Buying a home is a significant financial decision in your life. Your family and you’ll be under the gift of the umbrella of comfort of your home. However, signing up for a home loan might be necessary because of your vulnerable financial position. In such a reality, you need to check multiple things – if you really need loan at all, if the amount of the loan is right, or you’re simply loaning because it’s being offered at low interest, and many more questions. This write-up would steer clear of all your queries and misconceptions, and presents eight things you should consider before you sign for a home loan.
1. You need research it
Today, there are numerous sources for home finance including banks (private and public sectors), institutions especially catering to home loans, non-banking financial institutions, insurance companies and others. In view of the plethora of loan schemes, and the attached rules and so on, you need to judge which one is more appropriate than others, for which you need to research thoroughly. How much finance you actually need for the project, what part of the loan you can make down payment (if any), how much you need to pay as the monthly installments and how many of them, etc. Discuss the matter with the officials of the lending institutions.
2. Evaluate credit score
Credit worthiness is one of the most important criteria for a lending institution when allowing a loan for you. The credit score is awarded by Credit Information Bureau (India) Limited (CIBIL). The score is based on a 300- 900 point scale. If your score is not less than 700, you're likely to get a loan.
Credit worthiness score is based on your credit card usage in the past, how you paid loans, your outstanding loan (if any), bouncing of checks (if any), any outstanding bill amount for your credit card, how you use your credit card, etc.
You need to make sure that you do not apply to CIBIL multiple times to know how much you can get as a loan. Doing so is deemed as a negative attribute and therefore, your chance of getting the loan dwindles.
3. Consider the number of years you service the loan
This pertains to the tenure (duration) of the loan you are sanctioned. The longer the loan tenure is, the less would be the amount of EMI that you have to pay each month. Further, if you make some down payment (about 20% of the loan), your EMI amount will be less. However, note that longer the tenure, higher would be the amount of interest burden you are going to bear.
4. Interest rate - floating or fixed
Floating interest changes according to the prevailing financial market condition. Home loans carry interest according to the base rate applicable to the lender. And the base rate varies across lending institutions.
The benefit of floating rate interest is that it makes the loan cheaper – by about 2 - 2.5 % as against fixed interest carrying loans. Conversely, if you are looking for security against financial uncertainty, go for fixed rate interest carrying loans.
Make sure to compare interest rates of different lenders. You could use for this you can use portals such as Bankbazaar, deals4loan, and so on.
5. Estimate your EMI
Equated monthly installment is the amount of money you need to pay each month to pay back the loan. Your EMI depends on the amount of loan, the period of servicing the loan and the interest charged for the loan.
6. Hidden costs
Apart from interest burden, there are costs such as application cost, and transaction cost. Hidden costs include application process fee, legal fee (amount to be paid to the legal professional with the lender), stamp duty (on creation of mortgage), prepayment charges (the amount to be paid if you pay the loan before the closure of its tenure). These costs vary and depend on the amount of the loan and its tenure.
7. Check the past record of the realtor
It’s common that there is a tie-up between the builder from who you’re making the deal of buying home, and the lending institutions. Make sure to check the past track record of the realtor. Take the help of their past clients and word of month.
8. Peruse the documents carefully
This is the last but is the most important step. Read the documents carefully. Make sure to check if the terms and conditions are same as you negotiated with the parties.
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