Never Commit These 5 Mistakes While Getting a Home Loan

Although a home loan comes with tax-saving benefits under Section 80C and 24(b), it has its share of headaches. They involve a large sum of money with a long repayment tenor, which can extend to 20 years.

As a result, it is essential to apply for a housing loan after considering multiple factors. Often, borrowers make several mistakes that can become detrimental during repayment.

Here are five such mistakes to avoid when choosing a home loan –

Select financial institutions without comparing

Before choosing a lender, take a look at what they are offering. Compare the loan amount, tenor, interest rate, processing fee, preferred credit score, etc.

Housing Finance Companies also consider your Fixed Obligation to Income Ratio (FOIR) to determine your interest rates. A lower FOIR ensures that you have fewer liabilities, which increases your chance of availing the loan.

There are various financial institutions to choose from, so make sure to pick one that suits your finances without straining your monthly budget. Whether you apply for a home loan online or visit the braches directly, always compare their features before signing the agreement.

Also, check if you are eligible for Pradhan Mantri Awas Yojana, which grants you subsidies on the interest rate if you meet certain conditions.

Offer a small down payment

RBI regulations restrict financial service providers to finance more than 90% of the property’s value. The rest has to be paid by the owner in the form of down payment. Now, instead of paying 15–20%, you can choose to pay more.

By contributing a high down payment, you can:

• Decrease your loan to value ratio (LTV), which raises the chance of your loan application being approved.
• Settle for a reduced tenor or EMIs.
• Payless in terms of home loan interest.

Opting for a short tenor

Short term loans carry a higher risk of default. In the case of an emergency, you might be unable to repay your debt in time hence incurring huge penalties. Hence, it is advisable not to choose a very short tenor. You can also reduce the tenor and EMIs during repayment at any time.

It is ideal to have a long tenor so that you can switch between regular EMIs and prepayments. This option becomes unavailable once you chose to decide on a relatively short term like 10 years.

Also, fixed and floating interest is another factor you need to consider when looking through home loan offers. Fixed rates are best for short term loans. In case loans that stretch on for around 20 years, a floating rate is much more beneficial.

• Applying with a low credit score

A credit score of 750 or above raises your viability as a loan applicant. For instance –

• It gives you the leverage to negotiate for better rates of interest and fetches you a better deal.
• Your loan can be approved even if you have a high LTV.
• You will be able to choose from a variety of financial providers, especially those who require a high credit score.

Additionally, your credit score also determines your home loan EMIs. A low score may result in high EMIs due to the raised interest rates.

• Not availing insurance

Home loan insurance policies ensure your loan is repaid should you become incapable of doing so. Hence, insurance plans are a way of safeguarding the future of you and your family. It ensures that the loan is paid without jeopardizing your financial stability.

Make sure to use a home loan calculator as there are several benefits of calculating EMIs before taking a home loan.

A home loan is a significant financial investment that takes up a majority of your time and savings. Therefore, advisors state that you plan your finances, excluding any of the listed missteps to ensure a better and more secure future.