Taking a home loan can seem like a daunting process, as it involves so many facets such as finding the right loan, getting a good interest rate, different kinds of fees, lots of documentation and procedure to be followed and so on.
So we at PFN have decided to break down the act of taking a home loan into simple and useful facts that will help you, our readers, realize that it’s actually nothing to be afraid of.
All you have to do is be prepared. So let’s get started.
1. How much home loan am I eligible for?
Assuming you have decided how much of a loan you need, you should also know approximately how much of a loan you are eligible for. Lenders / banks decide how much home loan you are eligible for based on factors such as your income, repayment capacity, age (to see how many years you have left till your retirement), continuity of occupation, number of dependents, existing assets and liabilities, savings history and credit history, etc.
They also often have slabs within which they will offer you a loan of 36 / 48 / 54 times your gross monthly salary. For example, in the case of Bank of Baroda, if your salary is up to Rs. 20,000 per month, you will most likely be eligible for a loan of 36 times your gross monthly salary (GMS). For a salary of Rs. 20,000 to Rs. 1 lakh per month, you are eligible for up to 48 times your GMS. For above Rs. 1 lakh a month you are eligible for up to 54 times your GMS.
Also, lenders will most likely not give you more than 75 - 85% of the value of the home you want to purchase as a loan, so be prepared to have 15 – 25% of the house value to put up as a downpayment.
2. What are the documents I will have to furnish?
Typically, you will be asked for documents such as:
You will need to download and fill an application form and submit it to the lender with the required documents. The lender will go through your application, and informally tell you how much home loan you will most likely receive and also tell you what the T&C and associated fees will be for the loan. Processing the loan can take 1-2 weeks. The bank will also inspect the property papers and once satisfied, will issue you a sanction letter. This letter will contain all the details of your loan.
- Photo Identity Proof,
- Passport Size Photographs,
- Copy of your PAN Card,
- Address Proof,
- Proof of your Age,
- Last 6 months bank statements,
- Copy of the Property Title Deed,
- Form 16 for the last 3 years (for salaried persons),
- Last 6 months salary slips (for salaried persons),
- Copy of IT Returns of last 3 years (for businesspeople / self employed people),
- Copy of audited Balance Sheet & P&L statements of last 3 years (for businesspeople / self employed people)
3. What happens after my sanction letter is received?
Once the lender / bank issues your sanction letter, you will then have to furnish all the official property papers and other documents pertaining to the property. These will be scrutinized by the banks legal team. The documents will remain with the bank until the loan is repaid.
4. What collateral do I have to provide? Do I need insurance?
Lenders / banks typically ask for some form of security / collateral by way of existing assets, guarantee from 1 or 2 persons, life insurance policies etc. These details and documents are taken for the banks use in case the loan is not paid back. Often at the time of giving you a loan, the bank will also give you a home loan cover, which will provide you with insurance that will kick in, in case of your untimely demise, so the loan does not devolve onto your dependents.
This insurance policy is chargeable and adds to your EMIs. The bank providing the home loan is usually the beneficiary of the home loan policy. You will also have to get the property insured against fire and other hazards.
5. Can I negotiate? Can the lender waive / reduce some of the fees? Are there any incentives offers by the lender?
Yes, yes and yes. You must negotiate because even a 0.25% or a 0.50% lower home loan interest rate can mean lakhs of interest saved.
Some lending institutions such as HDFC will sanction the loan without requiring you to have a definite property identified for purchase.
Lenders also offer things such as:
You must ask, bargain and negotiate for all these, and if one lender offers you something, ask for it on paper and show it to the other lender to make the loan a little more competitive in your favour.
- free accident insurance,
- waiving the prepayment penalty should you choose to prepay more than the no penalty amount,
- waiving the home loan processing fee,
- free property insurance,
- free and safe document storage,
- discounts and lower home loan interest rates.
Remember, every 0.25% counts.
6. What is daily / monthly reducing balance and why should I choose it instead of yearly reducing balance?
Most banks follow the yearly reducing balance method of calculating interest rate. This means that your repayments (EMIs) are accounted for only at the end of their financial year, and as a result you are paying interest on principal that you have already returned to the bank. The effective rate of interest is therefore higher than the stated interest rate by almost 1%.
Opt for monthly reducing, or if you can, daily reducing balance. It’s also called monthly rest, or daily rest. These result in a lower interest burden.
7. What is predatory lending and why should I watch out for it?
Predatory lending is when the lender / bank agent asks you to furnish false information on your application or provides you with false information leading you to believe that your rate of interest is lower than it actually is.
Lenders can be accused of tricking a borrower into believing that the rate of interest is lower than it actually is, or that your repayment capacity is higher than it actually is.
This is usually done on loans that are backed by some kind of collateral that the lender can repossess or foreclose on if you, the borrower, due to predatory lending, find that you are unable to meet your EMIs.
8. What are the tax benefits of home loans?
This is actually one of the best things about taking a home loan – the tax benefits.
Self Occupied Property
If you are taking a home loan for a property that you want to live in yourself (a self occupied property aka SOP), you get the following tax benefits:
Let Out Property
- Principal Repayment up to Rs. 1 lakh every financial year under Section 80C
- Interest payment up to Rs. 1.50 lakhs every financial year (this is treated as negative income and subtracted from gross total income)
If you are taking a home loan for a second home, which you might be buying to give out on rent, you can avail the following benefits:
- Principal Repayment up to Rs. 1 lakh under Section 80C
- Interest payment over the course of the year is fully deductible from gross total income, it is not limited to Rs. 1.50 lakhs per financial year
A home loan is actually one of the best ways to build up your assets using a liability. You are effectively putting down some of your own money (the down payment) and gearing the rest (i.e. someone else is paying for it upfront, you are paying them back in installments).
Buying property is something that all of us want to do at some point in our lives, and a home loan is effectively the best way to do that.
Remember to insure the loan, and also increase your contingency reserve to include enough liquid funds for at least 3 EMIs available, for use in case of a financial emergency.
We hope this article has assuaged some fears / doubts regarding home loans and made the process a little more transparent and easy to understand.
As always, if you have any queries, do write in to us at email@example.com.