With rising property values, buying a home has become an expensive proposition for many aspiring buyers. In such a scenario, home loans are like the silver lining in the dark clouds. If you have decided to take the home loan route and don’t know where to start, below are a few important pointers which you should consider.
In this article, we will mainly cover the eligibility criteria, selection of a lender, the application process, documentation, selecting the right tenure and tax benefits.
It all starts with the eligibility perspective and here the credit score plays a very important role.
An individual’s score has a direct impact on the loan amount the bank sanctions. If you have been diligent in paying all your bills, then your credit score should be good. This score varies in the range of 300-900, and anything above 750 is considered good.
It is a good practice to check your score before applying for a home loan. Secondly, income is another factor in determining your repayment capacity. Depending on the number of dependents in your family, banks calculate an amount you can comfortably pay as EMIs after taking care of all monthly expenses.
In an ideal scenario, your EMIs should not be more than 50% of your salary. Lastly, most of the lending institutions consider the value of the property before fixing a loan amount. You have to pay the down payment (amounting to 20%) from your pocket, and the loan can be availed for the remaining 80% of the property’s cost.
Now that your eligibility criteria is done, it’s time to select the right lender. The best way to go about it is by getting the quotes for as many lenders as you can. While talking to the lenders, make sure to ask questions about the interest rate, processing fees, prepayment charges, projected EMIs, and tenure.
Once you have finalized the lender, you have to fill an application form with all your personal and professional details.
If you have already decided on a property, then you might also have to give its details. Along with the application form, you have to submit the required documents for identity, address, and income proof.
Some of the important documents which need to be submitted include, Form 16 or copy of IT returns for the last two financial years duly acknowledged by the Income Tax department, original salary statement or a salary certificate from your employer, bank account statement or updated passbook of the previous six months and personal assets and liabilities statement.
Other identification documents include voter ID card, passport, Aadhar card, driving license and PAN. At this stage, the bank will ask you to pay the processing fee.
After receiving the duly filled loan application form along with the requisite documents, banks will assess your repayment capacity, along with validating your information. Once the bank is completely satisfied, it will sanction the loan and issue the sanction offer letter. If you decide to accept the offer, then you will have to sign the duplicate copy of the letter and submit it to the bank.
Banks allow you to select the tenure of 5-30 years, depending on your age and income. A shorter tenure means that your EMIs will be high, but it will reduce the total interest that you pay to the bank and vice versa. However, the longer loan tenure will result in increasing the cost of your property, translating into a lower ROI.
Let’s say you take a loan of Rs 50 Lakh at the rate of 8.5% for 20 years. Then, your EMIs will be Rs 43,391. Thus, you would be paying an overall amount of Rs 1,04,13,840 to your bank by the end of your loan tenure.
Now, if you take the same loan amount for ten years at the same interest rate, your EMIs would be INR 61,992. In this case, your total payment to the bank at the end of your tenure would be Rs 74,39,040.
A home loan comes with certain tax benefits. The common ones include Section 80C, under which you can claim a deduction for the amount paid towards the repayment of the principal of the home loan.
The maximum amount that is deductible under this section is Rs 1.5 Lakh in a year. Section 24 - under this section, the deduction can be claimed for the amount paid towards the repayment of the interest. If the property is self-occupied, then the maximum limit for deduction is Rs 2 Lakh.
(The writer is Chief Operating Officer,
Trespect India Ltd.)
