8 factors to consider before applying for a home loan
Buying your dream home requires a big-time fund arrangement. A home loan can help you buy your dream property, which you can repay through Equated Monthly Installments. Today, the home loan market is buzzing with various attractive offers from multiple banks and financial institutions, with the interest rates at an all-time low.
Though the offer entices the customers, they have to be highly prudent while selecting a home loan. A slight mistake like mishandling a home loan can have dire consequences on their future. Several banks offer home loans at an interest rate below 7% these days. That said, the interest rates will not remain constant forever. There are so many factors that influence bank interest rates. The home applicants must consider the factors that can impact their home loan decision in the long term. Mentioned below are a few factors which the home loan applicants must take stock of before they go ahead with a home loan
Banks and financial institutions provide Home loans considering their credit score and repaying capacity. They don’t consider your future financial plans. For example, you may have thought of a corpus to settle comfortably. However, banks do not necessarily need to know about your personal financial goals. So, check your income regularity, financial goals, income beyond your current job to achieve your dream corpus before proceeding with a home loan application. Make sure that your home loan commitments do not prevent you from achieving your financial goals
Usually, banks finance up to 90% of the property value, and the rest needs to be borne from your pockets. The balance amount you pay out of your hand is termed as the down payment. Aside from the construction charges, there are other expenses you need to take care of, like stamp duty charges, registration charges, and interior decoration, which you may have to bear without financial support. Instead of being charmed by the low-interest rates, make sure you have sufficient down payment money to meet these expenses.
Usually, banks sanction loans to individuals at the best interest rates only when their credit score is above 750. Any score lesser than 750 will entail high-interest rates from the banks. So, before you apply for a loan, make sure your credit score is high to avoid high-interest rates. If the score is low, work on increasing it and proceed with your loan application process.
Include a Co-applicant
If the loan amount is greater than your borrowing capacity, then it is a good idea to include a co-applicant. Having a co-applicant to your home loan increases your chances of home loan approval as their score and income also contribute towards the home loan processing. Having a co-applicant with a good credit score can bring down the home loan interest by a significant margin.
Pick a home best suited to your budget and repaying ability. Going for a bigger home more than your budget requires a bigger home loan amount and higher interest rates. Aside from being an enormous burden on your monthly EMI obligation, a bigger home loan amount may also affect your future borrowing capacity.
The thumb rule in availing any loans is that their repayment through EMIs should not exceed 50% of your monthly income. So, if you have already taken other loans, make it a point to close it as early as possible before applying for a home loan. Existing loan commitments may reduce your chances of availing a home loan, and even if you somehow managed to avail, it would be a considerable strain on your finances.
Many people have no clue about maintaining a contingency fund for their loan commitments during a financial crisis. Your present financial situation may be strong, but no one knows what’s in store for the future. For example, if you suffer from a job loss, having a contingency fund would help you serve your loan commitments. So, it is crucial to have a proper contingency fund in place for an emergency.
Go for the maximum tenure
Most banks offer home loan tenure up to 30 years, depending on the applicant’s age. It would help if you went for the maximum tenure possible. Going for a longer tenure reduces your monthly EMI significantly. Later, when your income increases, you may pre-close the loan subject to the loan’s terms and conditions. A point to note is that floating home loan does not have any pre-closure charges.
Availing a home loan may be a life-changing move in everyone’s life. So, exercise sufficient caution, and be prudent enough to consider all these factors before arriving at a decision.