Home Loan FAQs
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
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
3. Are there any specific loans
available for NRIs?
Yes, there are specific loans that are
tailored for the requirements of NRIs who wish to build or buy a home in India.
4.What is reverse mortgage?
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
B. Loan eligibility and Cost
1. Who is eligible for a home loan?
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 )
- Income ( savings history )
- Experience & Qualification ( stability
and continuity of occupation )
- Existing loans
- Number of dependents
- Credit History (Past repayment history)
- Resident status ( The maximum loan that can
be sanctioned to a resident Indian is Rs 5,000,000 )
3. What are the factors included in the
total loan cost?
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.
4. How much loan can I avail ?
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
To know how much money you are eligible for,
to compare banks and figure who offers you the best loan bargain.
5. What are the other costs that
usually accompany a home loan?
Home loans are usually accompanied by the
following extra costs:
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.
e) Registration charges of the mortgage deed.
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
b) Free accident insurance
d) Waiving of pre-payment penalty
e) Waiving of processing fee
f) Free property insurance
7.When can I take a home loan?
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
8. Can I have a co-applicant for a 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
9. Who is eligible to be a
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
10. What is EMI? How is it calculated?
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.
12. What are the different types of
interest rates available?
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.
13. What is an amortization schedule?
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
15. Can I avail a tax rebate on my home
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.
16. What are the loan tenure options?
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
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.
3. If my loan application is rejected,
does that reflect on my record?
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.
1. How do I apply for a loan?
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
2. Can you provide me with a document
checklist, so that I can be ready when the Bank comes to collect it from my
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.
Here is a standard list of options for each
A. Identity proof:
Letter from a recognized public authority or
public servant verifying your photograph
Confirmation letter from your employer or
another bank verifying your photograph
B. Address Proof:
Bank passbook or Bank account statement
LIC policy/ receipt
Utility Bill – telephone, electricity, water,
gas (less than 2 months old)
Letter from any recognized public authority
verifying residence address of the customer
Letter from your employer
C. Age Proof:
10th standard mark sheet
D. Income Proof:
The following set of documents that detail
your credit profile varies according to whether you are a salaried individual
or a self-employed individual.
a. Self Employed/Entrepreneurs:
1. A brief introduction of
2. Balance Sheet, profit and loss account
statement of income, proof of income tax returns
for the last 3 years certified by a CA
4. Receipts of advance tax payments if any
5. A photocopy of Registration Certificate of
establishment under Shops and Establishments Act/Factories Act
6. Registration Certificate for deduction of
7. Certificate of Practice
8. Receipts of Bank loans
9. Proof of investments (FD Certificates,
Shares, any other fixed asset)
b. Salaried Individuals :
1. Income Proof ( you just need to provide
one of the options listed for income proof):
Latest Pay slip
Pay slip (Last 2 months) with salary account
Certified letter from Employer
IT returns ( for three years )
2. Investment proof (FD certificates, shares,
any fixed asset etc.)
3. Documents supporting the financial
background of the borrower (his liability and assets if
E. Property Documents
a. If a flat is purchased from the
builder, you need the following supporting documents to submit to the bank.
1. Original copy of your agreement with the
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.
3. Property register card, which is obtained
from the City Survey Department
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