6 Things To Do while Applying For a Housing Loan

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.housing loan check list fb

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.)

  • RAJ says:

    Dear Sreekanth,
    Urgent help required from you. What the documents required to be checked before buying an apartment?

    regards
    RAJ

  • basvaraj says:

    If any one is looking for any kind of property loans like

    Home Loan
    Plot Loan
    Mortgage Loan
    Top Up loan
    without any charges

    you can contact 9980007772

  • Samrat says:

    Hi Shreekanth,

    i have a home loan which i have take in 2011 , the emi’s of which started from March 2011 and is 17398 monthly, which i am paying regularly , the loan amount was 1847000/- with this i had taken a house insurance from them of 52000 also , so the total loan amount came to 1899000/- , i had paid close to 1140000/- rupees till this month and my principal outstanding is still 1802300/-, the current interest rate is 9.70 % the interest rate varied evry month after the loan stared , if i avg out the amount of interest rate it is coming to 10.40 % every month for entire tenure ,

    My question is , is the deduction of principal is ok , coz i think the principal amount should have been more for deduction after 5 years of EMI payments.
    and how do i connect to bankto correct this if anything is wrong ?
    Do u find it is ok or not (principal amount reduction ).

    Kindly Help.
    Samrat

    • Dear Samrat ..During the initial years of a home loan, most of your EMIs go for interest payments and less for Principal component.

      • samrat says:

        Shrikant ,

        Thanks for the reply,

        My question is as shown in the home loan calculator on hdfc site it is showing that if i put in the same figures , the amount remaining is less as compared to what it is now, is it right or how to correct if the calculation is wrong.

  • Deepak says:

    Hi Sreekanth,

    I have a question regarding the income tax benefit introduced in Budget this year for first time home loan buyers.
    It says loan amount should be <= 35 Lakhs and value of Home should be <= 50 Lakhs to get 2.5 Lakh tax benefit.
    I purchased a flat in Bangalore for 51 Lakhs and the amount shown in the Lease agreement is 31 Lakhs and Construction agreement is 20 Lakhs.(Registration will happen on 31 Lakhs)
    I am planning to apply for a Home loan in SBI for 35 Lakhs.
    Will I be eligible for the budget rule stated above, please let me know.

  • Varun Roy says:

    Hi Sreekanth, I have query, I am working in Delhi and my home town in Lucknow and i want buy home in lucknow city is it possible so can I take home loan from here (Delhi) or should i apply from Lucknow.

  • Dattatreya says:

    Dear sir,

    I have taken housing loan from private financial institution with heavy rate of interest with 40% of the building cost.Now I want to approach some other banks or private financial institution with my joint family income. One of my family member is having education loan. It is very difficult for me to approach banks or financial institution and I want to take over my existing loan and also take over my family member’s education loan also. Please give me the suggestion to go with other banks or not.

  • Nitin Arora says:

    Well researched and documented article! But I think the topic name should be ‘7 things to do while applying for a housing loan’. One thing that is missing is the Home loan EMI calculator. You must calculate “https://www.bajajfinserv.in/finance/home-loan/home-loan-emi-calculator.aspx”your EMI amount before applying for a loan. Unless and until, you know the per month deduction for this loan, you will not be able to maintain your financial balance.

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