Home loan is a lengthy-term economic commitment for borrowers, provided that it includes a longer tenure and a bigger loan quantity. Any incorrect decision or choice made by a home loan borrower can minimize his opportunity of availing an optimum home loan and also have an effect on future repayments.
Here are 5 errors that potential home loan applicants ought to steer clear of:
1. Accumulating insufficient corpus for loan down payment or margin contribution
RBI recommendations enable lenders to finance up to 75-90% of the property’s worth, based on the home loan quantity. The final proportion is decided based on the lender’s credit threat evaluation of the loan applicant. The remaining quantity wants to be contributed by the applicant from his personal sources in the kind of down payment or margin contribution. Home loan applicants ought to accumulate at least 10-25% of their property’s worth to make certain their economic preparedness for availing loan.
As producing larger down payment or margin contribution reduces the credit threat for lenders, applicants producing larger down payment or margin contribution have greater probabilities of loan approval and at normally decrease interest prices. Hence, loan applicants searching to minimize their interest price ought to attempt contributing larger corpus as home loan down payment. However, steer clear of compromising on emergency fund or investments earmarked for vital economic targets.
2. Not reviewing credit score just before producing home loan application
Credit score is one of the vital parameters factored in by the lenders though evaluating an applicant’s creditworthiness. Home loan applicants with a credit score of 750 have larger probabilities of home loan approval and increasingly at decrease interest prices. Thus, applicants organizing to apply for a loan ought to fetch their credit report at frequent intervals. Doing so would give them sufficient time for taking corrective measures to enhance their credit scores, if needed.
3. Not comparing home loan provides from various lenders
Interest price, processing charges, repayment tenure, loan quantity and LTV ratio provided by lenders can differ, based on the applicant’s credit profile. Thus, generally examine home loan provides from as lots of lenders as attainable just before submitting loan application. Applicants ought to strategy economic institutions with whom they currently share an current customer relationship. Then, take a look at on-line economic marketplace to examine the interest price and loan characteristics provided by other lenders. Go ahead with the lender charging the lowest price of interest for an optimal loan tenure and sufficient loan quantity.
4. Not examining EMI affordability
Lenders issue in home loan applicant’s repayment capacity though evaluating their application. Lenders normally favor lending to these obtaining total EMI obligation, like the one for new home loan, inside 50-60% of their month-to-month earnings. Those surpassing this limit have decrease probabilities of acquiring home loan approval. Thus, loan applicants exceeding this limit ought to attempt to minimize their repayment obligations by foreclosing/prepaying some of their current loans or by opting for a longer home loan repayment tenure or by producing larger down payment or margin contribution for their new home loan.
Home loan applicants ought to also take the assistance of on-line home loan EMI calculators to calculate optimum EMI based on their repayment capacity. Applying for home loan following understanding your optimum EMI can minimize the probabilities of defaulting in EMIs in future.
5. Not factoring in home loan EMIs in your emergency fund
Financial exigencies or loss of earnings due to job loss, illness, disability, and so forth can strike any time and adversely influence your loan repayment capacity. Failure to repay home loan EMIs on time would attract hefty penalties and minimize the credit score. Liquidating current investments for repaying your home loan EMIs can adversely have an effect on your lengthy term economic well being. Hence, issue in at least 6 months’ loan EMI obligations though setting aside emergency fund corpus.
(By Ratan Chaudhary, Head of Home Loans, Paisabazaar.com)