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Home Loan Guide for First Time Home Buyers

Team Antworks

If you’re one of the millennials, you’d know that owning a home has long since been the quintessential Indian dream. But in the 21st century, where an entire world’s economy hinges on a volatile stock market, buying one doesn’t come easy. If you are a first-time home buyer in particular, you need to be equipped with the know-how of how a home loan works in the current scenario.

Home Loan: What is it?

A Home Loan is basically a form of financial reinforcement availed of to fund the purchase or construction of a house. In the present times, a home loan can also be used to refinance an already existing home loan or simply reimburse the cost of buying a second-hand property.

Home Loan and Its Basic Types:

There are several different types of home loans, depending on the purpose they are used for. Some of the most commonly seen ones are:

What Is The Eligibility Criteria for a Home Loan?

All banks and NBFCs in India have their own eligibility criteria a prospective home loan buyer has to meet. Here’s a list of the primary requirements.

  1. You need to be aged between 18 and 60 years.
  2. You need to be a salaried or a self-employed individual with a steady income.
  3. You need to earn more than the minimum income quoted by the banks.

These three aspects qualify you for a loan. However, there are a few other factors on which your application hinges. They are:

  1. Your monthly income: When you apply for a home loan with any lender, you need to prove to them that you have at least 50% of your income ready to serve the EMIs.
  2. Other loan commitments: Having a high monthly income doesn’t necessarily guarantee you a home loan. Also, if you are in the pursuit of repaying any other loans, the total loan amount you’ll be eligible for will significantly decrease. This is why you need to make sure to clear every other loan commitment before applying for a home loan.
  3. Your down payment capability: A lender never gives out the entire loan amount you’ve applied for. In fact, the most they will give you is 80% of the value of the property. The other 20% funds should be mobilised by you. If you are applying for a new home loan, you should make sure to have the down payment fund ready so that your application doesn’t get rejected.

What are The Documents Required to Apply for a Home Loan?

Every home loan provider more or less follow the same documentation process before signing off on the loan application. Here are a list of documents you need to keep ready when you decide to take a home loan.

  1. Fully filled and signed application form along with a photograph.
  2. Identification proof and residence proof: For ID proof you can provide anything like your PAN Card and for residence proof, you need to provide a copy of your passport/driving license or any of the latest utility bill.
  3. Cheque for the processing fee.
  4. Bank statements of the previous 6 months.

Besides these, there are also a few other documents you need to provide depending on whether you are a salaried or a self-employed professional.

Salaried professionals need to provide their pay-slips for the last three months along with their Form 16 or Income Tax Returns (ITR) filing.

Self-employed professionals, on the other hand, need to provide proof of education qualification certificate and proof of their business’ existence. Apart from this they need to provide proof of ITR for the previous three years which should also include the computation of income. Lastly, they need to provide a CA audited/certified balance sheet and profit-loss account for the previous three years.

What are The Different Types of Home Loan Interest Rates in India?

Before we head into home loan interest rates in India, let’s first ascertain how a rate is fixed. An interest rate on a home loan is dependent on two policies: Marginal Cost of Lending Rates (MCLR).

MCLR policy is a policy brought into effect by the Reserve Bank of India (RBI) from April 2016 in place of Repo Rate policy. It plays a featuring role in determining the home loan lending rates set by financial institutions. Under this policy, banks need to fix a base rate based on their cost of running business based on which which they can quote an interest rate as per the borrower’s risk factor.

If RBI increases or decreases the repo rate significantly, banks and financial institutions need to follow suit to correct the base rate as per guidelines.

Now, that the basics of how an interest rate is set is ascertained. Let’s talk about the different types of interest rates available in India, of which they are two.

  1. Fixed Interest Rate Home Loan: A fixed interest rate home loan is a type of home loan rate, wherein the interest rate is fixed for the entire tenure of the loan. This means that the interest rates aren’t likely to change even if there are significant changes in the economic market. Under this type of loan, a major component of EMIs in the beginning go into servicing the interest while the principal repayment only comes in the latter half. Some of the advantages and disadvantages of Fixed Interest Rate Home Loan include:
    Advantages Disadvantages
    Interest rate stays the same through the tenure, which brings a level of certainty for the borrower. These loans usually workout a good 1%-2.5% more than floating rate loans.
    Helpful for good budgeters as it comes with a fixed monthly repayment schedule. Borrowers cannot take the advantage of an interest rate cuts during their loan tenure.
  2. Floating Interest Rate Home Loan: A floating interest rate home loan is a home loan where in the rate of interest varies according to the market conditions. This means that interest can either go up or down depending on how the market is performing. Some of the advantages of floating interest rate home loan include:
    Advantages Disadvantages
    Comparatively cheaper than fixed interest rate home loans, as long as the market remains stable. Market is volatile and any unexpected downturn can increase the interest rates and in turn EMIs significantly.
    This type of loan is cyclical as interest go up and come down often. This helps a borrower save a considerable sum on interest paid. If the rate goes beyond 11.5% or so, this type of loan can become an expensive burden for the borrower.

Things That Affect Your Home Loan Application and Approval Process

There are plenty of factors that will have a bearing on how your loan application fares with a a lender you have chosen to apply with. They are:

  1. Age
  2. Income bracket
  3. Property type and its location
  4. Market value of the property

After you submit the required documentation to the lender, they will thoroughly vet the details you’ve provided to ensure that they check out. Depending on their findings, you will be offered a loan deal. One important thing you should understand here is that their findings will be directly proportional to the term and conditions you get.

What Are The Home Loan Deals Offered By Some of The Leading Banks?

Here are some of the best home loan deals offered by some of the leading banks in the country.

What Are The Things You Should Keep in Mind Before Applying For a Home Loan?

A home loan can be a massive burden if you don’t consider all the details that go into it. Here are a few things you should keep in mind before applying for one.

  1. Your Borrowing Capacity: You shouldn’t opt for a higher loan amount just because you draw a bigger paycheck. Before applying for a home loan, you should carefully understand your borrowing capability. But, how can one exactly find out the loan amount they are eligible for? It’s fairly simple. First things first, you need to keep in mind all the expenses you incur in a month. These may include your regular household expenses, travel, kids’ fees, utility bills, pending loan payments, and miscellaneous expenses. Once you’ve listed down all these expenses, the amount you are left with is what you can use to make the EMI payments on the home loan.
  2. Credit Score:You may not feel the importance of credit scores all that much, but it is the most crucial determinant of the interest rate you are likely to get. For a good home loan rate, you will need to maintain a credit score of 750 or above. Having a score such as this would endear a lender to you as they are less likely to be a liability for them. This will also help you get an interest rate which is a which basis points lower that what they officially claim.
  3. Loan Tenure:Home loans can often go on for over 20 years, and up to 30 years, in the case of SBI. Analyse the loan tenure you’ve been offered and see if the tenure works out for you. If you think you need more room, negotiate a better term with the bank or reduce the total loan amount you have applied for instead.
  4. The Terms and Conditions of The Loan:The terms and conditions you sign when borrowing a home loan is legally binding, which suggest that you have read all the terms and conditions laid out by the bank and comply with the offer. What you may not know, however, is that this is also one of the places where lenders tend to add draconian clauses and enforce them. So, avoid falling into such rabbit holes and make sure to go through all the clauses and sub clauses mentioned in the loan agreement before signing on the dotted lines.
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