By V Swaminathan
A home loan is a crucial element for a home buyer. A home loan helps the buyer leverage one’s finances or future income and buy their dream home. Besides enhancing the purchase budget, a home loan also provides tax deduction benefits to borrowers. However, before you take a leap, it is very important to understand the important factors that can help you get a better home loan deal. Here are a few tips for home buyers looking at home loans:
1. Check credit score
When you apply for a loan, the first thing that all lending institutions check is your credit score. Whether it is your eligibility for a loan, the amount of loan that can be sanctioned to you, or the interest rate it all depends on your credit score. Against an excellent credit rating, you can avail of bigger home loans at better interest rates. A credit score above 800 basis points is considered excellent. Lending institutions such as banks prefer loan applicants with good credit scores because such borrowers are considered honest and worthy customers who will pay their credit on time. You can build and improve your credit score by paying the existing EMIs and credit card bills on time.
Once you have an idea of your credit score, ensure that all documents such as identity proof, address proof, income tax returns, salary slips, bank statements, employer proof, and so on are in place. If you have already finalized the property you wish to buy, keep documents related to the property, such as the seller’s identity and address proof, property title, map, completion certificate, and so on, ready.
2. Go for a joint home loan
There are various advantages and benefits of taking a joint home loan. When you add a co-applicant your home loan eligibility increases, as the lending institution will take into consideration the income of all the applicants while deciding the loan amount. A joint home loan also makes all the applicants eligible to claim the tax deduction benefits against home loan repayment. Some banks even offer interest rates that are lower by up to 50 basis points if one of the applicants is a woman. Besides these benefits, the responsibility of repaying the home loan can be shared by both persons if the loans have been taken jointly.
3. Shop for low-interest rate
Different banks offer different interest rates and are also ready to negotiate on them. Even a small reduction of 10 to 20 basis points can help you save a significant amount per month, especially over the long term. As a borrower, identify the best lending companies that are charging the lowest interest rates. If the applicant is buying a property that is new construction and has pre-approved bankers to provide loans, then the buyer can avail such a loan as the lenders can process it quickly; they would already have many details of the property. Moreover, the lender may be offering interest rates that are lower than what others may be offering.
4. Go through the documents and read all details
Lending institutions will ask you to sign a plethora of documents before disbursing your loan. While it is a difficult task to read all those documents thoroughly, do try to go through as many as possible carefully. The clauses written in the small font should be carefully read as these typically contain terms and conditions that may be against a borrower’s interest.
5. Maximise the down payment and minimize the tenure
Typically, a minimum of 20% down payment is expected or is mandatory to be paid by the borrower. However, financial prudence dictates that the borrower should try to pay 50-60% of the property value as a down payment and the remaining amount can be financed through a home loan. The bigger the down payment, the lesser will be the interest burden. In terms of tenure, while many lenders offer long loan tenures of up to even 30 years for repayment; try to choose a tenure not longer than 20 years. The reason is that over longer tenures, a borrower ends up paying a lot as interest on the loan and also faces a higher risk of interest rate volatility.
(The author is CEO, Andromeda & Apnapaisa)