Before You Take a Home Loan

1. The factors which may affect the eligibility criteria: The best way to calculate your home loan eligibility is by calculating the EMI. Generally, banks limit the amount to 40 and 50% of the borrower’s income – including the basic salary and the dearness allowance. It also considers the credit history of a borrower. So if you have any existing loan or a poor credit score, the loan amount will be decreased further or you may have to pay an increased rate of interest on the home loan. People with a stable income, strong repayment capability and good credit score find it relatively easier to get a loan as compared to those with erratic earnings and poor credit history. Also having a co-applicant allows you to get a home loan easily.

2. Understand your loan type: Banks offer home loans in two interest types – the fixed interest loan and the floating interest loan. The fixed interest loan is a type of home loan where the interest rates remain same and borrower has to pay a fixed EMI throughout the loan tenure. On the contrary, in case of a floating interest rate, it varies as per the market conditions that lead to fluctuation in EMI amount more often. This is why home loans with fixed interest type have 1 to 2.5% higher interest rate than floating interest loans.

3. The interest rate: Whatever home loan type you choose, do not forget to negotiate on the rate. Though the banks would always have an edge, you’ll have to haggle on this, especially if you have been a loyal customer of the bank and have savings account in the same bank. The negotiation would be a lot easier if you have a clear credit history. Besides, you may also be benefitted if you apply for the loan at the end of the month. Since the banks have business targets, they can be more flexible at this time if they want the business.

4. The fine print: A home loan agreement is a legal document that has all the details of the loan. If you think that not paying the EMI on time will only lead to troubles, you’re wrong! There are many clauses hidden in the fine print. Thus it is advised to read the final papers of the loan agreement carefully before signing the dotted line. Be careful about the loan processing fee, penalty charges, hidden clauses, service charges and the prepayment penalty, etc. Any negligence in this context would lead to bigger problems in future.

5. Longer loan term means costlier loans: As a general rule of thumb, the longer the tenure of the loan, more will be the interest you are likely to pay over a period of time. Many can afford this rise but not everyone can do so. Therefore it is wise to apply for a loan amount that you can easily payback in the shorter tenure. This way you might have to pay huge EMIs but for a shorter duration and without propping up more interest rate.

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