A house of one’s own is not a mere dream but a practical essential security need for oneself and for the next generation. All other luxuries are secondary to having a decent house of one’s own. Owning a house is like a dream because it involves huge amount requiring lots of financial planning. Especially salaried people who cannot shell out a lump sum amount at one go, have to chalk out financial matters very carefully, so as to balance the regular household expenditure and also save to buy a house. With limited income Home loan is the only option to buy a house as it involves a huge amount.
Home loan (Mortgage) is a secured loan offered by the bank against the security of a house or property. If the borrower fails to pay back the loan, the banker can retrieve the amount by selling the property.
- Home purchase loan- For purchasing a new house.
- Home improvement loan- For renovation, repair of already purchased loan.
- Home extension loan- For extending or expanding an existing home, e.g. adding or extending a room.
- Home conversion loan- This loan is for those who have already taken Home loan for the current house, but now want to move to another house. The existing loan is transferred to the new house which requires extra funds. The new loan pays the previous loan and provides for the new house.
- Bridge loan- Bridge loan is a short term loan for those who to buy a new house and sell the old one. The loan provides for the funds to buy a new house till the old house is sold and you get the money.
- House construction loan- For constructing a new house.
- Land purchase loan- For purchasing land for construction or investment purpose.
Selecting the bank for home loans
Different banks have different parameters of granting home loan. A study of all the schemes of home loan offered by different banks should be conducted to arrive at the one which best suits your financial needs and limitations. Some of the basic points to be considered are-
- Interest rate- Different banks and schemes offer different rates of interest.
- EMI- Calculate the EMI and see if it fits in comfortably with your income and expenditure.
- Duration of loan- Longer the duration of the loan, higher the interest rate and lower EMI.
- Shorter duration will have lower interest rate and higher EMI.
- Processing charges- Non-refundable fee payable at the time of submitting the loan application to the bank.
- Administrative fees- Fee incurred by banks at the time of loan sanctions.
- Legal charges- Banks incur some charges from the customer for legal and technical verification of the property.
- Delayed payment charges- Late payment fee is charged in case of delayed payment.
- Cheque bounce charges
- Prepayment penalties- When the borrower pre-pays the loan before the loan tenure, banks charge a penalty.
Eligibility criteria for home loan
Getting a loan and the amount you can avail as loan, depends on your eligibility for the loan. Banks have their own standards and parameters of evaluating the creditworthiness of the potential borrower. The loan amount sanctioned depends on many factors which the lending banks studies before granting a loan. Some of the factors which the banks consider for granting loan are-
- Income- Your income is the first and foremost indicator of your repayment capacity. A history of around three years is required.
- Current profile- The banks want to know about your current job and career prospects. This is especially for self employed people.
- Experience- Number of years you have been working as salaried or self employed.
- Spouse’s income/additional income
- Previous loans- If you already have a loan, chances of getting bigger loan is less.
- Repayment track record- The banks study your previous loan repayment track record to evaluate your creditworthiness. If you already have repaid your previous loans on time, it adds to your creditworthiness (credit score).
- Owned assets- If you own assets you are further eligible to acquire loan because the assets can be mortgaged against the loan.
- Tax history- Amount of tax you pay defines your actual earnings.
- Personal expenditure and saving pattern- Bank statements are required to check your spending and saving habits. Like income, the expenditure pattern also reflects your ability to pay back loans and EMI. For example – If your monthly income is Rs. 10, 000 & your monthly expenditure is Rs. 8000, you can pay Rs. 2000 as home loan. But because it is practically difficult to estimate the monthly expenses of each borrower, banks use a pre-determined percentage of the borrower’s income (say 40% of monthly income) as being available for loan repayment/installments, based on their past experience as well as available household data. It is also assumed that those with higher income should be able to pay a higher percentage of their income for repayment. Hence banks have different slabs for different income groups.
- Academic qualification- Educational qualification indicates your career prospects and your dependability.
- Age – Applicant’s age
- Property legal documents- These are required by the banks to check the authenticity of the property so as to keep them as security.
- Value of the property- The banks also conduct a valuation of the property to determine the loan amount to be sanctioned.
Norms of loan amount eligibility
The final loan amount sanctioned by the bank is according to –
- 1) Loan-to-value (LTV) norms- The sanctioned loan amount is based on the total cost of the property. The loan eligibility according to other parameters may be higher, yet the loan amount cannot exceed the cost or value of the property. The ratio varies between 70% and 90% of the registered value of the property.
- 2) Installment-to-income ratio (IIR) norms- This is generally denoted as a percentage denoting a portion of the borrower’s monthly installment on the home loan taken. The percentage may vary from 33.33% to 40%. For example, if IIR is fixed as 40 %, and the borrower’s monthly income is Rs. 1 lakh, his monthly installments will not exceed Rs. 40,000.
- 3)Fixed-obligation-to-income-ratio(FOIR) norm- A bank takes into account the installments of all other loans previously taken by the borrower, including the home loan applied for. For example- A borrower has an income of Rs. 1 lakh/month and the bank’s FOIR is 30%. He has a car loan installment of Rs. 10,000, personal loan installment of Rs.2000 per month. According to FOIR rate he can avail of a loan of Rs.30,000. But because he is already paying Rs. 12,000 as car and personal loan instalment, he is eligible for only Rs. 18,000 as home loan.
Many formalities and evaluations are involved in granting and availing a Home Loan (Mortgage). Opting for a home loan thus has to be carefully calculated move.