With rising property values, buying a home has become an expensive proposition for many aspiring buyers. In such a scenario, home loans are like the silver lining in the dark clouds. If you have decided to take the home loan route and don’t know where to start, we’ve got you covered.
By the end of this post, you will learn about:
- The eligibility criteria
- How to select a lender
- The application process
- Selecting the right tenure
- Tax benefits
Credit score: Your credit score has a direct impact on the loan amount the bank sanctions. If you have been diligent in paying all your bills, then your credit score should be good. This score varies in the range of 300-900, and anything above 750 is considered good.
It is a good practice to check your score before applying for a home loan.
Income: A no brainer, we know. Income is an important factor in determining your repayment capacity. Depending on the number of dependents in your family, banks calculate an amount you can comfortably pay as EMIs after taking care of all monthly expenses. In an ideal scenario, your EMIs should not be more than 50% of your salary.
Property value: Lastly, most of the lending institutions consider the value of the property before fixing a loan amount. You have to pay the down payment (amounting to 20%) from your pocket, and the loan can be availed for the remaining 80% of the property’s cost.
Selecting a lender
Now that you know the eligibility criteria, it’s time to select the right lender. The best way to go about it is by getting the quotes for as many lenders as you can. While talking to the lenders, make sure to ask questions about the interest rate, processing fees, prepayment charges, projected EMIs, and tenure. Once you have these details, compare all the banks logically and make an informed decision.
Majority of banks in India have a process for availing a home loan. First and foremost, you have to fill an application form with all your personal and professional details. If you have already finalized a property, then you might also have to give the details of the property.
Along with the application form, you have to submit the required documents for identity, address, and income proof. At this stage, the bank will ask you to pay the processing fee.
Here is a list of documents that your bank would ask you to submit to your home loan application.
- Three passport size photographs
- For the proof of identity, voter ID card, passport, Aadhar card, driving license and PAN card works
- For address proof, a recent telephone bill, electricity bill, or bank statement
- Bank account statement or updated passbook of the previous six months
- Personal assets and liabilities statement
- The original salary statement or a salary certificate from your employer
- TDS certification on Form 16 or copy of IT returns for the last two financial years, duly acknowledged by the Income Tax department
After receiving the duly filled loan application form along with the requisite documents, banks will assess your repayment capacity, along with validating your information. Once the bank is completely satisfied, it will sanction the loan and issues the offer letter. If you decide to accept the offer, then you will have to sign the duplicate copy of the letter and submit it to the bank.
How to determine the right loan tenure
Banks allow you to select the tenure of 5-30 years, depending on your age and income. A shorter tenure means that your EMIs will be high, but it will reduce the total interest that you pay to the bank and vice versa. However, the longer loan tenure will result in increasing the cost of your property, translating into a lower ROI.
Let’s say you take a loan of INR 50 Lakh at the rate of 8.5% for 20 years. Then, your EMIs will be INR 43,391. Thus, you would be paying an overall amount of INR 1,04,13,840 to your bank by the end of your loan tenure. Now, if you take the same loan amount for ten years at the same interest rate, your EMIs would be INR 61,992. In this case, your total payment to the bank at the end of your tenure would be INR 74,39,040.
Tax benefits on a home loan
A home loan comes with certain tax benefits. The common ones include:
Under this section, you can claim a deduction for the amount paid towards the repayment of the principal of the home loan. The maximum amount that is deductible under this section is INR 1.5 Lakh in a year.
Under Section 24, the deduction can be claimed for the amount paid towards the repayment of the interest. If the property is self-occupied, then the maximum limit for deduction is INR 2 Lakh.
Keep watching this space for detailed information on every aspect of financing a home.