Home Loans – What you Need to Know Before Taking one

Purchasing a home of your own is certainly a very big step. And having the support of a suitable lender in this purchase can be extremely important. A person will also need to understand all the aspects, terms and conditions associated with a loan offer.

Meanwhile, a lender also has a considerable risk and responsibility associated with giving a Home Loan. They need to be sure that the person being given the loan will ensure to pay the EMIs on time besides other considerations such as housing prices constantly being on the rise.

So prior to approaching a bank for a Home Loan, here are some of the things you need to know:

Criteria for Eligibility and Documentation

On the basis of a number of parameters, a bank is able to assess an individual’s ability to repay a loan on time. These parameters include the age of the applicant, employment history, sources of income, nature of the job, and other financial records. From these, the bank decides the eligibility of a person for a Home Loan.

Importance of the Credit Score

The payment habits of an individual are understood from his/her from their credit score. This is calculated by CIBIL, India’s credit information company. Generally, a CIBIL/credit score that exceeds 750 is considered to be good.

However, if a loan request is rejected because of a poor credit score, re-applying for a loan results in further lowering of this score. Hence it is important to make your payments on time and maintain a good credit history.

Interest Rate

A Home Loan can be taken at a fixed interest rate or at a floating interest rate. In the case of a fixed rate, the interest to be paid remains the same during the entire tenure of the loan. And for a floating rate, the interest paid changes according to a change in the bank’s base rate.

Note that a customer is given a choice of switching from a fixed interest rate to a floating rate or vice versa.

EMI and their Pre-payments

A borrower has to pay an equated monthly installment (EMI) on a monthly basis to the lender. This amount can vary depending on the type of housing loan interest taken.

While a property is under construction, the borrower does not pay the full property amount to a builder. In this phase, the borrower can pay a pre-EMI to the bank to repay the interest on the amount given by the bank.

Pre-payments of a Home Loan

You can also consider paying an amount that exceeds your EMI. This is a good practice that helps you save considerably on the interest you end paying in the long term. Through pre-payments, you are able to choose whether to reduce the tenure of your loan or the number of EMIs you pay.

Tax Savings

According to the Income Tax Act, an individual is eligible for home loan tax benefits under section 80C for the principal amount, and under section 24C for the interest paid on the loan. This usually means a tax deduction of up to INR 1.5 Lakhs on the principal payment and INR 2 Lakhs on the interest paid.