A housing loan in India is a critical, long-term financial commitment for borrowers, primarily because it involves a significant loan amount and a longer tenor. Any wrong choice made by a borrower while availing of a home loan reduces the borrower’s chances of availing of an optimum housing loan, thereby also impacting their future payments and repayments. Here are some of the common mistakes that prospective home loan applicants must avoid.
1. Accumulating Insufficient Corpus for down Payment/margin Contribution
RBI guidelines permit lenders to finance nearly 75-90% of the property’s value, based on the housing loan amount. The final amount is decided based on the financial lender’s credit risk evaluation of the applicant. The remaining sum of money must be contributed by the applicant from his resources in the form of margin contribution or down payment. A housing loan applicant must accumulate at least 10-25% of the property’s value to ensure financial preparedness before availing housing loan in India.
As making higher margin contributions or down payments reduces the credit risk for lenders, applicants doing these stand improved chances of housing loan approval at lower rates. Hence, loan applicants who wish to reduce home loan interest costs can try contributing a bigger corpus during their housing loan down payment. However, they must also avoid compromising on building a full-proof emergency fund or special investments earmarked to meet financial goals.
2. Not Reviewing Credit Score before Submitting a Housing Loan Application
A credit score is one of the most essential parameters factored in by the lenders, including banks, while evaluating a borrower’s creditworthiness. Home loan applicants who have a credit score of 750 or above have higher chances of getting approval on their housing loan in India. They are also able to get a relatively more favorable home loan interest rate. So, if you are an applicant planning to submit a housing loan application, keep track of your credit report and check it at regular intervals. This will allow you adequate time to take corrective measures and improve your credit score and creditworthiness, if need be.
3. Not Comparing Home Loan Offers from Multiple Lenders
Interest rate, home loan repayment tenors, sanctioned housing loan amount, processing charges, foreclosure rates, and LTV ratios offered by financial lenders can vary. One of the reasons behind this is the borrower’s credit profile. It is always a good idea to compare home loans from as many financial lenders as possible before submitting the final loan application.
Home loan applicants must ideally approach those financial institutions with which they share an existing relationship. Then, they can visit the online financial marketplace and compare the home loan interest rates and housing loan features offered by the other lenders. The applicant can move forward with the lender who charges the lowest home loan interest rate for an optimal loan tenor and adequate housing loan amount.
4. Not Reviewing Their Home Loan EMI Affordability
Lenders, including banks, factor in the repayment capacity of a home loan applicant while evaluating their housing loan application. Lenders prefer lending to those borrowers who have the total EMI obligation, including the one for a new housing loan in India, within 50-60% range of their income. Applicants who surpass the limit have relatively lower chances of getting approval for their home loan application. So, applicants exceeding this limit must try reducing their repayment obligations by prepaying/foreclosing some of the existing loans. Alternatively, they can also opt for a more spread-out home loan repayment tenor. They may also try making a higher margin contribution or down payment for the new housing loan to improve their chances of loan approval.
Aspiring housing loan applicants must use online home loan calculator to check their home loan eligibility. With these tools, they can also calculate the expected home loan EMI based on their repayment capability. Applying for a housing loan in India after knowing the optimum home loan EMI can bring down the chances of defaulting on EMIs in the future.
5. Not Factoring in Home Loan EMIs in the Emergency Fund
Financial exigencies or loss of income can strike at any time and significantly impact a borrower’s home loan repayment capacity. Failure to pay a home loan EMI on time attracts hefty penalties. It also reduces the borrower’s overall credit score. Liquidating existing investments for home loan EMI repayment can impact a borrower’s long-term financial health. The wise thing to do would be to factor in at least 6 months’ housing loan EMI obligations while building one’s emergency fund.
The Final Word
Irrespective of whether you wish to buy a new house or renovate an existing one, a housing loan in India is a one-stop solution for all housing finance-related needs. Simple terms of home loan eligibility and minimal documentation requirements ensure that this financing option is available to all.