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A. An Introduction to Home loans

1. What is a Home loan?
Home loan is the sum of money a bank or financial institution lends you to help you buy your dream home.

By taking a home loan from a bank or a housing finance company you pledge your home as the lender’s security for repayment of your loan. The bank or financial institution will hold the title or deed to the property till the loan has been paid back with the interest due for it.

Home loans are generally taken for long tenures as the loan amount is usually a huge sum. A home loan can be taken anywhere between 5 and 30 years. The amount of loan one is eligible for is dependent on the individual’s credit profile.

2. What is a down payment? What are the ways in which I can source my down payment?

Generally as a thumb rule, banks or financial institutions lend 85% of the cost of the property. 15% of the money is expected to be paid as a down payment for the loan.

Opting for a personal loan if you can afford that cost as well, pledging your investments, getting loan against your insurance policy etc. are some ways to liquidate your assets and pay your down payment.

Yes, there are specific loans that are tailored for the requirements of NRIs who wish to build or buy a home in

India

This loan facility allows a senior citizen (above 60 years of age) eligible to apply for a reverse mortgage loan and avail 60% of the value of the residential property he resides in and retain the right to continue to reside there. The maximum tenure for this loan scheme is 15 years.

Indians with a regular source of income, which includes salaried individuals, self-employed professionals, self-employed business people, NRI individuals and existing property owners who can pledge it as security for the loan, are all eligible for a home loan. The individual applying for the loan should be above 21 years of age, when the loan period begins and should be less than 65 years when the loan period closes.

2. What are the other factors, which are relevant for home loan eligibility?

- Purpose of the loan – ( purchase of property, improvement, purchase of land )

- Resident status ( The maximum loan that can be sanctioned to a resident Indian is Rs 5,000,000 )

Registration charges, transfer charges and stamp duty costs apart from the actual loan amount are included in the total cost calculation of the home loan.

The amount of loan you can avail depends on factors like salary details, qualifications, employer/business, years of experience, growth prospects, alternate employment prospects and sources of other income, if any. Generally, about 40% of your monthly gross income can be availed as your loan amount.

For self-employed applicants, profit is the benchmark that determines loan value. The longer the time frame for repaying the loan the lower the EMI and this also means you can opt for a larger loan amount. The loan amount you are eligible for is also dependent on other factors like the company you are employed with, the location of your residence and your credit history.

To know how much money you are eligible for, to compare banks and figure who offers you the best loan bargain.

a) Processing Charge: It is a fee paid to the lender when you apply for a loan. It could either be a fixed amount not linked to the loan or could also be a percentage of the loan amount.

b) Pre-payment Penalty: When a loan is paid back before the end of the agreed duration, a penalty is charged by some banks/financial institutions, which could be up to 5% of the amount pre-paid.

c) Commitment Fees: Some institutions levy a commitment fee in case the loan is not availed within a stipulated period of time after it is processed and sanctioned.

d) Miscellaneous Costs: Some lenders may levy a documentation or consultant charge.

6. Can you detail some of the incentives offered by housing finance institutions?

a) Some lending institutions sanction the loan without requiring you to identify a property as a prerequisite for eligibility

You can take a home loan before or after identifying the property you want to purchase or when the property is under construction or for purchasing a plot of land for investment or to renovate an existing home.

Yes, it is good to have a co-applicant. This can help you increase the loan amount you are eligible for as the income of the co-applicant is also taken into consideration. Providing additional security like bonds, fixed deposits and LIC policies will also help in enhancing eligibility.

The co-owner of the property you are going to purchase should also be a co-borrower/co-applicant. The reverse however is not stressed by lending institutions. Financial institutions accept a parent or spouse as an ideal choice for a co-applicant. A fiancée can also become a co-applicant but the loan disbursal will begin only after the submission of the marriage certificate.

An equated monthly Installment (EMI) is the amount of money that is paid back to the lender on a monthly basis. It is essentially made up of two parts, the principal amount and the interest on the principal amount equally divided across each month in the loan tenure. The EMI is always paid up to the bank or lender on a fixed date each month until the total amount due is paid up during the tenure.

The EMI facility helps the borrower plan his budget. The EMI is calculated taking into account the loan amount, the time frame for repaying the loan and the interest rate on the borrowed sum.

11. What is the difference between a fixed interest rate and floating interest rate?

A fixed interest rate remains constant throughout the loan tenure regardless of the market conditions whereas a floating interest rate can decrease or increase depending on market fluctuations. For instance, it increases when RBI hikes up short term interest rates. Banks usually quote the floating rate loans as their index rate (prime lending rate) plus or minus x%. Banks usually increase or decrease their prime lending rate when the RBI increases or decreases short term interest rates.

Interest rates are quoted either as fixed flat rates or reducing balance rates. In the flat rate method of interest calculation, the outstanding loan amount is never reduced during the entire tenure of the loan even though you make payments monthly.

In the case of reducing balance interest rates the EMI is calculated on the basis of daily, monthly, quarterly or annual rests. A ‘rest’ indicates the time frame in which the bank will recalculate the EMI based on the amount of loan paid back and the frequency of any compounding interest rate. Suppose you have a loan with an annual ‘rest’ then, though you pay a monthly installment, your benefit kicks in only at year end, here the bank gets to benefit. A monthly ‘rest’ will recognize the reduction in the loan amount on a monthly basis, a quarterly rest does it every quarter while a daily ‘rest’ will do it each day. The more closely the rest matches the frequency of your payments, the lower the total interest paid as the total outstanding loan amount is reduced by your monthly payments more frequently.

An amortization schedule is a table giving the reduction of your loan amount by monthly installments. The amortization schedule gives the breakup of every EMI towards repayment interest and outstanding principal of your loan.

14. What are the factors I need to keep in mind while comparing loans from different financial institutions?

A loan applicant needs to keep a few things in mind when comparing loans. The applicant needs to determine the kind of loan and the amount he wants to apply for. He needs to keep in mind the total cost of the loan, which will be paid up by the end of his loan tenure.

The second step is to understand the terms and conditions under which financial institutions are offering the loan. Finally he needs to evaluate, which loan offer is the best bet for him. Search for your home loan at BankBazaar.com to gain access to the most interactive tools in helping you compare and evaluate the best deal you can get from any bank of your choice.

Other factors that you should look out for are customer service levels and the average time the bank takes to process a loan.

Section 80C and Section 24 grant income tax rebates to people who have taken home loans.

These tax deductions are capped at 1 lakh for the principal repaid and 1.5 lakhs for the interest repaid.

You have the option of selecting a loan tenure you are comfortable with, ranging up to 25 years, provided the term does not extend beyond your reaching 65 years of age or retirement age, whichever is earlier.

1. What is credit history? How does a financial institution check on my credit history?

A credit history is basically a record of your past repayments of loans and credit card bills. Also, there is a central bank of data available with the Credit Bureau of India Limited (CIBIL), where data from all the banks on existing loans and their repayment patterns of their customers are accumulated. Before approving your loan a financial institution always checks with CIBIL on your loan repayment track record.

2. Is the repayment track record of my previous loans considered in calculating my eligibility for a new loan?

It definitely has its benefits! A good repayment track record could fetch you a higher loan amount at a lower interest rate as it is standing proof for your money management capabilities. In case of a bad repayment record you will be charged high interest rates and you will find it difficult to obtain a loan.

Every time you apply for a loan to a financial institution, your credit report with CIBIL is checked and the inquiry appears on the record. Many such inquiries will adversely affect the interest rates you are charged and will make your borrowing options limited as it suggests you are likely to be facing a financial crunch.

When you are ready to apply for a home loan, you should evaluate your options by presenting your requirements with different banks. What was earlier a daunting task involving rushing from bank to bank for a series of discussions and bargaining for the best deal, is now just a simple 15 minute process thanks to BankBazaar.com. Search BankBazaar.com to find the best loan bargain that is most suited to your needs. Then get your documents ready for the Bank to collect it at your doorstep and begin processing your loan.

2. Can you provide me with a document checklist, so that I can be ready when the Bank comes to collect it from my residence.?

Make sure you check with your Bank or NBFC to figure out which of the following documents you need to submit, as the requirements differ from bank to bank.

Letter from a recognized public authority or public servant verifying your photograph

Confirmation letter from your employer or another bank verifying your photograph

Letter from any recognized public authority verifying residence address of the customer

The following set of documents that detail your credit profile varies according to whether you are a salaried individual or a self-employed individual.

2. Balance Sheet, profit and loss account statement of income, proof of income tax returns

5. A photocopy of Registration Certificate of establishment under Shops and Establishments Act/Factories Act

1. Income Proof ( you just need to provide one of the options listed for income proof):

3. Documents supporting the financial background of the borrower (his liability and assets if

a. If a flat is purchased from the builder, you need the following supporting documents to submit to the bank.

2. 7/12 extract – This is issued by the concerned land authorities giving details such as the survey numbers, area, date from which current owner is registered as owner etc.

4. N.A. permission for the land from the collector, if its agricultural - If the land is agricultural and is being utilised for residential/ commercial/industrial use, then such agricultural land has to be converted to non-agricultural land and a Non-Agriculture Order has to be obtained from the Collector of the district where the property is located.

Home Loan FAQs