7 Factors You Should Consider Before Applying for a Home Loan

1. Home Loan Interest Rate The home loan interest rate offered to a borrower largely determines its affordability. Low-interest rate home loans make EMIs affordable and reduce the total interest pay-out. High home loan interest rates, on the other hand, can make EMIs unaffordable and the home loan difficult to repay. Borrowers are, therefore, advised to research their options and try to get the lowest home loan interest rate deal.

Borrowers must also carefully decide the interest rate regime that will work best for them. In India, home loan borrowers can opt for three different types of interest rate regimes: fixed, floating, and hybrid. It should be noted that most lenders predominantly offer only floating interest rates.

Under the fixed interest rate regime, the rate of interest and the home loan EMIs remain the same throughout the loan tenor. In the case of floating interest rate home loans, your interest rates are subject to revision and, thus, your EMIs vary over the course of the tenor. Changes to your interest rate are subject to the benchmark rate, which in turn depends on macroeconomic factors, among other things. In the case of hybrid interest rates, the home loan interest rate stays constant during the early years of the loan and then eventually changes to the floating rate regime.

2. Home Loan Eligibility Borrowers planning to avail of a home loan must ensure they meet their lender's eligibility criteria. Inability to do so inevitably leads to either a borrower being compelled to avail of a high-interest rate home loan or facing rejection. Borrowers must do their best to avoid home loan rejection as application rejections negatively impact a borrower's credit score and their ability to avail of a home loan in the future.

If you do not meet your lender's home loan eligibility criteria, you have two options: first, you can work on your candidature and apply once you meet the eligibility requirements. However, if you need funds urgently, your only option is to apply to another lender with less stringent eligibility requirements.

3. Loan Tenor Another crucial factor that determines a borrower's repayment capacity is the home loan tenor. Borrowers are advised to keep their loan tenor short. The intent is to help them save on the total interest outgo and become debt-free as soon as possible. However, this is not the right approach always.

Borrowers must decide the loan tenor keeping in mind affordability. If you cannot afford to pay high EMIs, it's better to opt for a long-tenor loan and keep your EMIs on the affordable side rather than facing a situation when repaying EMIs becomes burdensome. However, if you can afford to pay high EMIs, it is always a better idea to keep the loan tenor short and become debt-free as soon as possible.

4. Down Payment If you are buying a home worth Rs.1 Crore, your lender will sanction anywhere between Rs.75 Lakh to Rs.90 Lakh as a loan. This is in line with the RBI’s guidelines for Loan to Value ratio.

The remaining amount that a borrower must arrange on their own is referred to as the down payment. Lenders ask borrowers to arrange the down payment to ensure they have a stake in the property they are buying as this reduces the chances of loan default.

Borrowers must try their best to pay as high a down payment as is comfortably possible for them to reduce the principal amount. The lower the principal amount, the lower will be your EMIs and the total interest outgo.

Borrowers must also know that the loan amount a lender approves depends on the value of the property for which the loan is being taken. So, borrowers must talk to their lender and figure out the loan amount they are eligible for and the down payment they must mandatorily make to secure the home loan and the property.

5. CIBIL Score An individual's CIBIL score is a three-digit number ranging between 300 and 900; the higher a person's CIBIL score, the better their chances of getting approved for a loan on good terms and conditions.

A borrower's CIBIL score indicates their repayment capacity and their attitude towards credit in general. A high credit score, i.e. anything between 750 and 900, indicates high creditworthiness. Individuals with such a high credit score get the best home loan deals. Individuals with a good or average credit score (in the range of 650 to 750) may get approved for a home loan but are often asked to pay higher interest rates to compensate for the risk involved for the lender in lending money to such individuals. A bad credit score, i.e. anything below 650-700, makes it nearly impossible for the applicant to get approved for a home loan.

Those planning to avail of a home loan in India must check their credit score at least six months before beginning the loan application process. If their credit score is unsatisfactory, they must work on pushing it into the satisfactory range and then apply for a home loan if they wish to make themselves eligible for low home loan interest rates and beneficial home loan terms and conditions.

6. Processing Fee and Prepayment Charges Your lender will charge you a home loan processing fee to process your loan application. This processing fee is usually 0.25% to 7% of the home loan amount. Since home loans are big-ticket loans, even a small difference in the processing fee can help you save substantially in the long run. Many lenders offer zero processing fee deals during the festive season to lure new customers - keep an eye out for such offers.

Borrowers must also talk to their lenders and figure out their prepayment charges. Prepayment or foreclosure refers to the process of closing the loan either partially or entirely before the agreed period. In the case of both foreclosure and prepayment, some lenders charge a fee. Some lenders, on the other hand, allow borrowers to close their loans without paying any fee. Borrowers must get full clarity on this subject before signing the loan agreement.

7. Pre-Approved Loans Lastly, before you apply for a home loan with any lender, see if you have been pre-approved for a loan by any lenders. Having a pre-approved loan offer not only gives you access to better loan terms but also makes it possible for you to get approved for a loan quickly.

In conclusion, several factors determine the housing loan interest rate a borrower gets. Developing an understanding of these factors allows borrowers to negotiate better with their lenders and avail of the best loan deal for themselves.