No one likes bad surprises and often investments in home feature pretty nasty disclosures that make dreams turn into nightmares. First time home loan applicants face common problems like rejection in the initial stages, non-refundable processing fees, and desired amount of loan not sanctioned and perpetual issue of interest rate (or EMI burden). The other issues that crop up include difference in property evaluation, down payment to banks, crucial title deeds and NOC.
Is there a way out? Yes, of course. There are few structured steps for a home loan to be sanctioned in the first application itself.
Even before squirreling through a sea of home loan products..,
Do your own evaluation. Did your home loan agent just send you a Bible to read on the choices available? Fine he has done his research and it is time to do yours before applying to a bank. Prioritize the chances to live the nest is being practical.
Know your own worth.
If you do not know how much you are eligible for then you may be dreaming of sand castles that may be washed ashore. There is a maximum eligibility and every bank has their limits. Find out how much you have earned in the last 5 years. How much would you earn in the next ten years?
This projection also includes the ability to pay back credit cards and bills. No lender is willing to touch a borrower if the assessment of previous records shows a CIBIL score of less then 750 points (more on that later). If the score is less the home loan may be given with a higher rate of interest, which may be an uphill task to repay.
An average borrower is eligible for 80% of the property value. A lender may scan the salary sheet (or financial sheet of a small business owner) to calculate repayment terms.There is difference between loan eligibility salary amount and actual amount. Only if you’re payment worthy, the loan will be sanctioned. If you are buried in car loan, debts, then even with a high salary rejection slip is possible.
CIBIL score report is a diagnostic tool
A laboratory test determines how much an organ functions. When it comes to financial scores, the CIBIL (Credit Information Bureau (India) Limited) is the ultimate score card. On a scale of 900 points it evaluates the applicant. It is based on parameters like credit card usage, existing loan payments or EMIs, net salary after deductions and spending and saving structure of the applicant. The score basically decides if the borrower will have the capacity to repay for long terms.
NB: Applicants get rejected when they approach multiple lenders. They pay processing fees that are non-refundable and come under the radar of CIBIL as ‘credit hungry’- a category that reduces the chances of getting the cheapest home loan!
EMI blues
Why is this 3rd important in this list and not first? It is only when you are eligible, the question of EMI payment is considered. When you have reached here, more than half the battle is won.
Home is an asset that leverages as collateral for many other unforeseen difficulties. Hence everyone wishes to have at least one property that they own. It is a secured collateral and commands premium in the loan market. Hence home loan seekers kick-start at an early age so that the repay period (even if it is 20 years) can be met during the active working years.
NB: rates keep changing and this can rapidly make a change in payment terms. Both fixed and floating rates, late fees and other methods of repayment should be cross checked before selecting the lender.
How long will it take to be loan free?
Some people just spend their lives paying off home loans. EMIs are calculated keeping in mind both interest rate and loan tenure. The EMI and duration of loan share an inverse relationship while the total interest paid is directly proportional to the tenure. The longer the tenure, lower is the EMI.
Plan the finances to phase out the payment years. Look at the impact of the EMIs before taking decisions; know the job status, salary, the anticipated growth, and other factors like partner contribution, surplus scenarios, and family inheritance.
NB: Be thorough with documentation and know processing amount, late payment fees and pre-closure terms.
Before signing re-read the entire document
Most people barely scan through the fine print. But it is an important exercise. If not anything else read if the terms negotiated at the time of securing the home loan were the same. Know if any charges will be applicable.
Good luck in your home loan quest for the nest!
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in
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