Here is a list of some important questions to help you avoid making a mistake while you plan to take a home loan.
Buying a home on loan involves big financial decision-making. Even a small mistake while buying a home can spoil the buyer’s other financial goals. Home loans are long-term big-ticket borrowings. A variation in the loan charges or interest rates can burgeon into substantial dues. That said, depending on whether you plan to buy an under-construction or a ready-to-move-in property, adequate care must be taken while selecting the appropriate loan product and finalising a loan amount that could be repaid in full in time. It becomes all the more significant in the present times when banks have reduced their home loan interest rates to multi-decade lows to encourage interested buyers to take the plunge.
We have prepared a list of some important questions to help you avoid making a mistake while you plan to take a home loan.
Q1. Are you planning to purchase a home for end-use or as an investment?
It’s important to understand the purpose of buying a home. It can be either for end-use or as an investment. If you are buying for end-use, you should focus on questions like what will be the ideal property size that could meet your family’s requirements, what are the amenities on offer, how is the social and physical infrastructure surrounding your property, etc. On the other hand, if you want to buy a house only for investment purposes, you also need to focus on the property’s return potential, i.e., capital appreciation and capacity to generate rental income. Depending on your decision to buy a home for end-use or investment, you must also assess its impact on your tax liability.
Q2. Have you evaluated your property expectations against your affordability?
Most of us want to own a big house packed with amenities at a posh location. However, you must also evaluate and restrict your expectations as per your financial capacity to comfortably repay the loan that you’ll require to buy the property. Now, many overstretch their home budget by a long margin thinking their income will increase in the future; however, they forget that expenses too increase with time. As such, you might not want to buy a home that you feel to be excessively expensive. Stick to your priorities and buy a home with features that are non-negotiable as per your needs to avoid over-borrowing.
Q3. Do you have the necessary margin money?
Before you apply for a home loan, make sure you have sufficient margin funds to contribute from your side. Banks usually allow a home loan up to 90% of the property’s value in low-value cases and 75% in high-value cases. The rest has to be contributed by the borrower as a down-payment/margin. Plus, there are other expenses like registration, interior decoration, etc. that are unlikely to be covered under a home loan. Margin money requirements may vary depending on the borrower’s age, credit score, loan size, loan-to-value ratio, and other factors. So, you must ascertain how much margin money you will be required to pay while buying a home on loan and also ensure you don’t disturb other critical financial commitments while building this fund.
Q4. How good is your credit score?
Most of the banks have now linked their home loan interest rates with the borrower’s credit score. If the credit score is low, the bank usually charges a higher risk premium and the effective home loan interest increases to that extent. So, if you don’t want to pay higher interest on a home loan, make sure that you maintain a very good credit score (ideally above 750-800) not just when applying for the home loan but also during the entire loan tenure.
Q5. Can you afford the EMIs?
A home loan requires a long-term commitment. Before you apply for a home loan, you must consider your existing loans and also the loans that you plan to take in the future to evaluate your loan affordability. Existing loans can restrict your repayment capacity. You may have also planned to take a loan in the future, for example, an education loan for your child’s higher education. Adding a new loan in the future can reduce your repayment capacity, and you may find it difficult to repay your home loan. So, ensure you evaluate the affordability of your home loan EMIs after factoring in your expenses and other loan obligations.
Q6. Have you finalised a lender that offers the best repayment terms?
There are many banks and financial institutions in the market that offer home loans in different variants. Select your lender carefully based on factors like offered interest rate, applicable processing fee on loan, processing time, tie-up with the builder, etc.
Q7. Do you have a regular source of income?
Stay financially prepared before you apply for a home loan. You must ensure a long-term arrangement for a regular source of income to repay your home loan EMIs on time. You may focus on arranging multiple sources of income to ensure income stability. For example, you may start a part-time job or a business to boost your income.
Q8. Will there be a requirement for a co-borrower?
Before applying for a home loan, make sure that you fulfil the eligibility criteria of the lender. If you are falling short of fulfilling the eligibility criteria such as credit score, income level, etc., you should be ready with the arrangement of a co-borrower such as your spouse to join your loan. A co-borrower can improve your chances of getting a home loan and in lowering the interest rate. Often the lowest home loan rates are reserved for female borrowers.
Q9. Have you got your property documents verified?
Before buying a property, you must get the property documents verified by a legal expert to avoid any future disputes. Lenders take legal opinion and property valuation done from their side before sanctioning a loan. If there are any discrepancies, they might reject the home loan. As such, you must get prior clearance from your legal expert before applying for a home loan to avoid rejection.
Q10. Do you have adequate life insurance cover?
Having adequate life insurance cover can safeguard the financial future of the dependents if something untoward happens to the insured. Repaying home loans can be a challenging task for bereaved family members. So, having an adequate life insurance cover is highly desirable when you have a home loan. You could buy term insurance or even a home loan protection plan.
Q11. Will the new loan impact other critical financial goals?
Buying your own home is an important dream in everyone’s life, but not at the cost of other crucial financial goals. Are you taking a home that will negatively impact your crucial goals like a retirement fund, a fund for children’s higher education or marriage, etc.? Will taking a home loan restrict your financial freedom? If the answer is yes, you need to think again and replan your home buying decision. You can also consider buying a cheaper home to ease the loan burden. The bottom line being, you should buy a home on a loan when you are absolutely sure that it won’t impact your other crucial financial goals in any way.
(The writer is CEO, BankBazaar.com)