Learn more about home loans
Home loan is one of the leading products offered by banks and NBFCs to customers. Home loan is also the largest selling banking product and the one that ensures the longest banking relationship with the lender. Own home is generally an obvious as well as a major decision in a person’s life. However, the cost of construction or purchase of property is quite high and this is where home loans play a major, almost indispensable role for the majority of home buyers. Home or housing loans are advances made to borrowers who require funds to purchase flat/land. They can also be availed of for construction, extension, and renovation of houses. Lenders can be banking or nonbanking financial institutions.
Home loan is a loan with a very long time-frame. Generally, people opt for a home loan for 20 to 30 years. Mostly, customers avail loan on floating interest rates. The rates keep changing and long-term loans for a tenure of 20 years cannot be predictable. Home loan rates will change in 20 years, so making a decision to take a home loan just based of the interest rates is not a smart idea. So thinking to start a loan at a lower rate has low relevance in the long run.
Therefore the right time to take a Home loan is when:
Let's discuss the steps involved in applying for a home loan.
The primary step involved in the process is to find the property that you are planning to buy. Then you should verify the documents of that property. Simultaneously, you can start searching for a lender or financial institution who can offer the best home loans after checking your eligibility criteria.
Banks and other NBFCs offer the loan amount based on your monthly income and the property value. The maximum amount that you get is 50-60% of your income.
Comparing home loan interest rates of various banks is the most important feature in the home loan selection process. However, you should not forget to compare other charges like application charges, processing charges, and legal charges of various loan offers. To check the interest rates & other charges ordered by various banks, mymoneykarma.com has brought in a Home Loan Comparison Chart across various government and private banks. Banks offer fixed and floating rates in home loans. Most customers choose floating rates.
How to Applying for the Loan: After you have selected your lender, you have to fill in the home loan application form, where the lender requires complete details of your financial assets and other personal & professional details together with the property details & its costs.
Home Loan Verification Process: You need to submit the necessary documents to the bank, which will be compared and verified together with the details that you have written during filing the application
Banks check out the borrower’s loan eligibility through repayment capacity & the amount of loan approved. Once the borrower’s repayment capacity exceeds based on the Net income, age, experience & type of business etc. Banks also check the applicant's credit history through their Credit Score, which plays a critical role in deciding your eligibility for loan. If you have a low credit score, then banks upfront reject your application on the basis of earlier credit defaults; on the other hand high credit score gives a green signal to your application
Banks sanction loans & send the same to the borrower: After the credit appraisal of the borrower, banks decide the final amount & sanction the loan, with further details like the rate of interest, tenure and repayment period, etc.
Copy of Acceptance to the Bank: The borrower has to send an acceptance letter to the bank stating that he agrees with the terms and conditions of the bank.
Legal check of all the documents: Banks further ask for the legal documents of the property that the borrower is willing to sign up to get the loan, and the check its authenticity. The next step is the valuation of the property, where an official of the concerned bank visits the location of the property; he conducts the verification process and sends it to bank. Then the loan gets approved.
The borrower signs the loan agreement & the bank disburses the loan amount.
Documents required in Home Loan
In general, all the documents that are required to process your loan application are similar. Variations of the documents may depend on the bank if they have any specific requirement.
In the last few years, real estate has been one of the best investment options for investors. No matter how profitable it sounds, the rising growth of real estate as an investment option has led to high-reaching prices of property in the country. Both land and buildings have become quite expensive for customers to buy. This has led to an upsurge in the number of home loans applied each day.
Even though rising prices of real estate is one reason for borrowers to avail of home loans, another major reason behind this is that property transactions are generally hefty as compared to other daily financial transactions. It is not at all guaranteed that the buyer will have the entire property cost available with him or her at the time of acquiring the property. This is where home loans step in and bridge the gap between property seller and buyer.
Banks pay on behalf of property buyers in return for a particular rate of interest. The general rule of 80-20 applies here, which means that banks offer only 80% of the value of a home to customers and the rest 20% is to be borne by the property buyer. This serves as a win-win proposition for both banks & capital buyers as the banks are able to make profits by loaning out money while buyers are able to assimilate the entire cost of the property and pay it back within a fixed period of time.
Home loans are eligible for certain income tax exemptions, which can be used to save up on the amount of income tax that an individual pays every financial year. According to income tax act under section 24, tax benefit can be claimed on up to Rs.1.5 lakh out of the interest component of your home loan. In case you reside in the house bought for loan, then you can claim a maximum exemption of Rs.1 lakh on the principal amount of the home loan too.
Depending upon the type of property being purchased and the amount of the loan being availed, home loans can be classified into the following different types. In India, banks and NBFCs generally offer home loans under any one of the following listed variants of housing loans.
Some of the most outstanding features of home loans are outlined below.
Home Loans are ensured advances.
This means that home loans are offered in return for a security deposited by the loan borrower.
Interest rates are flexible, being either fixed or floating. The Indian government has come up with a new marginal cost of funds based lending rate or MCLR, which is to be used by banks to decide the rate of interest at which they can lend money to a home loan applicant. The earlier base rate used to be the rate based on which banks used to decide their lending rate. MCLR is a more flexible rate that takes a lot of factors into account like funding composition and strategies. MCLR can be reset by banks after every specific interval of time. For example, if a bank decides to reset their MCLR annually, then your home loan rate will reset after every one year.
Home loan interest rates are lower when compared to unsecured personal advances. Unsecured personal loans have a higher risk ratio associated with them since the bank does not have any security deposit to fall back on in case of a loan default.
The advance can be used to fund property for residential or investment purposes.
Whether you need a house to stay in or for investment purposes, home loan can be availed from a bank of your choice.
Amounts offered are higher on other types of loans, usually up to certain percent of the property value.
Considering the cost of buying property as compared to any other commodity, the loan amount offered and sanctioned is substantial as compared to other loan types. Hence, the loan tenures offered for home loans are also longer than those for other loans.
Repayments are made in EMIs (Equated Monthly Installments).
Since the amounts approved towards home loans are usually huge and the tenure also is long, the repayment of home loans is done in equal monthly installments.
Prepayments are allowed, in order to cut down liabilities.
Prepayment of home loan is allowed by all banks - private and public. Earlier, some banks used to charge pre-payment fees for earlier than stipulated repayment of home loan amount. However, these days, most public & private banks let borrowers pay off their home loan as and when convenient. Most banks have stopped charging prepayment charges for the same.
Home loans are long-term in nature and usually vary between 5 - 30 financial years
Since the loan quantum for home loans is generally greater than all other types of loans, the repayment period is quite longer than that of any other loan type.
Non-interest charges include processing fees, pre-payment charges, inspection fees, documentation fees, etc. Apart from the interest charged on the home loan amount, there also are various charges that are levied while the loan sanction process is underway. These charges are communicated to loan applicants at the time of application.
Home loans allow for joint loan applications. Since the loan quantum is high and the tax benefit also is good, banks allow for co-application or joint application of home loans.
They certify for tax benefits as per provisions of the IT Act, 1961, and hence make for a good investment option.
The interest rate charged on any home loan scheme is one of the primary features. The rate of interest is what generally helps a customer decide in favor of or against a home loan scheme. Fixed and floating rate of interest are the two types of interest rates that banks normally ask customers to choose from at the time of home loan application.
To avail home loans at a faster rate, there are certain eligibility criteria to adhere to. Please refer to the details mentioned below for home loan eligibility: