Buying a house is a major decision and has an implication on the finances of an individual. Therefore, it becomes amply important to take necessary steps before applying for a housing loan. Following are six must do things before one signs on a home loan application.
Check List before applying for a Housing Loan
Check your CIBIL Score
Your credit worthiness has a major impact on the loan underwriting process. Therefore, it becomes important to check your CIBIL score since this three digit number denotes your credit worthiness. In India the credit score is scaled on a range of 300 – 900 (with 900 being the best). To be able to have access to home loan, you need to have a score of at least 700. A score lower than 700 can lead to either rejection of your loan application or getting a higher rate of interest charged on loan. Both the situations will have a bearing on your finances.
Check your eligibility
It is very important to check the for the loan amount you would be eligible for. Eligibility is primarily an outcome of two factors, the value of property and your debt to income ratio. Generally the banks finance up to 70 to 80% of the property value (balance amount is your down-payment). Then they calculate if you have the required income to service the EMI for sanctioned loan amount. As a formule, the banks take 50% of your income as your living expenses. The rest half of your income is taken as your capacity to repay the loan EMI. In case your EMI is higher than 50% of your income then you would need to be prepared for a lower loan amount being approved.
Also, having a co-applicant allows you to get a higher loan as the income of the co-borrower is clubbed while considering the eligibility.
Apart from your financial strength your profile also effects how much the bank may agree to lend. For instance, if you have a stable source of income, you may find it relatively easy to get loan than say a self-employed with erratic earnings. Your age defines how many earning years you have and therefore your re-payment capacity vis-a-vis the tenure of the loan. Usually, loan tenures do not go beyond your retirement age, unless you’ve a younger co-applicant.
Decide on your Loan Tenure
Your home loan EMI is calculated on the basis of the amount of the home loan, home loan interest rate and loan tenure. The monthly EMI is inversely proportional to loan tenure, i.e., the longer the tenure the lower the EMI, and the shorter the tenure, the higher the EMI.
Similarly, the total interest paid is directly proportional to the loan tenure. The higher the tenure, the higher the total interest paid, and vice-versa. Know the impact of your EMI payments on your finances before deciding on the loan tenure.
Check the details on interest rates
Interest rates play a major role on your finances and thus it becomes imperative to check on it before applying for a housing loan. The rate of interest being charged, type of interest rate are important items to be checked. There are two types of interest rates – fixed and floating. Fixed is where the rate of interest does not change for a specific period, including the entire loan term. The floating rate is where the interest keeps changing with a change in base rate. In a fixed rate of interest the EMIs remain constant while on a floating rate of interest the same increases or decreases depending upon the change in base rate.
Read the loan documents carefully
You must scan the loan documents carefully. It is important to check if the terms are as communicated by the sales person and agreed by you. A small variation in charges, the rate of interest, tenure of the loan or the loan attracting different charges can have a major implication.
Be aware of Income Tax Benefits
Before you apply for a housing loan, be aware of all the income tax implications that are linked to buying a property through a housing loan. Do note that you get no tax breaks if you take a loan to buy a plot of land. Also, no tax deductions are available for an under construction house.
In case, If you have plans to sell your residential house within five years, you may have to forgo your tax benefits. The entire amount of deduction claimed under Section 80C in prior years on the amount of the principal repayment will be added to the taxable income in the year of sale of the property. Also, no income tax deductions shall be allowed in respect of repayments made during the year of sale of the property. Kindly note that this rollback is applicable only to deduction(s) claimed under Section 80C. Deductions claimed under Section 24 (b) on interest payable on your home loan will not be withdrawn.
(This article is co-authored with Aman Kapoor, Chief Engagement Officer at Credit Sudhaar.)
(Image courtesy of Stuart Miles at FreeDigitalPhotos.net) (ReLakhs.com is not associated with Credit Sudhaar. This post is for information purposes only.)