5 essential checkpoints to clear before taking a home loan

Home loans have become affordable over the past few years as their interest rates are hovering in the range of 8.3% to 14.5% currently. Because of lower rates, many individuals are taking home loans for buying their dream home. However, longer loan tenures of up to 30 years and large ticket sizes of home loans require prospective borrowers to be well prepared before taking up such long commitments.

Given below are the 5 checkpoints you must clear while planning to avail a home loan:

1. Down payment: RBI guidelines allow home loan lenders to finance up to 75%-90% of a property’s value through a home loan. Thus, a minimum of 10%-25% of the property’s cost has to be contributed by the loan applicant from his own pocket in the form of down payment. The final proportion would be arrived at as per the lender’s risk assessment of the borrower’s credit profile and the borrower’s ability to make higher contributions.

Therefore, one should always aim at contributing a higher proportion from one’s own pocket for twin benefits. Doing so will reduce the overall interest cost of the home loan and increase the chances of loan approval. However, borrowers must not overstretch their finances or compromise other crucial financial goals in an effort to make larger down payments. Doing so may force them to avail costlier loans in the future and, thereby, severely affect financial fitness.

2. EMI affordability: Loan applicants’ fixed obligation to income ratio (FOIR) is another vital factor considered during the loan approval process. This ratio is the proportion of income currently being used for making debt payments like credit card bills and loan EMIs. The lower the ratio, the higher are the chances of getting the home loan approved. Most home loan lenders prefer lending to those with FOIR within 50%-60% (including the new loan’s EMI).

Hence, ensure that your FOIR falls within the 50-60% range before submitting a home loan application. If not, then first consider to bring down your existing EMIs by prepaying or foreclosing some of your existing debts. This will reduce the overall FOIR and thereby, improve the loan approval chances.

3. Credit score review: Credit scores of 750 and above are considered as ‘good’ by most lenders. Thus, those having such credit scores have higher chances of loan approval. Many home loan lenders have also started offering preferential interest rates to those having good credit scores. Hence, prospective home loan borrowers should review their credit report before making any home loan application. Doing so will allow those having lower credit scores to take corrective measures to first improve their credit score and then make the application for a home loan with higher approval chances.

4. Adequate emergency fund: The ongoing pandemic-induced lockdown and restrictions have re-emphasized the importance of having an adequate emergency fund. Ideally, an emergency fund should amount to at least 6 times of your mandatory expenses like loan EMIs, insurance premiums, rent, etc. Having an adequate emergency fund would help in continuing with loan repayments in case of loss of income arising from joblessness or disability.

The prospective home loan borrowers can also opt for home loan variants like home loan interest saver or smart home loan products to ensure liquidity for dealing with unforeseen financial emergencies. The interest component of such loans are calculated after deducting the monthly average balance of a loan-linked current or savings account from the loan’s outstanding principal. Borrowers are allowed to deposit surplus funds in the linked account and withdraw from it as per their liquidity or cash flows. This allows the home loan borrowers to reduce their interest cost during situations of having surplus funds while and withdraw those surplus funds when faced with unforeseen exigencies or constrained cash flows.

5. Compare home loan offers: Interest rates, processing fee, LTV ratio, tenure and even the loan amount offered can vary widely depending on the lender and risk assessment of home loan applicants. Hence, prospective home loan applicants should compare home loans offered by as many lenders as possible before making the final loan application. The easiest way to do so is by visiting online financial marketplaces to choose the most suitable option from a wide spectrum of lenders as per your loan requirement and eligibility criterion like credit score, monthly income, job profile, and employer’s profile, among others.