Get Your Checklist Ready Before Applying for Home Loan
Buying a home is a dream-come-true for Indian families, but it requires intense planning and meticulous preparation. Hence it is advisable to maintain a very detailed checklist of items to be done when you are going for a home loan. You not only have to manage your property, but also manage the home loan. As we shall see later, you start with the CIBIL score when you enumerate the things to check before taking home loan. Here is a quick checklist that will update you on how to go about the home loan process as well as the things to know before applying for home loan.
1. How Good or How Bad is Your Credit Score?
Today, there are several agencies like CIBIL Transunion, Equifax, Experian and CRIF that keep a tab on your credit score.
All your transactions are mapped through your PAN, so it is hard to miss out anything good or bad about your credit score. The CIBIL score is the most popular credit score metrics. It typically ranges between 300 and 900, but most banks generally insist on a minimum CIBIL score of 750 to go through the loan process smoothly.
If your credit score is lower than that, you can still get a home loan, but it is best to work towards improving your credit score to 750 plus as that will ensure better rates and better terms on the loan.
This is your first step. Start work on credit score improvement before you zero in on your property.
2. Evaluate Your Home Affordability Index
You obviously want the best home for your family, but then everything comes at a cost. The question is; how do you get value for money without compromising on quality of property and amenities?
For that, you must first look at how much you can afford. There is a 15% margin you must arrange and the rest can be funded. Ensure your loan amount is such that you don’t pay more than 40% of net take-home income as your home loan EMI.
You should not only be able to afford the home loan EMI, but it should also make sense from a tax saving perspective. Also, make provision for higher EMIs, should interest rates move up.
3. How Much You Can and Should Put Upfront?
One of the basic questions any bank would ask you is how much of equity margin you can bring in to be eligible for a home loan. Typically, the banks will only finance you to the extent of about 80% to 85% of your home value. Hence there is the 15% to 20% of the value of the home that you need to bring in as equity.
Target the upper end of 20% as your margin for home.
For example, if the property value is Rs. 80 lakhs, how do you arrange Rs. 16 lakhs as margin? You can use your savings, and any inheritance for this purpose. You are also allowed to withdraw from your PF and that can also be used to partly fund your equity. Some people use personal loans for the margin amount, but that is not recommended considering that it comes at a high cost. Be prepared with the economics of your margin money.
4. Reduce High-Cost Debt Before Taking Home Loan
High-cost debt typically refers to personal loans and credit card debt. They cost anywhere between 18% and 40% annually. The first thing to do before taking home loan is to wind down such high-cost loans before going for a home loan. Your bank will be impressed if they see that you have got rid of your high-cost loans. It’ll improve your eligibility for a bigger loan amount and better terms and conditions for the home loan. For an 8.5% home loan to be meaningful, it is essential that you don’t splurge too much money servicing your high cost loans.
5. Compare Lender Options Before Selecting the Home Loan
It is advisable to stick to your long-term banking relationship for its many benefits. However, you must also make full use of the information that is available easily on the internet about competing loan offerings, the rate of interest, the tenure, processing charges, exit loads etc. Instead of just looking at the rates, look at the entire package of loan to make a choice. This helps you negotiate better terms with your bank for the home loan deal.
6. Work Out The Loan Servicing Options
At this stage, you must work out the tenure of the loan you want, whether you want the periodic bullet or the end-balloon facility, plans to prepay the loan after a certain tenure etc.
At this stage you are ready to conclude the deal. We have now covered all the things to check before taking home loan. Remember, these are the essential things to know before applying for home loan. You are on the trot!