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Owning a home of your choice is a dream that all sections of people dream of, irrespective of their social status, financial position. In a country like India, there are vast differences between different sections of people based on various factors. In spite, one of the common wishes that every family looks to fulfil is to own a home of their own. However, owning a home of their own is not something that everyone can acquire outright due to lack of sufficient funds.In such a scenario that the availability of home loans comes to their rescue. Today most banks and financial institutions offer home loans that can be availed even by low income families or individuals based on their income and repayment capacity due to expansion of organized banking and various private and public banks. However, before approaching such banks or financial institutions, there are various factors that home loan seekers need to take into consideration.
To determine the financial health of the loan applicant the bank undertakes a thorough due diligence. In this regard, the bank which provides the home loan will seek bank statements of the applicant for a certain period, salary slips, company background. Besides, it will also ask for disclosures of Income Tax Returns (ITR) for the last few years, certificates showing the Tax Deducted at Source (TDS) as well as the proof of other financial transactions.
These documents are sources by the bank directly from the applicant while the credit history is obtained from other concerned agencies such as CIBIL (Credit Information Bureau of India Ltd, repository of credit records for banks and financial institutions). However, it is also possible for the applicant to get his credit history report directly from the CIBIL. The credit history not only determines whether an applicant qualifies for a home loan, but also the terms and conditions that he can avail on the loan.
· Volume of liability:
Bank loan is a huge liability and one must consider his/her limitations, even banks consider carefully this aspect. The bank sanctioning the loan will try to determine the repayment capacity based on the past and present credit history of the applicant before sanctioning the loan. However what will be uncertain is the unforeseen future expenditure that the applicant may incur. Hence, to be on the safer side, it is always advisable to adopt a more conservative approach by taking a loan as low as possible. Ideally, no more than 40% of your salary should go towards payments of your EMIs (Equated Monthly Installments). Safer option is to choose EMI which is about 30% of your income.
· Fixed or floating interest rate:
This is one of the pertinent aspects that an applicant should consider while going for a home loan. Banks, generally permit applicants to avail of fixed rate of interest in the first couple of years of the loan repayment tenure to attract the loan buyers, based on the total amount of the loan availed as well as the tenure of the loan. On the contrary, it is more beneficial to go for a fixed interest rate if the rate is lower currently but expected to rise soon. Even if the bank allows the applicant to avail of fixed rate of interest on the home loan, it is likely to be beneficial only in the short term. In the long term, it would be better to convert to a floating rate of interest. Hence, it would be better to clarify with the bank regarding such procedures especially about charges for converting from fixed rate to floating, reducing EMI burden or reducing term of the loan. Besides, the applicant can arrive at an appropriate decision by approaching different banks and checking out their policies as well as their terms and conditions.
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