administrative fee of 1%, the Actual cost of your loan will be 12.1 per cent including all costs (processing charges and administration costs are spread over 15 years).

PROCEDURE TO AVAIL THE HOME LOAN

You must fill the application form available at the lender’s office and submit it along with supporting documents.

After scrutinizing the application form, the lender’s official will ask you to present yourself for a personal interview.

On the loan application being accepted, you will be asked to pay the processing fee (if any).

The lender will issue a ‘Loan Offer’ letter to you with the loan terms stated.

On acceptance of the loan, you will be asked to pay the administrative fees (if any) calculated as a percentage of the loan amount sanctioned.

You will submit the property title deeds to the lender for inspection by the lender’s advocate.

The lender’s technical team will visit the property for inspection and submit a report.

The lender will disburse the loan amount after you meet the down payment.

Loan disbursement

The lender disburses the loan amount in the form of a cheque in the name of the seller or builder. Disbursement takes about a week after execution and completion of all legal documents, technical appraisal of the property, and the borrower having invested his contribution in full. You contribution is the total cost of the property less the loan amount. In case of house under construction, the loan will be disbursed in full or in suitable instalments (normally not exceeding three) taking into account the requirement of funds and progress of construction, as assessed by the lender.

How much time is usually taken for the disbursal of loan?

Depending upon the lender you choose and his turnaround time, it can take anything between a few days to a couple of weeks for the loan to be disbursed.

How to expedite the loan disbursal process?

You can expedite the loan disbursal process by taking all possible precautions while applying to ensure that there are no delays. Take due to care to fill the application form completely and correctly. Also furnish all the documents required along with the application form. In short, make things easier for the lender and your loan application will move swiftly.

What steps should be taken when the loan is not disbursed on time as assured by the lender?

If you do not receive the loan proceeds as per the timeline indicated by the lender, you must contact the lender immediately. Enquire about your loan application and the delay in the disbursal. Check if you can do anything at your end to expedite the process.

SWITCHING FROM FIXED TO FLOATING INTEREST RATES OR VICE VERSA

It is possible that during the loan term, you may wish to switch from your fixed interest rate to a floating interest rate or vice versa. Before opting to do so, you must consider the following:

Prevailing interest rate on existing loan and new loan: Before opting for a switch, consider the prevailing interest rates. Undertake a switch only if it means a considerable savings at your end.

Cost of switch:While deciding on switching from one interest rate type to another, do factor in the fees chargeable. It is generally a percentage of the outstanding loan amount.

Future outlook on interest rate movement: Undertake a switch with a long term perspective rather than a short-term.

Steps to take to activate a switch

Once you have decided to undertake a switch, you must inform the lender of your intention. Understand the financial implications and undertake the necessary paperwork so that you can take advantage of the new EMI amount at the earliest.

SWITCHING HOME LOAN LENDERS TO SAVE INTEREST COSTS

Borrowers can switch lenders to save interest for the balance years of your loan. Normally, housing finance companies refinance up to the remaining part of the original loan tenure. For example, if you have taken a loan for 15 years and want to switch at the end of 8 years, the refinancing lender will consider a loan for 7 years.

However, keep in mind the following important aspects:

Switch from a higher interest loan to a lower interest one immediately if you foresee a rise in interest rates in the new future. This will lock you in with lower interest rates compared to market rates.

Your housing finance company will not let go of your loan easily. Be persuasive. You may also convince them to lower the rate for you if you have a good track record of prompt repayments.

Don’t bother switching lenders if you have almost completed repaying your loan. Switching only makes sense if you still have a long way to go.

Make sure pre-payment penalties are not very high. You should ensure this at the time of availing the loan.

The Income tax Act, 1961 permits you to enjoy the same tax concessions in terms of interest and rebate.

If possible, convince the new housing finance company to deal directly with your existing housing finance company. This will make life much easier for you in all respects. The two entities will negotiate among themselves and documents will be transferred directly between them. This will save you a lot of legwork.

If the new lender pays off your existing housing finance company, you will not have to pay stamp duty as the mortgage is transferred. However if you foreclose the loan and then apply again to another lender, you would have to pay the duty again.

By switching your loan, you may have to pay processing fees and documentation charges again as it would be taken as a fresh loan by the new lender.

Renegotiate the loan terms. You may want a longer tenure to bring down your EMI or may want to shorten it to repay the loan earlier. Ask your lender to give it in writing about the new terms of the loan.