PUNE: A home loan looks like an attractive proposition. When you see an advertisement of a bank in a newspaper, offering a very attractive interest rate, a subsequently low EMI, etc., your long cherished dream of owning a house suddenly looks achievable. With banks offering loans on attractive terms and conditions, a dream home is no longer a dream but a reality. However, before you make a home loan application, it would be better to be aware of some of the issues faced by borrowers during the home loan process.
Listed below are some issues that can be handled effectively, if you are proactively prepared for it.
Rejection of home loan application
Home loan applications can be rejected for various reasons at the primary stage itself. Every lender has its own set of guidelines/internal policies, for sanctioning of a loan. If your application falls under certain professions or income criteria or geographical area that is listed in their policy guidelines, as not suitable for lending, then the chances of getting a loan are very slim.
Above all, it can be your poor credit history. So, before you apply for a home loan, it would be advisable to check your credit score with CIBIL. Poor track record on repayment of earlier loans or credit cards, will make you non eligible for any credit facility from the system, for a long time. A good credit score will give you an edge in negotiating with the lenders for better interest rates and waiver/concessions in processing fees.
Processing fees is not refundable
For every loan application, the borrower has to pay a processing fee in the range of 0-1.12 per cent (including service tax) of the loan amount. This amount is charged towards the cost of processing a loan application. It is often believed that in case the lender rejects the loan application or in case you do not avail the loan after being sanctioned, this processing fee will be refunded. This belief is especially prevalent among those borrowers who apply for a pre-approved loan and then fail to finalise the property within the stipulated time. The processing fee, in such a case, is lost forever. So, unless and until you have been promised in writing about a refund, do not trust verbal promises regarding the refund of processing fees.
Sanctioned amount less than expected
Banks can fund a maximum of up to 80 per cent (90 per cent for loan amounts below Rs 20 lakhs) of the agreement value of the property. Be prepared to pay 10-20 per cent of the balance amount from your own pocket. In addition, you will also have to foot the cost of stamp duty and registration, which are no longer financed by banks. Of course, your overall eligibility will also depend on your income, regular outgoings, repayment track record and any existing loan that you may be servicing at that time. You can increase your home loan eligibility by adding your earning parents, spouse or children or increasing the tenure of the loan.
In case you are buying a resale property, note that most lenders get the property valued independently and provide the loan based on that value, rather than the one mentioned in the purchase agreement. Most of the time, the valuation of the property calculated by the lender’s valuer is significantly lower than the actual cost and hence, your effective down payment goes up.
Fixed or floating rate of interest
If you are looking for a fixed interest rate option, remember that very few lenders offer pure fixed rate, i.e. the rate remains fixed for the entire tenure of the loan. Most of the banks offer a fixed rate option with a reset clause of 2-5 years. So, after that period, chances are that your interest rate will go up.
It makes sense to read the terms and conditions of the agreement very carefully for the prepayment clause, in case you wish to part-prepay or foreclose the loan or transfer the balance outstanding to another financial institution for better interest rates at a later stage. Whatever option you choose, you should review it at least once in six months. The decision can be reviewed periodically, in case the rates have fallen, in order to evaluate the option of shifting from a floating to a fixed rate of interest. Ideally, you should use online platforms to compare the latest rates offered in the market.
Tenure of the loan
If you have decided to opt for a floating rate of interest, you should choose a longer tenure for the loan. You retain the flexibility of low EMIs and at the same time, you can prepay the loan without any penalty, whenever you have surplus funds, as the prepayment payment penalty is waived off on all home loans provided under the floating interest rate, whether by a bank or a housing finance company.
Never apply for a loan without proper financial documentation for the lender, as it can delay your loan process or even cause the lender to reject the application. No lender is likely to finance you without the original title deeds and detailed documents. So, before you apply, make sure you have a complete list of documents needed by the lender to process your loan application. Ensure that you get the NOC from the society, builders, etc., in the format which the bank requires. All this will help you be better prepared before applying for a home loan.