As the name suggests home loan is taken for buying or construction of home / residence. Apart from this, home loan is also taken to buy land and construct a house on it or to renovate or repair an existing property. Home loan, thus, helps in realization of dream of owning a home even if a person / family do not have ready cash to pay it all up front. There are certain lending norms for availing a home loan and these vary slightly from one lender to another. Banks usually lend between 75-85% of the value stipulated in the agreement and the rest of the amount is borne by the buyer (borrower). The Home Loan is taken by a borrower against the property/security to be bought. This is done by giving the banker a conditional ownership over the property i.e. if the borrower fails to pay back the loan, the banker can retrieve the lent money by selling the property.
Most lenders get the property valued independently and provide loans based on their estimated value. It is important to remember, however, that frequently their valuation is significantly lower than the actual cost and hence the requirement of the Borrower goes up. Equated Monthly Installments (EMIs) spread over a fixed tenure. The repayment time period, which ranges upto 30 years, is fixed based on the amount taken as loan and includes the outstanding principal plus the interest costs.
Home Loan can be classified as:
- Ready House/Flat purchase – A simple home loan that enables you to purchase a new residential property (house / villa / flat).
- Land purchase and construction – For the purchase of approved plot and residential construction on it.
- House construction – This type of loan is only for the residential construction on self-owned and approved residential land.
- House construction – This type of loan is only for the residential construction on self-owned and approved residential land.
- House improvement – This is for the renovation of house to get the desired look and comfort.
- Balance transfer – This loan is to get a better offer, that is, reduced ROI on existing home loan by taking it over from the current financial institution to another.
- Top up – One can get enhanced amount from the existing lender on the running home loan.
- Pre-approved home loan – One can get the loan approved prior to finalizing the property to know his / her maximum loan eligibility.
Criteria for eligibility of Home Loan are:
- Credentials of the borrower (Income, Age, Duration, CIBIL, KYC etc)
- Credit history (CIBIL Score) – Your credit report tells the bank about your repayment capacity and hence determines if you’re eligible for a loan.
- Type and age of property
- Your current income - Your income determines the amount of home loan you are eligible for. Banks generally keep the EMI to income ratio at 0.50 to 0.70.
- The nature and continuity of your employment
- Your current obligations i.e. the other installments (EMIs) you are currently paying, the number of credit cards and credit limits you have or use
- Tenure – The longer tenure you opt for, the more is your home loan eligibility and the lesser is your EMI. Lenders generally go up to maximum of 30 years tenure based on age of the applicant.
- Age – Your age will determine your home loan tenure and hence your eligibility.
- Interest Rate offered – Banks offer Fixed and Floating Rates of Interest. If your interest rates are on a lower side, then the loan eligibility will be higher.
Home Loan Application Fees and Charges:
Home Loan Lenders levy some fees and charges at the time of loan sanctioning which includes Processing Fees. Prepayment/ Foreclosure Charges: As per RBI norms, banks are not allowed to levy foreclosure charges on home loans anymore.
Mandatory Documents Required for Applying Home Loan:
- Application form with photograph of applicant and co-applicant.
- Identity and Residense Proof.
- Income documents viz. Latest 3 months salary slip and Form 16 for salaried employees and Proof of Business existence along with last 3 years Financials including ITRs and Profit & Loss Account and Balance Sheets.
- Last 6 months bank statement of saving/ salary account in case of salaried and of current/ limit account in case of self-employed.
- Processing Fee Cheque.