Given the boom in real estate in India, housing or home loan has become the most popular form of loan. This type of loan benefits the middle class the most in their quest of fulfilling their lifetime dream of owning a house. One should look into the details of a housing loan before deciding on going in for any of the numerous offers available.
What exactly is a ‘home loan’?
Home loan is basically a monetary assistance offered by a bank or other financial institutions to fulfill your residential needs. In this transaction, the purchased home itself stands as ‘security’ until you pay back the entire loan amount with interest.
Basic requirements to procure a home loan
Banks and other financial institutions have various rules concerning this factor. These rules may differ from institution to institution however; the very basic requirements are as follows-
* Have a fixed, dependable source of income (employed/self-employed)
* A acceptable financial record extending to at least 6 months of active banking
* Be of 21-60 years of age if employed or 21-65 years, if self-employed
The first step before embarking on a home-loan application is to decide on your budget. A standard home loan will cover up to 85% of your requirement (the overall cost of the property). You will need to raise a minimum of 15% and also separately, take into account stamp duty, registration charges, brokerage etc.
Are you eligible for a home loan?
This step is the crucial juncture of this process and decides the loan amount for which you are eligible. This eligibility criterion is calculated based on your total income and overall liabilities (other financial commitments such as car loan, etc). In case your spouse also has an active income, he/she can be included in the proceedings as a joint applicant- this increases your eligibility for a higher loan amount. Usually, your EMI (Equated monthly Installment) for the loan can be upto 40% of your monthly income.
Calculating Interest Rates and other Fees
An ‘interest rate’ is additional payment that a bank/financial institution charges over the granted loan. These rates vary from institution to institution and through certain periods of time through the year when special promotional offers and discounts are in place. As a thoughtful consumer, consult various banks/financial institutions, research through media like newspapers- television and the internet before zeroing in on a provider with the interest rate that’s just right for you. Beware of such banking terminology as ‘fixed rate’, ‘floating rate’ and ‘reducing balance’.
Discuss these factors thoroughly before deciding on an option that suits you best. Also, banks charge separate charges such as processing fee, commitment fee and admin fee. These must be ascertained by you and used as a factor when deciding upon a bank/financial company for the loan.
What are the documents I will have to furnish?
You will be asked for documents such as:
* Photo Identity Proof,
* Passport Size Photographs,
* Copy of your PAN Card,
* Address Proof,
* Proof of your Age,
* Last 6 months bank statements,
* Copy of the Property Title Deed,
* Form 16 for the last 3 years (for salaried persons),
* Last 6 months salary slips (for salaried persons),
* Copy of IT Returns of last 3 years (for businesspeople/self employed people),
* Copy of audited Balance Sheet & P&L statements of last 3 years (for businesspeople / self employed people)
What is a ‘pre-payment’ option?
Pre-payment is an option afforded by your loan provider wherein, after a specific number of EMI payments, you can clear the entire pending amount thereby enforcing an early closure of the loan. Through this method you can save a lot of money towards the interest payments. Always keep this option as an important prerequisite when choosing a bank for your home loan.
What are the tax benefits that I can avail of for repaying a home loan?
This is actually one of the best things about taking a home loan – the tax benefits. You will be eligible to claim both the interest and principal components of your repayment during the year.
Roundup: Important points to remember
* Try keeping the repayment period as low as possible. More EMIs equals to more interest paid.
* Judge the quality of service and reputation of the home loan provider. Bad service quality could also mean that the loan may cost you more and you might not get the proper customer support that you require.
* Always remember to avail of the applicable income tax benefits.
* Ask as many questions as possible. Your inquisitive nature will make you certain about the opportunity you are getting into. Question and seek advice from friends who have taken similar home loans.
* Some banks/financial institutions offer incentives or other freebies with their loan package. Do enquire about them.
* What’s the interest rate?
* Basis of EMI calculation- daily, monthly or annual
* Reputation and quality of service
* Other applicable fees- what are they?
* Is pre-payment option available? Is there a penalty involved?
- By Brijesh Parnami
(The author is CEO - Distribution, Destimoney Enterprises Private Limited. The views expressed here are author's own)