Things To Consider When Applying For a Home Loan
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Whether salaried or self-employed, young or old, Indians across generations and geographies share a dream: to own a home. Home ownership remains a part and parcel of our national identity and social standing.
Home loans comprise an integral part of the home building or buying experience. However, the process of accessing this financial tool is a journey in itself. Factors such as interest rates and loan amount will influence your choice between different loan products. At the same time, multiple factors determine your eligibility for the loan. The importance of paying attention to these factors cannot be stressed enough, for they determine whether your loan application is approved, how fast your loan application is processed, and the terms and tenure of the loan.
Here’s looking at some of the top things that you must keep in mind when applying for a home loan to get the best deal.
Type of employment
While you can apply for a loan of up to 80 per cent of home value with most banks, if you are a salaried individual, banks review your net salary to evaluate your loan application. A good rule of thumb to follow is to compare your EMI-to-net income ratio. If your salary falls under the INR 25,000-40,000 per month bracket, your EMI should not cross 50 per cent of your income. If it is more than INR 40,000, then the EMI should not exceed 65% of your income.
Housing finance companies calculate your loan repayment capacity by relying on your salary slip for the last six months. They also take into account your credit history, details of existing debt, EMIs, and your bank statements. The evaluation also factors in your Form 16 filing for last two years and 26AS statement for two years. The number of family members who rely on you is also considered during the evaluation of your eligibility for the loan.
If you are self-employed, the going might get tougher for you. The risk perception regarding self-employed professionals is greater because lenders usually look for financial stability before approving the loan. However, there are a host of options available today when it comes to availing loans, especially with the rise of new-age financial institutions that are keen to tap into this underserved market.
Having said that, you will need to provide the following documents to get your home loan application processed: savings and current account bank statements of the last six months, copies and details of your PAN card, personal identity proofs, educational and professional qualification certificates, residential address proof, ITRs (income tax returns) of the last three years, audited financial statements attested by a chartered accountant, and proofs that validates the existence of your business.
A good credit score is crucial
For both salaried and self-employed professionals, the importance of good credit history cannot be overstated. Financial companies evaluate your entire credit report to establish your credit-worthiness, which determines the approved loan amount, duration and interest rate. Your credit score, also known as the CIBIL score (managed by credit information company TransUnion CIBIL), helps the banks to review aspects such as your previous loan repayment behavior and history of credit card dues or delay in payment, etc. Your CIBIL score is higher if you clear your dues (such as postpaid telephone bills and existing EMIs) in a timely fashion—and you typically need a credit score of 750 or above to avail a home loan.
Lenders estimate the ability to pay EMIs by calculating your fixed obligations to your net monthly income, commonly known as fixed obligation to income ratio (FOIR). Self-employed applicants must keep in mind that if you have an existing loan, your eligible loan amount will be adjusted against the prevailing FOIR, which ranges between 50-60 per cent.
In a credit report, financial institutions also check if any credit account is settled with write offs by the institution. Write offs occur when you settle with a bank in case you’re unable to repay a loan. Applicants must do everything they can to improve their credit score before applying for a new loan. And repaying the written off amount mentioned in the credit report is one such step they can take. Other steps include not defaulting on existing EMIs, avoiding borrowing too much at a time, diversifying your credit, and checking your CIBIL report for errors and getting them rectified, among others.
Net income and DTI
Whether salaried or self-employed, net monthly income is given prime importance by banks when considering a home loan application. However, it is also important to maintain good repayment capacity with a low debt-to-income (DTI) ratio. Doing so underlines that you have robust financial health and have the capability to take on more debt without unduly stressing available capital.
A DTI of 40 per cent is typically the threshold limit for sanctioning loans for most banks. Any higher, and your loans can get rejected outright, even if the credit score and net income meets the bank’s requirements, due to low financial liquidity.
Age mainly impacts the duration of the loan, irrespective of whether you are a salaried or self-employed professional. The maximum tenure given by housing finance companies is 30 years for a salaried employee, which affects the EMI amount and the overall interest paid.
Young applicants are often preferred, as they have lesser liabilities and are more likely to move up in their professional career over time. Most lenders’ risk appetite decreases as the age of the borrower goes up since they have relatively lower FOIR and additional liabilities. If you are a home loan applicant between 41 to 60 years, you will need to close outstanding loans before applying for new long-term credit. While proving your loan eligibility, you might also be required to include the income of your spouse.
Borrowers above 60 years of age are usually offered flip/step-down repayment options and may require a younger, employed individual—typically an offspring or a close relative—to be a co-applicant. These options are generally exercised in cases when one of the co-applicant's income is likely to decline after a certain period. Elderly borrowers can also avail the option of a reverse mortgage loan (RML), which is designed for homeowners who need financial support in their twilight years.
The event of moving into one’s home may be the culmination of a long-held aspiration but the journey typically consists of various steps taken and decisions made along the way. A home loan is one such step. By keeping the aforementioned factors in mind, applicants can ensure that this single step can become a giant leap towards owning their dream home.