People generally have two options when it comes to where they live and ultimately call home. One is to rent a home that someone else owns and the other is to purchase a home for themselves. Home is not only a place to live but also a reflection of who we are. Buying a house is a milestone decision of the life.
People who decide to buy a house often do so because they are ready to settle down in one location and are ready to make a financial investment. When a person has the money to buy a home it may also be less expensive over time than renting. This is where home loan comes into assistance.
Applying for a home loan can be an instant solution to the house-related financial crunch. Further all the banks and Financial Institutions are eager to offer loans at a very premium rate of interest. Also the government of India is pushing their objective of home ownership by way of subsidies on affordable home segment to first time home buyers.
A home loan or housing loan is an amount borrowed by individuals for a fixed tenure from financial institutions to buy, construct, repair or renovate a residential property. The Bank/NBFC charge an interest on the amount borrowed, which has to be paid by the borrowers along with the principal amount which is termed as Equated Monthly Installment (EMI).
The bank provides home loan to the borrower on certain terms and conditions .Banks/ NBFC get the property valued independently and provide the loan on the basis of re-payment capacity of the borrower, also considering the property value and the agreement/Registry amount of the property being purchased. Usually the final sanction amount is lowest of these 3 values.
Types of Home Loan
Depending upon the type of property being purchased and the amount of loan required, home loans are classified into the following different types.
- Home Purchase Loan
As the name Suggest, home purchase loans are given for purchasing a flats or a home. This is one of the most popular type of home loan and are availed by most home buyers. Almost all banks and Non-Banking Financial Corporations offer home purchase loans.
- Construction Loan
Construction Loan is offered to customers who want finance for the purpose of constructing their own house on their existing land/plot. Under this loan the land on which the construction has to be done should have been bought before availing the loan The formalities for construction loan are slightly different than those for regular home loans. The loan applicant have to get a construction estimate made from an architect which has to be given to the bank/NBFC and thereafter the financial institute evaluates and decides to sanction amount of the loan.
- Plot purchase plus construction Loan
As the name suggests this is the loan given to the borrower for the purchase of the land/plot along with the construction of a house on that piece of land. These loans are very similar to the construction loan; The only advantage is that under this type of home loan the bank give a loan for the purchase of the plot as well as for the construction of the house on it thereafter. You can also get a loan just for the purchase of land/plot.
- Home Extension/Renovation Loan
Home loans for extension or renovation of home are offered to those home loan borrowers who already have a house but are looking for further construction or renovation on their existing piece of property. For example, addition of an extra floor or flooring and painting etc.
- Construction linked Home Loan
These loans are specifically designed to finance under construction properties primarily builder’s flats, Under the ‘Construction Linked Payment Plan’, the bank disburses installments to the developer on your behalf for pre-decided construction milestones. Every time a certain level of slab is laid, the bank will release some percentage of the loan amount.
- Balance Transfer of Home Loan
Individuals can use the balance transfer option to transfer their home loan from one bank to another. Most people choose this option to avail better interest rates and other loan terms and conditions. This loan can also be availed if the borrower is looking for some additional funding over and above his existing home loan amount. The additional finance availed under this type of loan can be used for any purpose. The top up amount is usually priced at the same rate of interest as of home loan.
Home Loan Characteristics
Following are the different characteristics of a home loan to help you understand the home loans in a better way.
- Home Loans comes under the category of secured loans. This means that a house or collateral is offered as a security to the bank by way of depositing the original property papers by the loan borrower. Against which the bank offers a loan to the borrower upto a percentage of the market value of the borrower.
- Being a secured loan, home loan interest rate is comparatively lower than an unsecured loan, such as a personal loan.
- The amount of the home loan can vary based on your income, credit history, the area where you are planning to purchase the property and various other factors. You can apply for a home loan jointly with your spouse or blood related family members who are known as co-applicants.
- Home loans usually have longer repayment tenures and ranges from 1 years to 30 years depending upon your current age and employment type.
- The repayment of the home loan is done in Equated Monthly Installment (EMI) which is the amount you pay each month to the bank to repay the part of your home loan. This EMI includes some portion of the principal amount along with the interest charged on the loan.. You can use home loan EMI calculator to calculate the EMI which you will have to pay for your home loan.
- Prepayment of home loan can also be done. As per RBI guidelines if a Home loan is given to an individual on a floating rate of interest there will be no pre-payment charges associated at any point of time but if the loan is on fixed rate of interest or given to non individual there would be a pre payment charge if you want to close the loan before the tenor maturity. Therefore, home buyers should compare the home loans available to find the best home loan offers.
- You can avail tax benefits on your home loan as per provisions of the IT Act, 1961, which is subject to change.
Home loan eligibility Criteria
Home loan eligibility includes many criteria’s that the loan applicant needs to satisfy in order to be eligible for a home loan. Every lender has different home loan eligibility criteria but there are certain common factors which are checked to access the loan applicant’s credibility such as age, income, work experience and credit history and the type of property he is purchasing along with the employment type.
Irrespective of the applicant’s occupation or profession, there is a need to check eligibility before approaching banks and this can be done through Mudrahome.com with a help of few clicks.
The criteria with respect to eligibility for a home loan tend to vary from one lender to another. Following are some key requirements to be taken into consideration:
- Employment Stability
It’s a crucial aspect for home loan consideration. Unless the applicant is salaried and employed for at least 2 years in the current profession or if the applicant is self-employed with minimum 3 years of total business vintage, home loan will not be processed.
- Age Criteria
The younger the applicant is there is more probability of getting loan. The minimum age of the applicant should be 21 years. Most banks offer home loan for salaried employees only if they are between the age group of up to 60 years. However for self-employed this will change to up to 65 years.
- Credit Rating
Apart from the applicant’s company’s performance, individual credit rating has a lot of importance. Good credit rating will increases the chance of getting the loan with more flexibility on loan amount, EMI, tenure and interest rates. Default payment records, fraudulent tracks, and outstanding loan, will reflect negatively on the applicant, this could lead to bank’s rejecting the loan application or will charge high rate of interest.
- Income Levels
Your current income level plays a key role in determining not only your eligibility but also the maximum limit of the home loan offered to you. A high net monthly income is indicative of an ability to pay a higher EMI amount and better chances of timely loan repayment. For this factor, not just present income status is considered, the past records of financial stability holds lot of value in deciding the eligibility for home loan. It is a key to success in all fields if you have good financial records, this can decide the interest rate percentage, loan amount and tenure when applying for loan.
- Property market value
Bank/NBFC get the property valued independently and offers a loan amount upto a percentage of the current market value , this varies from bank to bank but usually falls in between 75% to 80% of the current market price. This is also done to check if the property in question meets all the by-laws of construction laid by the government authorities.
- Agreement Value
For a Home loan the lenders also considers the agreement value of the property which is basically a government defined rate of the area termed as circle rate. This is the value basis which the purchaser will pay the stamp duty/taxes to the government of the purchase of the property and basis which the sale deed of the property will be made. Financial Institutions give loans upto a certain percentage of agreement value.
- Legal Search/Title Search
The lenders do a complete legal search of the property which the borrower is intending to purchase, this is done in order to confirm whether the property in question is free from all encumbrance, and to check the authenticity of the ownership of the property.
Applying for home loans online or offline requires the borrower to submit a list of documents as demanded by the loan provider. Documents required for home loan vary as per the employment type of the individual, i.e. salaried or self-employed, The following, however, are commonly requested for from all the applicants:
- A duly filled bank loan application form
- 2 recent passport size photographs.
- Proof of identity (Copy of Aadhar/Passport/Voter ID/PAN Card/).
- Proof of address (Copy of latest Electricity Bill/Telephone Bill/Property Tax Receipt/Voter ID/Passport).
- Last 12 months’ Pass Book/Bank Account Statement for all saving and current accounts
- Identification of signatures from present bankers or a signature proof such as PAN card.
- A cheque covering the administrative costs/processing incurred by the bank in processing the application
Documents Requested from Co-applicants
- Identity and address proof.
- 2 passport sized photos.
- Proof of business.
- Identification of signatures from his/her present bankers or a signature proof such as PAN card.
Additional Documents Requested from Salaried Applicants
- Letter of employment
- Salary certificate from the employer (original).
- Copy of ITR along with computation of Income or Form 16 for last 2 years.
- Last 6 month salary slips
Additional Documents Requested from Self-Employed/Professionals/ Business entities
- Copy of ITR/Assessment Orders of 3 years.
- Computation of Income/ Profit and loss account/ Balance Sheets of last 3 years.
- Audit reports for last 3 years if any.
- Business registration proof in case of self employed individuals.
- Statement of Personal assets and liabilities.
- GST returns for last 4 quarters.
- Partnership Deeds in case of partnership firms
- Certificate of Incorporations/Article of associations/Memorandum of associations in case of private ltd company.
Documents related to property
- Copy of agreement to sell for the property in question.
- In case of builder property purchase copy of builder buyer agreement along with payment receipts.
- In case of resale copy of complete chain of property papers right from the origination.
- Copy of allotment and possession letters
- Copy of house tax, along with other government departmental taxes.
- Copy of the sanction map of the property
Fees and Charges associated with Home loans
- Processing Fees
As the name suggests this fee is collected towards processing of your home loan application. This fee is non-refundable and is collected upfront at the time of sanctioning of the loan. Take this into account before choosing the bank you want to take the loan from. It may vary for every institution but usually ranges from 0.5% till 1% of the loan amount.
- Pre-payment charges
Paying off the loan either entirely or in parts before the end of the loan tenure is considered as pre-payment of the loan. While there are no pre-payment charges applicable on home loans with a floating rate of interest, as per Reserve Bank of India norms, lenders do charge some penalty for home loans with fixed interest rates if the borrower wants to prepay the loan. The penalty charges vary from bank to bank but hover around 2% to 5% of the outstanding balance at that time.
- MODT (Memorandum for deposit) charges
It is essentially an undertaking given by you that you are depositing the title documents of the property with the bank at your own free will in return for a loan. For some banks, apart from the loan agreement, the undertaking needs to be registered and the government levies a stamp duty towards registration charges. Stamp duty charges vary from one state to the other, but on an average, charges of 0.1 per cent to 0.2 per cent of the home loan amount apply.
- Legal and technical verification fee
Once you submit your property documents with the bank, the bank has to undertake a process to get the documents verified legally. Banks have a team of legal and technical experts, or outsourced agents, who verify the submitted documents for each loan applicant and initiate technical inspection for the property. For some banks, the processing fee is inclusive of these charges while some others charge this separately. In case you are seeking a property that is from a project approved by the same bank, then the legal charges are usually waived off.
- Loan conversion fee/switching fee
If you have taken up a home loan with a floating rate of interest but now want to switch to a fixed interest rate or vice versa, the bank will charge a loan-switching fee to facilitate such a request. While charges vary from bank to bank, most banks on an average charge 0.5% to 1% of the outstanding loan amount to facilitate such a switching as requested. In recent years, such switching fees are more prevalent for fixed-to-floating than the other way around.
- Late payment charges
If you are a home loan borrower, make sure you follow your EMI due dates diligently. Banks and NBFCs charge a late payment charge for every delayed EMI. On an average, late payment charges can vary from Rs. 200 to Rs. 500 plus 2 per cent additional interest as penalty.
Check List before applying a Home Loan
Taking a loan allows you to borrow money for almost all your requirements and to have a better experience, there are certain points you must know before availing a personal loan.
- Loan Amount & Tenure
Depending on your income and repayment capacity, decide upon the loan amount you need and for how much duration.
Checkout eligibility criteria of different banks and identify which one suits your needs the most.
- Processing Time
For your immediate monetary requirements, knowing about the processing time of loan can be of great help.
- Interest Rate & other charges
Your complete loan experience depends upon the interest rate, processing charges, prepayment charges and other such charges. Know them before hand to take a well-informed decision.
- Repayment History
Your financial health will define your credit worthiness. Make sure you have all the necessary documents to prove your strong credit history and income.
Note down the list of documents required to apply for a loan.
Do not ignore independent foreclosure policy and charges of different banks.Please note the same is negotiable.