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Home loan is a long-term financial commitment for borrowers, given that it involves a longer tenure and a larger loan amount. Any wrong choice or decision made by a home loan borrower can reduce his chance of availing an optimum home loan and also affect future repayments.
1. Accumulating insufficient corpus for loan down payment or margin contribution
RBI guidelines allow lenders to finance up to 75-90% of the property’s value, depending on the home loan amount. The final proportion is decided depending on the lender’s credit risk evaluation of the loan applicant. The remaining amount needs to be contributed by the applicant from his own resources in the form of down payment or margin contribution. Home loan applicants should accumulate at least 10-25% of their property’s value to ensure their financial preparedness for availing loan.
As making higher down payment or margin contribution reduces the credit risk for lenders, applicants making higher down payment or margin contribution have better chances of loan approval and at usually lower interest rates. Hence, loan applicants looking to reduce their interest cost should try contributing bigger corpus as home loan down payment. However, avoid compromising on emergency fund or investments earmarked for crucial financial goals.
2. Not reviewing credit score before making home loan application
Credit score is one of the crucial parameters factored in by the lenders while evaluating an applicant’s creditworthiness. Home loan applicants with a credit score of 750 have higher chances of home loan approval and increasingly at lower interest rates. Thus, applicants planning to apply for a loan should fetch their credit report at regular intervals. Doing so would give them adequate time for taking corrective measures to improve their credit scores, if required.
3. Not comparing home loan offers from multiple lenders
Interest rate, processing charges, repayment tenure, loan amount and LTV ratio offered by lenders can vary, depending on the applicant’s credit profile. Thus, always compare home loan offers from as many lenders as possible before submitting loan application. Applicants should approach financial institutions with whom they already share an existing consumer relationship. Then, visit online financial marketplace to compare the interest rate and loan features offered by other lenders. Go ahead with the lender charging the lowest rate of interest for an optimal loan tenure and adequate loan amount.
4. Not examining EMI affordability
Lenders factor in home loan applicant’s repayment capacity while evaluating their application. Lenders usually prefer lending to those having total EMI obligation, including the one for new home loan, within 50-60% of their monthly income. Those surpassing this limit have lower chances of getting home loan approval. Thus, loan applicants exceeding this limit should try to reduce their repayment obligations by foreclosing/prepaying some of their existing loans or by opting for a longer home loan repayment tenure or by making higher down payment or margin contribution for their new home loan.
Home loan applicants should also take the help of online home loan EMI calculators to calculate optimum EMI based on their repayment capacity. Applying for home loan after knowing your optimum EMI can reduce the chances of defaulting in EMIs in future.
5. Not factoring in home loan EMIs in your emergency fund
Financial exigencies or loss of income due to job loss, illness, disability, etc can strike any time and adversely impact your loan repayment capacity. Failure to repay home loan EMIs on time would attract hefty penalties and reduce the credit score. Liquidating existing investments for repaying your home loan EMIs can adversely affect your long term financial health. Hence, factor in at least 6 months’ loan EMI obligations while setting aside emergency fund corpus.
(By Ratan Chaudhary, Head of Home Loans, Paisabazaar.com)