With the rising prices of property and the ongoing financial crisis induced by the COVID-19 pandemic, not everyone can afford to buy a home from their savings. Opting for a home loan seems to be the best available option to manage your finances without putting any burden on your pocket. However, taking a home loan involves a lengthy and complicated process.
There are several formalities that you need to be aware of, and if you are applying for the first time, you must be aware of factors such as interest rate, credit score, processing fees, eligibility criteria, documentation, etc. It is a once-in-a-lifetime decision which makes it crucial to select a home loan that caters to your needs and preference. Here are the top 10 factors you must consider while applying for a home loan.
10 Important Major Factors To Consider While Choosing a Home Loan:
- Interest rate
Not every lender offers the same interest rate. So, you must compare different lenders and choose one that offers the best home loan interest rate. You must also be aware of the type of interest rates available. For instance, floating and fixed interest rates.
Under a fixed rate of interest, your EMIs remain constant throughout the loan tenure. Whereas, under a floating rate of interest, the home loan interest rate changes over time, based on the RBI’s instructions, and may prove to be beneficial as interest rates usually fall in the future. You should also check the lender’s terms and conditions to ensure that you understand how your monthly EMI will be calculated based on the interest rate – reputed lenders charge the interest rate on a per annum basis, whereas a few others may charge it on a quarterly or a monthly basis.
- Credit score
Your credit score is one of the crucial factors considered in determining your creditworthiness before approving your home loan application. So, if you wish to take a home loan and secure the lowest home interest rate, you must maintain a good credit score. Most lenders require a minimum CIBIL score of 700.
- Loan tenure
Your home loan EMI depends on the loan tenure that you choose. Lenders generally prefer borrowers to choose a shorter loan tenure. Besides, if you are in favor of getting the lowest home loan interest rate on your EMIs, you might want to opt for a shorter repayment tenure. A longer loan tenure always translates into a higher interest rate.
- Equated monthly installments
Equated monthly installments (EMIs) are your monthly payment towards your home loan. It depends on factors like your loan amount, interest rate, and loan tenure. It would be wise to keep your EMI amount within or below 45% of your total income.
- Down payment
Lenders are allowed to offer up to 80% to 90% of the property’s value as a loan. It means that you will need to pay the remaining amount as a down payment to buy a house. If you have the budget for it, try to make a higher down payment as a lower loan amount can help you save on the interest rate to be paid in the future.
- Processing fees
Lenders charge a processing fee after your home loan application is accepted. Although the processing fees vary across lenders, they are generally within 1% of the total loan amount. You will need to compare lenders and choose one that offers the lowest processing fee.
- Reads the documents carefully
Before signing home loan documents, you must carefully read the terms and conditions of the home loan agreement. It includes processing fees, insurance charges, additional fees, foreclosure / part-payment charges, penalty charges, etc. You will need to read the fine print and clarify all the doubts before signing the home loan agreement. If you need help, you can always ask your lender to assist you in understanding the terms and conditions of the loan agreement.
- Additional charges
The lowest home loan interest rate should not be the only parameter to choose a home loan. Several additional charges involve a home loan which you must consider before taking a home loan. Ensure that you have discussed all charges with your lender beforehand.
- Prepayment penalty
As per the Reserve Bank of India’s instructions, financial institutions cannot charge a prepayment penalty. It means that you can choose to prepay your loan amount whenever you have a surplus amount in your bank account without incurring prepayment penalties. However, always compare the cost of repaying the loan against the cost of continuing the EMI.
- Foreclosure Norms
Home loan foreclosure refers to the repayment of the outstanding loan amount before the end of the loan tenure. If you repay your loan amount before the due date, you will save on the interest rate payable. If you have chosen a floating rate of interest on your home loan, you will not have to pay any foreclose penalty.
Keep the above-said points in mind while applying for a home loan to buy your dream house.