One of the most popular and convenient ways to finance your dream home is Home Loan. However, applying for a home loan can be a daunting task if you are not aware of the process and the factors that affect your eligibility. In this blog post, we will provide you with a step-by-step guide to home loan in India, covering the main points such as:
What are home loans?
Home loans are loans that are taken to purchase or construct a residential property. The property acts as a collateral or security for the loan, which means that if you fail to repay the loan, the lender can take possession of the property and sell it to recover the money. Home loans typically have a long tenure ranging from 5 to 30 years and a lower interest rate compared to other types of loans. Home loans also offer tax benefits under Section 80C and Section 24 of the Income Tax Act.
How does a home loan work in India?
A home loan works in the following way:
- You apply for a home loan with a lender of your choice, after comparing various options and checking your eligibility criteria.
- The lender evaluates your application and verifies your income, credit history, property documents, and other factors.
- The lender approves your loan amount and disburses it to you or directly to the seller or builder of the property.
- You repay the loan in monthly installments called EMIs (equated monthly installments), which consist of both principal and interest components.
- You can also prepay or foreclose your loan before the end of the tenure, subject to certain charges and conditions.
A home loan works on the principle of equated monthly installments (EMIs), which are fixed payments that you make every month to repay the loan. The EMI consists of two components: the principal amount and the interest amount. The principal amount is the actual amount that you borrow from the lender, while the interest amount is the cost of borrowing that money. In the initial years of the loan tenure, the interest component is higher than the principal component, which means that you pay more interest than principal. As the loan progresses, the interest component decreases and the principal component increases, which means that you pay more principal than interest.
The EMI also depends on three factors: the loan amount, the interest rate, and the loan tenure. The higher the loan amount or the interest rate, the higher will be the EMI. The longer the loan tenure, the lower will be the EMI. However, a longer tenure also means that you pay more interest over time. Therefore, you should choose a loan amount, interest rate, and tenure that suit your income and repayment capacity.
Step-by-step guide to home loan application process
Step 1: Check your eligibility and credit score
Before applying for a home loan, you need to check whether you meet the eligibility criteria set by the lender. The eligibility criteria may include factors such as your age, income, occupation, employment stability, existing liabilities, property value, etc. You can use online tools such as eligibility calculators to get an estimate of how much loan amount you can get based on your profile.
Another important factor that affects your eligibility and interest rate is your credit score. A credit score is a numerical representation of your credit history and behavior, which reflects how responsibly you have handled your past loans and credit cards. A credit score ranges from 300 to 900, with higher scores indicating better creditworthiness. A good credit score can help you get a higher loan amount, lower interest rate, quicker approval, and better terms and conditions. Therefore, you should check your credit score before applying for a home loan and try to improve it if it is low.
Step 2: Compare different home loan offers
Once you have checked your eligibility and credit score, you should compare different home loan offers from various lenders based on parameters such as: Interest rate, Processing fee, Prepayment charges, Foreclosure charges, Customer service
You can use online tools such as comparison websites or aggregators to compare different home loan offers in one place. You should also read the fine print of each offer carefully and understand all the terms and conditions before making a decision.
Step 3: Choose a suitable home loan scheme and lender
After comparing different home loan offers, you should choose a suitable home loan scheme and lender that match your needs and preferences. There are various types of home loan schemes available in India such as Fixed rate home loans, Floating rate home loans, Hybrid or dual rate home loans, Home saver or smart saver home loans, Balance transfer or refinancing home loans, Top-up or additional home loans etc.
Step 4: Fill Application form, Submit the required documents and Pay the processing fee
Once you have chosen a home loan scheme and lender, you need to fill application form and submit the required documents to complete your application. The documents may vary depending on the lender and the type of property you are buying, but generally include identity proof, address proof, income proof, bank statements, property documents, etc. For example, some of the common documents that you may need to submit are PAN card or Aadhaar card for identity proof, electricity bill or rent agreement for address proof, salary slips or IT returns for income proof, bank statements for last six months for bank account details, sale agreement or allotment letter for property details, etc. You can submit the documents online or offline as per the lender's convenience.
The lender charges a processing fee for processing your application and verifying your documents. The processing fee is usually a percentage of the loan amount (ranging from 0.25% to 2%) and is non-refundable. You can pay the processing fee online or offline at the time of submitting your application or later.
Step 5: Get the property valuation and legal verification done.
After submitting the documents, the lender will conduct a property valuation and legal verification to assess the market value and legal status of the property you are buying. The property valuation is done by an independent valuer appointed by the lender, who will inspect the property and prepare a valuation report. The valuation report will state the current market value of the property based on various factors such as location, size, condition, amenities, etc. The legal verification is done by a lawyer appointed by the lender, who will check the title deeds and other legal documents of the property and prepare a legal report. The legal report will state whether the property is free from any encumbrances or disputes and whether it has a clear and marketable title.
Step 6: Receive the sanction letter and sign the loan agreement.
Based on the property valuation and legal verification reports, the lender will decide whether to approve or reject your home loan application. If your application is approved, you will receive a sanction letter from the lender stating the loan amount, tenure, interest rate, EMI, etc. You need to sign and accept the sanction letter and return it to the lender along with any other documents required by them. For example, some of the documents that you may need to submit are post-dated cheques or ECS mandate for repayment mode, property insurance policy for security cover, guarantor form if applicable, etc.-
Step 7: Pay the down payment and get the loan disbursed.
The final step of the home loan process is to pay the down payment and get the loan disbursed. The down payment is the amount that you have to pay from your own pocket as a part of the property purchase price. The down payment may vary depending on the lender and the property value, but generally ranges from 10% to 25% of the property value. For example, if you are buying a property worth Rs. 50 lakhs and the lender agrees to finance 80% of the property value, you will have to pay Rs. 10 lakhs as down payment. The loan disbursement is the amount that the lender will pay to the seller or developer of the property on your behalf. The loan disbursement may be done in one go or in installments depending on the stage of construction of the property. For example, if you are buying a ready-to-move-in property, the lender will disburse the entire loan amount in one go after deducting the down payment. If you are buying an under-construction property, the lender will disburse the loan amount in installments as per the progress of construction after deducting the down payment. You need to pay the down payment before or at the time of signing the sale deed or agreement for sale with the seller or developer. You also need to submit some documents such as sale deed or agreement for sale, NOC from builder or society, etc. to get the loan disbursed.
Things that affect your home loan approval
There are several factors that affect your home loan approval such as:
-
Your income: Your income determines your repayment capacity and hence your eligibility for a home loan. The higher your income, the higher is your chances of getting a higher loan amount at lower interest rates.
-
Your credit score: Your credit score reflects your creditworthiness and hence your reliability as a borrower. The higher your credit score, the higher is your chances of getting a faster approval at better terms.
-
Your age: Your age affects your repayment tenure and hence your eligibility for a home loan. The younger you are, the longer is your repayment tenure and hence higher is your eligibility for a higher loan amount.
-
Your employment status: Your employment status affects your stability of income and hence your eligibility for a home loan. If you are salaried, you should have a minimum work experience of 2 years in the same organization or 3 years in total in different organizations. If you are self-employed, you should have a minimum business vintage of 3 years with regular income proof.
-
Your existing liabilities: Your existing liabilities such as other loans, credit cards, etc., affect your debt-to-income ratio and hence your eligibility for a home loan.
Conclusion
Home loans are an effective way to finance your dream home,
FAQ
Here are some frequently asked questions about home loans in India:
Question: How much home loan can I get?
Answer: The amount of home loan that you can get depends on various factors such as:
- Your income
- Your credit score
- Your age
- Your employment status
- Your existing liabilities
- The value of the property
Generally, lenders offer up to 80% of the value of the property as home loan, subject to your eligibility criteria.
Question: What are the types of interest rates on home loans?
- Fixed interest rate: A fixed interest rate remains constant throughout the tenure of the loan, regardless of the market fluctuations. This gives you certainty about your EMI amount, but it may be higher than the prevailing market rates.
- Floating interest rate: A floating interest rate changes according to the market conditions and the lender's benchmark rate. This gives you flexibility to benefit from lower rates when they fall, but it also exposes you to higher rates when they rise.
Question: What are the tax benefits on home loans?
Answer: You can claim tax benefits on both
Question: What are
Answer: Apart from
- Processing fee: A one-time fee charged by
- Prepayment fee: A fee charged by the lender if you prepay or foreclose your loan before the end of the tenure