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Home Loans FAQs

A comprehensive explanation of the things you need to know before applying for a home loan.

What is the age criteria for loan sanctions?

You need to be at least 21 years of age for your home loan to get sanctioned and the loan must terminate before you turn 70 years old or when you turn 70.

What are the criteria for loan eligibility?

You must be employed or self-employed, someone with a regular source of income. Your income, age, assets, liabilities, qualifications, employment or business stability, etc. are considered while assessing your capability of loan repayment.

How to improve loan eligibility?

Add any additional income to be included in order to increase your loan amount. If your partner is earning, add them as your co-applicant. Also, if there is a co-owner, add them as the co-applicant. Even your fiance’s income can also be considered for getting your loan sanctioned on your combined income but the loan payment is only done after submitting proof of marriage. Bonds, fixed-deposits nad LIC policies can provide additional security to enhance your eligibility. Even rental income can be of help. A guarantor is not necessary but it will help improve your credibility. In the end, your repayment capacity decides the final amount that will be sanctioned. The total cost will include extra charges of registration, transfer and stamp duty costs as well.
The important thing to note is that banks are not willing to finance properties that are old or are in bad condition.

Which documents are required while applying for a home loan?

The following list of documents are required while filing for a home loan.

  • Under proof of income:
    1. Minimum 4 months salary slip of the salaried applicant along with 2 years form 16.
    2. For self-employed/professionals, ITR with profit and loss of 3 years, balance sheet and Annexures if any.
  • For a business, a business profile containing the detailed nature of the business, clientele list, supplies, geographical spread, staff strength, etc.
  • PAN card, Passport, Voters ID or License.
  • A copy of a ration card or company ID card.
  • A copy of the salaried account statements for the last 6 months or an updated bank passbook and 1-year statements for self-employed/professionals.
  • A copy of educational certificates and proof of business like Shop Act Registration, GST/TAN registration.
  • A cheque for processing fees, original certificate from the employer for allowances which are not reflected in the salary slip.
  • Passport size photographs of the applicant and the co-applicant (if present).

Further documents might be required to submit if asked by the bank or its approved lawyers.
Don’t forget to retain photocopies of all your submitted documents.

When will the loan be disbursed?

After selecting and identifying the purchased property and submitting the requisite legal documents, the loan will be disbursed. Legal and technical verification of all the submitted documents might take some time. The 230 A Clearance of the Seller and/or 371 Clearance from the Appropriated Income Tax Authorities (if applicable) is required. After satisfactory completion of all of the above processes, the registration of the conveyance deed and investment of your own contribution, the loan amount as confirmed during the construction stage will be disbursed by the bank. The disbursed loan will be in favour of the seller or the builder.

Which documents are required for disbursement?

  1. Disbursement request.
  2. Loan agreement.
  3. Post-dated cheques.
  4. Personal guarantors’ documents, if applicable.

What is the method used to verify my home loan eligibility?

To get a proof of your repayment capability, he/she/they will take a detailed look at your assets and liabilities along with your income statements, credit history or other existing loans will also be checked to see how you handle repayments, educational qualifications and work experience to know your qualification and ability to meet professional and financial goals and if you can actually afford the large debt burden that comes with a home loan.
The application of FOIR (Fixed Obligation to Income Ration) of a borrower is the standard method used by banks to assess home loan eligibility. This becomes a vital calculation for the bank because this helps to understand your other obligations as a borrower. The FOIR is calculated by taking into consideration all the monthly installments done by you, this includes the applied home loan payment as well. While what is not considered in this calculation is your statutory deductions like provident fund, insurance premium, etc. from your salary.

For example:
If a prospective borrower with a monthly income of Rs. 50,000 per month, pays an EMI of Rs. 8000 per month for a car loan plus, an EMI of Rs. 2000 per month for a recent gadget purchase, his proposed per month home loan installment will be Rs. 15,000. The monthly FOIR of 50% or Rs. 25,000 is calculated by dividing all his installments with his monthly salary. FOIR of up to 70% of monthly income is considered by Few Housing Finance Ltd. A limit of maximum 50% FOIR of one’s monthly income is restricted by most lenders. This means if about 50% of one’s monthly income goes towards one’s personal expenses, then the remaining half will go towards the fixed obligations like a home loan.

What are the advantages and disadvantages of floating rate home loans?

Pros:
The floating interest rate on a home loan is cheaper than a fixed rate by 2 to 2.5% minimum. In cases where the floating rate interest exceeds the fixed rate interest, this change happens only for some period of your whole loan tenure because of the cyclic nature of the interest rates. So, when the interested rates soften in the market they bring a lot of savings for the borrower. If the bank reduces the ROI on loans anytime in future, the interest rates will also automatically reduce.

Cons:
Such rates drawback is the impact they have on the monthly outgo as EMI. Because of the uncertain nature, EMI may drastically rise up all of a sudden and throw off your monthly budget or you may have to repay a substantially higher amount due to the extension of your loan tenure, the EMI will remain the same here. But if this aspect does not cause you any harm, opting for a floating rate home loan makes sense

What are the advantages and disadvantages of fixed rate home loans?

Pros:
The market conditions don’t affect your EMI, it remains the same throughout. This is a great option for those who don’t like a disturbance in their monthly budget. This gives the borrower peace of mind and a sense of security.

Cons:
It is at least 1-2.5% higher than the floating interest rate. A major disadvantage is that when the interest rates decrease, the borrower cannot benefit from it. The borrower needs to verify if the interest rate is fixed for the entire tenure or not. If you think that the interest rate will be high in the next few years, then it makes sense to opt for a fixed interest rate and be locked for that period.

How does EMI work? And what is it?

While getting a home loan, EMI is an important thing to consider. Equated Monthly Installments (EMI) is the amount you need to pay monthly until your outstanding loan is clear. The stipulated monthly date is given by your bank. EMI is calculated based on your loan amount, rate of interest and the tenure of the loan.
The popular method of calculation is the monthly reducing loan. Here, the principal amount reduces after the payment of every EMI and then the interest is calculated based on the outstanding balance. This method is used in general retails like home loans, auto loans and personal loans.
Hence during the initial years, the payable interest forms the major component of the EMI and as the tenure reduces, so does the principal amount to be paid and the interest on it. But if your tenure increases, then the interest rates will increase too and so does the interest component of your loan. Therefore, it is advisable to pay as much of EMI as possible to reduce the tenure of the loan.

What does a floating rate of interest mean?

Here, the interest rates change with the existing market conditions. The floating rate interest disbursed home loans are done with the relation to the base rate of a lender. Therefore, a change in the floating rate interest will occur if there is a change in the base rate.

What is a CIBIL score?

The borrower’s financial stability is represented by a CIBIL credit score and this helps the assessment of the borrower’s financial credibility for the lenders. Being India’s first credit information bureau, CIBIL contains the entire track record of one’s loans and credit cards.

Example:
An average, mid-level professional is keen on enjoying the fruits of easy credit card purchases but if he is not vigilant about timely repayments, it could result in a poor CIBIL score and reduce the chances of getting a loan when he needs it.

Can I get a home loan with a bad CIBIL score?

Leading banks in India have made their credit appraisal processes very stringent and one of the most important norms is the 750 and above CIBIL score.

Example:
36-year-old Suresh Mehta was enjoying the perfect life with a promotion and great salary hike, so he decided to buy a home. He already had a home in mind and was all set to make it his own when a reputed bank ABC rejected his home loan application.
After talking with his loan officer, Suresh understood that his loan request was cancelled to his low CIBIL score, which was only 650 out of 900. He tried other banks but the interest rates were quite high. So, now he is working on improving his CIBIL score.

How can I improve my CIBIL score?

  1. Check your Report: If you have a poor CIBIL score, then check your CIBIL credit report. If you do not understand it, ask your loan officer to explain it to you and check for any discrepancies. If there are disparities like a closed loan have not been updated on your CIBIL report by the respective bank, raise a dispute through the Dispute Resolution Process of CIBIL. It is ideally suggested to do this process before applying for a home loan.
  2. Pay Off Debts: Your loan hasn’t been approved and there are no discrepancies in your report, you need to look at your debts and start a planned payment. Choosing smaller debts over bigger one will be easier to pay and will look good on your credit report.
  3. Timely Payments: On-time payments are vital and need to be done diligently. For credit card usage, it will be best to not overuse them in case of a bad credit score and if used, the usage should be below 30% (i.e. don’t keep the amount of your credit limit more than 30% on a revolving cycle). Ensure before date payments of credit card bills.
  4. Do not apply for new debt: In case your home loan is rejected due to bad credit score, it is wise to not apply for a new car loan or personal loan to compensate or even inquire about it. Everything is recorded by CIBIL. It may take about 6 months or a year to clear out your past dues and improve your CIBIL score, concentrate on improving it.

Is it important to check my credit score before applying for a home loan?

Even if you do everything right and yet your home loan gets rejected then, there is a problem with your CIBIL score. There might be a discrepancy in your credit report, which can be resolved ib around 30 days of raising a dispute, or it might be your bad credit score. Majority banks require a mandate of 750 plus CIBIL score (out of 900) to consider you for a mortgage. The sooner you check your credit score and try to keep it in check before applying for a home loan, the better will it be for you during the loan application process as it will not be delayed and you can get your loan approved on time.

Additional tips for a good CIBIL score?

  1. Avoid hasty credits: Be careful while applying for loans and credit cards. If you apply for too many of them in a short time, it will give you a poor credit report.
  2. Within limit spendings: In your credit handling, credit utilisation is an important aspect. Being very close to the credit limit is not a good move on your behalf when you want to apply for a loan.
  3. Healthy credit profile: Get a good mix of both secured and unsecured debts. Home loans, loan against security, car loan, etc. fall under secure debts while personal loans, credit card outstanding, etc. fall under unsecured debts. A balanced mixture of both helps to improve your credit profile and attain a healthy profile.
  4. On-time payments: It is the most important parameter for maintaining a good credit profile. By making provisions you should ensure timely payments of your bills, EMI and insurance policy.