For most of us, home loans are invaluable gateway for realizing our dream of owning a home. Given that it usually involve big ticket amount and longer repayment tenure, it’s important to have strong financial plan and avoid missteps while availing a home loan. Let’s look at some of the mistakes we must avoid while planning to borrow home loan:
Failure to accumulate adequate down payment corpus
As per RBI regulations, lenders can finance up to 75- 90 per cent of the property's value, depending on its valuation. This implies that at least 10-25 per cent of the property’s cost has to be contributed by the borrower in the form of down payment. Therefore, before availing home loan, make sure you have accumulated down payment corpus as per property’s value and LTV ratio. Failure to do so may lead to rejection of your loan application.
Try contributing higher down payment instead of just the minimum requirement of 10-25 per cent. This is because the higher you contribute from your own pocket, the lesser you would need to borrow in the form of loan. However, while doing so, make sure you don’t over stretch your finances or cause hindrances to other goals.
Ignoring whether your property falls in lender’s geographical limit
Apart from considering the property’s value and LTV ratio, lenders also factor in geographical location and age while evaluating loan application. Your loan application may get rejected if the property does not fall into the geographical limit defined by the lender or in case the residual age of property is on the lower side.
Submitting loan application without comparing lenders
Once you are financially ready to avail home loan, make sure you compare among various loan options before zeroing in on any one option. Instead of visiting multiple lenders offline to enquire about available loan options, consider visiting online financial marketplaces. These platforms allow you to compare amongst different lenders after factoring in your credit score, monthly income and other eligibility criterion. Choose the most suitable lender by comparing them on various parameters such as interest rate, tenure, loan amount, processing fee etc.
Keep in mind that submitting direct loan applications to multiple lenders can harm your credit score, given thatsuch lender initiated credit enquiries are considered hard enquiries by credit bureaus.
Not factoring in your repayment capacity
Lenders assess your repayment capacity by evaluating your FOIR (Fixed obligation to income ratio), i.e. the proportion of your income currently being used for mandatory debt payments including credit card bills and loan EMIs. Most lenders -whether banks or HFCs - hesitate lending to borrowers with FOIR above 50-60 per cent, as higher FOIR depictsimbalance in individual’s income and debt ratio, and increases the risk of defaulting future repayment.
Opt for loan tenure whose corresponding EMI ensures that your FOIR remains within 50-60 per cent. Consider opting for a longer repayment tenure of 20-30 years for relatively smaller EMI outgo.However, remember that longer repayment tenure can translate into higher interest pay-out.
Not reviewing your credit score before applying
Possessing good credit score implies higher creditworthiness, which not only boosts your chance of loan approval, but can also fetch lower interest rate and better deal on loan. As credit score is computed on the basis of information provided in your credit report, it’s always prudent to review it before submitting loan or credit card application. Doing so would assist in timely identification and reporting of errors to the bureaus for rectification.
Ratan Chaudhary, Head of Home Loans, Paisabazaar.com...