Mistakes To Avoid When Applying for a Home Loan
A home loan is among those credit instruments which come with a long-term commitment. While there is no better medium to fulfil the aspiration of owning a dream house than a home loan, the applicant should remain vigilant and contemplate the various aspects before applying for it. A home loan constitutes several components — the principal amount, the interest rate on home loan, the payable home loan EMI, additional charges, and the like. Any wrong choice or error of judgement can prove to be disastrous in the long run.
When you apply for a home loan, you do not deal with a meagre amount. Most banks and home loan financing houses grant about 70–80% of the property’s value as a home loan. Thus, the amount in question is a large one, which calls for better precautions. Hence, to get hold of the best deal and streamlining your repayment process for the entire duration, you should watch out for pitfalls. Here are five mistakes that you should avert while home loan apply.
1. Neglecting accumulation of savings for down payment purposes and depending wholly on the home loan:
The loan-to-value ratio (LTV ratio) varies with the home loan amount. RBI guidelines sanction banks to grant a maximum of 80% of the property’s value in the form of a housing loan. Furthermore, the bank evaluates the risk involved, scrutinizes the borrower’s credit score and much more to bring down the LTV ratio. Thus, the applicants have to furnish the remaining amount from their own pockets.
So, as a borrower, you should not wholly depend on the bank to cover the entire cost of the property. Saving 15–20% of the house’s value becomes a prerequisite as this would take the form of a down payment or margin contribution. Furnishing a large amount as a down payment comes with several benefits. Firstly, the credit risk of the bank or the financial institution reduces significantly. Secondly, the EMI on home loan also shrinks with the reduction in the loan amount. Last but not least, the chances of receiving approval for the home loan at best home loan rate enhance.
2. Neglecting evaluation of credit score prior to applying:
Before applying for a home loan, you should necessarily review your credit score. The credit score reflects on your payment history and informs the lender of your repayment abilities. A decent credit score helps in building trust between the borrower and the lender. Most banks require the borrower to secure a minimum credit score of 750 to be eligible for a housing loan, and that too at a lower home loan interest rate. Hence, before filing the application, you should assess your credit report frequently. If the credit score is poor, reviewing it at regular intervals would provide you with enough breathing space to make any necessary corrective adjustments.
3. Not entailing a proper analysis of the home loan market:
Once you get your loan approved, you are in for a long-term commitment. Hence, you should devote a significant period towards the analysis of the home loan process of multiple lenders. The home loan rate, the processing fees, prepayment, and foreclosure charges vary from one lender to another. Moreover, within the same institution, there can be variations in the home loan rate of interest based on the age of the applicant, professional status, and the like.
For instance, home loan interest rates for senior citizens and salaried employees tend to be lower than for others. Hence, to land the best deal, a proper evaluation of the home loan market is mandatory. You can use the housing loan EMI calculator to make a rough estimate of the changes in home loan EMI from lender to lender. Choosing one with the lowest home loan interest rate for an adequate tenure happens to be the worthiest decision. If the borrower already shares a good rapport with the financial institution, the home loan process further gets streamlined.
4. Not factoring in EMI affordability:
Before approving a loan, the lender assesses the repayment capabilities of the borrower. The borrower may have existing EMI obligations. If the total EMI commitment exceeds 50–60% of the borrower’s monthly income, financing houses reject the application. Hence, before applying, you should factor in your EMI affordability. Prepaying or foreclosing the existing loans can come in handy. Otherwise, you can always negotiate to increase the home loan tenure or make a higher down payment for the new home loan. Furthermore, it is recommended that you avail the services of an EMI calculator for home loans to reduce the scope of defaulting on EMI payments in the future.
5. Not taking EMI into account while setting aside the emergency corpus:
Financial exigencies can strike at any moment without a warning. Sudden illness or unemployment come unprecedented to put a heavy burden on the finances. Hence, forming an emergency fund becomes necessary. However, it should be materialised after considering at least six months’ EMI. Resorting to the liquidation of existing financial investment to cover the home loan EMI can severely affect long-term financial planning.
Apply for a home loan with any of the leading lenders today to avail of all-time lowest housing loan interest rate and an array of other benefits, such as no prepayment or foreclosure charges for solo applicants.
Additional Read: What is the Interest Rate on a Home Loan, and why so Important?