9 things you should know when taking a home loan

Home loans rates are down to historical lows. At least 20 banks and housing finance companies today provide home loans at interest rates of 7.00% or lower. Several large lenders are also lending under 6.80% to eligible borrowers – people with stable incomes and credit scores above 750. Cheaper loans means lower EMIs. Lower EMIs can also mean being able to take larger loans for the fulfilment of home-buying aspirations without compromising on square footage or location.

However, a home loan is a long-term financial commitment. It will have a profound impact on your finances. Therefore, care must be exercised while availing it and repaying it. Here are some basic things you need to be aware of when taking a home loan.

Are you self-occupying or investing?

Data suggests that home ownership for investment purposes is avoidable due to high costs and low returns. In many cities, it’s difficult to get a rental yield of even 3% on new properties. For example, if your property costs Rs. 1 crore and provides an annual rental income of Rs. 3 lakh, your rental yield is 3%. When you apply income taxes and property taxes, loan interest, and maintenance costs, the yield is even less. This rate is less than what you’d earn on a mutual fund investment, provident fund holdings, or even a savings account. Therefore, it pays poorly as an investment. So it makes little sense to take a large loan for it. What makes much more sense is self-occupation. If you plan to live in this property for the foreseeable future, settle down, have a family, grow roots in your community, or if you generally like the idea of securing the roof over your head, go for the home loan.

Do you have the margin money?

A home loan will finance up to 90% of your costs in low-value cases (under Rs. 30 lakh) and typically up to 75% in high-value cases (above Rs. 75 lakh). Also, there are several additional costs of home ownership. If your property has a nominal cost of Rs. 100, registration and stamp duty may cost around Rs. 6. Furnishing may cost another Rs. 5 to 10. Various other expenses (building funds, water and electricity connections, loan costs, and payments to the property broker) may cost another Rs. 5. Therefore, your total cost could be Rs. 120. Of this, the home loan may be Rs. 80. The other Rs. 40 need to come from your pocket. The out-of-pocket payments may need to be up front in ready-to-move properties or staggered in case of under-construction properties. You can buy the home—and by extension, take the loan—only when you’re capable of providing the margin money. As such, the bank may require you to show proof of payment (for example, up to 20%) before it gives you the rest as loan.

Will your finances be stable?

The home purchase will shock your finances. If you’ve been saving for years in preparation for this moment, you should be fine. If you’re unprepared, the shock could leave you vulnerable. Making the down payment, taking the loan, and registering the property should not destabilise your finances. If you were to have a crisis such as a loss of income or a health emergency, the loan payments can become hard to manage. Therefore, ensure you’re well-prepared not just for this home purchase but for any unplanned events that could strain you.

Will you be able to repay the loan?

This extends from the previous point. Stable income and employment are what you need to repay your loan. A break in income or employment will make repayments hard. Home loans are secured by your property whose papers remain with the lender till the loan is repaid in full. If you default on the loan, the lender will provide you ways to get your payments back on track. However, as a final recourse, the lender has the legal right to repossess the property and auction it to recover their dues. Therefore, you need to be confident that you would be able to pay your dues without financial stress.

What is your credit score?

Credit scores have become important. They allow lenders to assess the borrower’s creditworthiness. They allow borrowers a way to establish their creditworthiness by displaying their repayment of previous dues. Today, the best loan offers are reserved for borrowers with credit scores of 750 or more. If you have existing loans and credit cards, it would be wise to do a monthly check of your credit score. If it’s less than 750, you can take steps to improve it. This will help you get better loan offers. A lower interest on a long-term loan could mean lakhs of savings. Conversely, with a poor score, your interest payments will be much larger.

What are you eligible for?

Every lender has their own home loan eligibility criteria. Your income, source of income, the company you work with, the amount you’re borrowing, the loan-to-value ratio, your credit score, your gender, and other parameters used by the lender help shape your loan interest rate. You must ensure that you meet the eligibility criteria of your preferred lender. If not, you’ll need to find another lender. The eligibility details are clearly advertised by most lenders. Make sure you read them.

Who can be your co-borrower?

The lowest home loan rates are typically reserved for women. Men, too, can make use of the opportunities to get lower rates by co-borrowing with women. Typically, a husband and wife can co-borrow. A co-borrower with good credentials such as stable income and high credit score can improve your overall loan eligibility, share your repayment burden, and increase tax savings – a win-win situation. In case your own eligibility is low, you may want to identify a co-borrower in your family to improve your case.

Are your papers in order?

For the loan application, you’ll need to provide proofs of identity, income, and address. As identity and address proofs, you need to provide any proofs from the list of Officially Valid Documents (OVDs) such as Aadhar or passport. To establish your income, you’ll need to show recent salary slips, the latest Form 16 and income tax returns, proofs of income and investment, and any other proof required by the lender. If you have a co-applicant, the same set of documents will be required for them as well. Therefore, you should get these documents in order as you apply for the loan.

What kind of terms do you want?

Look beyond the interest rate. A loan is many things with many terms and conditions. For example, two loans may offer the same interest rate, but they may be completely different in terms of quality of customer service, digitisation of services, proximity from the branch, and various loan-related charges imposed. It isn’t easy for a customer to establish immediately if their loan is the best. They must, however, try to compare their options and go with one option that fits their agenda.

Lastly, there are many things about a home loan that you’ll gradually discover—and it may not always be to your liking. You need not stick to one lender. You could always transfer your loan to another lender offering better terms.

(The writer is CEO, BankBazaar.com. Views expressed are personal)