Home Loan Guidebook for First Time Home Buyers

Home Loan Guidebook for First Time Home Buyers

By : Thinley Wangmo  Date : Apr 20, 2018

A home loan in India can be availed for either buying a house/apartment or a plot for construction of a house, or renovation and repairs to an already existing house. Today nearly 80% of home buyers opt for a loan as the price of the properties is high and due to the availability of alternative investments. Gone are those days wherein people used to only rely on their hard earned money to purchase a home. As the property prices keep soaring, Banks and Financial Institutions have come up with various home loan provisions and schemes to support people’s dream to own a home. Additionally, more people are positive about buying houses with Home Loans due to the income tax deduction scheme released by the Indian Government. Having said that, for a first time home buyer, it is important to pay attention to the eligibility criteria. Home Loan eligibility criteria is generally calculated based on factors such as the current age, monthly income, retirement age and credit score. To help you get started with this, you can refer to various Home Loan Eligibility Calculators provided by leading Banks and Financial Institutions. [You can find links at the end of this page for Home Loan Calculators]

Now, let’s get started on Home Loan.

What is Home Loan?

Investopedia defines Home Loan as “a loan given by a bank or other financial institution for the purchase of a primary residence”. So, a Home Loan is a form of financial assistance availed to fund the purchase or construction of a home.

Types of Home Loan

There are 4 main types of Home Loans in India that you should know.

  • Loans to Purchase House

This type of home loan is used for the purchase of a new residential property or a resale home. This loan is the most popular amongst all and is commonly availed by the people either at a fixed or floating rate of interest. Most of the leading banks and financial institutions offer this loan in different variants. Almost 85% of the total value of the property is offered as a loan by the lender. Also, a home purchase loan offers tax benefits wherein income tax deduction can be claimed on the interest paid on this type of loan.

  • Loans to Purchase Plot

This loan can be availed when you want to purchase a land for building your dream home. For this type of loan, most of the banks will provide up to 85% of the total plot cost. However, you cannot claim tax deduction on the interest paid for a loan on land purchase. This type of loan is offered by leading banks like ICICI Bank, HDFC Bank and Axis Bank.

  • Balance Transfer Home Loans

When you are not happy with the services offered by your bank and if your current interest rates are high, you can avail this type of loan. Under balance transfer home loans, you can transfer your home loan to another bank which offers better services and lowers home loan interests. Your current loan is transferred from one bank to another. This type of home loan is also known as refinancing or home loan take over. The popular lenders offering this type of loans are SBI, HDFC Bank and DHFL.

  • NRI Home Loans

This type of loan is designed to support Non-Residents Indians to buy a residential property in India. Leading banks such as HDFC, Kotak, SBI and ICICI offer specialized home loan schemes for NRIs for a wide range of housing needs such as purchase of house or plots, construction of house and renovating of an existing home.

Rent Vs. Buy! Is it better to live on rent or buy a house on home loan?

Are you still confused between renting and buying a house? Renting or buying a home cannot be fundamentally termed as good or bad. It is the individual factors that should be considered in the decision making process.

In general, there is no doubt that the cost of buying a house will be more than living on rent. But we cannot overlook the fact that owning a home is on the top of every person’s wish list. Why wouldn’t it be? As owning a home brings social status, pride and security along with any sort of customization you want to add to your beautifully crafted architecture. However, it is impossible to say whether renting or buying is a better decision for you as you should consider your affordability and long term plans to make a decision.

According to research, buying is better if you plan to stay for a long period of time in the same house. Like such a factor, there are few other elements that you can consider to come to a conclusion depending on your unique situation:

Factor 1: How long will you live in the house?

Studies show that the longer you plan to stay in a house, the better it is to buy it. This definitely varies depending on your market but is a good option as your costs are spread evenly over time. For instance, in Bangalore, if your annual salary is around Rs.13 Lakhs and you pay Rs.30,000 monthly rent, it would be advisable to purchase a property (worth Rs.80 Lakhs and above) if you plan to stay for 8 years and longer in the same house. In this scenario, your cumulative net gain over renting will be Rs.2.7 Lakhs in 9 years.

Magic Bricks Rent Vs Buy Calculator can help you to simplify these complexities up to an extent, depending on individual specifications. You can use this home loan calculator to check when it is profitable to buy and when to rent.

Factor 2: What is the cost of housing in the location of your choice?

Property price differs in every location. So do a research on the cost of housing in the locality that you live or plan to live. Some areas renting may be costly, so it might be affordable to purchase a house. It all depends on the market in your location.

Factor 3: What is the rent amount to live in the location of your choice?

Similarly, calculate the rent amount spend every year and figure out the opportunity cost of buying a house. As per Livemint, it is preferable to stay on rent if the rent amount does not cover even 60% of the equated monthly instalment (EMI). In this case, you can live on rent and accumulate the down payment so that the EMI would be lower when you finally decide to buy a house.

Factor 4: Can you afford the EMI burden and will you be able to arrange the down payment?

Make sure the EMI amount does not burden you because it is better to buy a house at a price that does not destroy your financial stability. You also have to consider the additional expenses such as maintenance and other renovation costs.

The choice between purchasing and renting a home is one of the biggest financial decision that many adults have to make. The bottom line is that it is very helpful to have a fixed long term plan, awareness of the real estate market trends, calculate your finances and finally do what feels right and works for you.

What is the process to apply for Home Loan?

Once you have decided to buy and have shortlisted your desired property, the procedure to apply for loan is simple after you have gathered all the required documents. Also, these days various online portals have made home loan application a hassle free process.

Although the home loan procedure varies from one bank to the other in India, the overall process is the same. Below are the steps to apply for a home loan from your end:

Step 1: Select a Bank or a Financial Institution of your choice

Step 2: Gather all your necessary documents. Generally includes:

  • Income proof
  • Identity (or id) proof
  • Age proof
  • Address proof
  • Employment details
  • Educational proof (school/diploma/degree certificates)
  • Bank statements
  • Registered property details on which the loan is applied

Step 3: Fill up the loan application form and attach the documents

Step 4: Pay the loan processing fees

  • The processing fees usually range from 0.25% to 0.50% of your loan amount

Step 5: Go for a discussion with the bank for the document verification process

Step 6: The Bank will then evaluate your repayment capacity.

  • This Sanction or Approval process after all your documents are approved is the most critical stage as it determines whether your loan will get accepted or rejected

Step 7: Collect the Home Loan Offer letter. It mentions the following details:

  • The sanctioned loan amount  
  • The interest rate applicable to the total loan amount.
  • Whether the interest rate for the loan amount is fixed or floating.
  • The loan tenure
  • The modes of loan repayment
  • Terms, policies, and conditions associated with the home loan.

Step 8: Now it’s the turn for property verification

  • Your property papers are processed with a legal examination. You have to submit all the property original documents to the bank and it remains with the bank until the loan is repaid.
  • Additionally, for further caution, the bank conducts a technical examination of the property, such as the quality and progress of the construction.

Step 9: After all the paper works and evaluations are approved, you have to register and sign the loan agreement

Step 10: The Loan Disbursal 

  • Finally, the bank will disburse the loan amount either in full or part disbursement based on your agreement.

How to get Home Loan approved?

Your home loan will get approved if you earn a stable income and can repay the amount regularly on time. Your track record of loan repayment in the past, popularly referred as credit score will be considered by the bank.

In spite of having all the supporting documents, there are many cases where loan gets rejected. Thus, you should be aware of few reasons that will help you to get your home loan approved:

  • The name of the home loan application should be same as that on the property agreement or the PAN Card.
  • Always conduct an income eligibility check before you apply for the loan.
  • Make sure your credit score is good to get your loan approved. Credit Information Bureau (India) Limited (CIBIL) is one of the credit information companies that compute credit score. A good CIBIL score generally starts from 700 onwards.
  • Income Tax Return (ITR) is another important factor that the banks consider for approving,  If you have been inconsistent in filing your ITR, there are high chances that your application may get rejected.
  • Get genuine documents from the property owner as your application might get rejected if the documents of the property are not registered.
  • It is advisable not to apply for loans if you are nearing retirement, as your chances will be less to get a home loan approved.

What is the Best Age to Take Home Loan?

There is no perfect age to take home loan. Most banks will advise that it is better to start early as home loan is a long term commitment. Most of the home loan ranges from 5 to 25 years. Your EMIs are lower when the tenure of repayment is longer. The banks will allow you to take a home loan if you have a steady job or source of income and if you are not near your retirement age.

What is PMAY (Pradhan Mantri Awas Yojana) and how to apply for it?

Do you know that by applying for PMAY, you can be eligible for a subsidy up to Rs.2.67 Lakhs from the government on your applied home loans?

So, what is PMAY? The Pradhan Mantri Awas Yojana (PMAY) is a social welfare program initiated by the Government of India under Prime Minister, Narendra Modi on 1st June 2015. The mission of this scheme is to provide housing for all in India by the year 2022.

  1. PMAY consists of two components:
    1. Pradhan Mantri Awas Yojana (Urban) (PMAY-U) for the urban section
    2. Pradhan Mantri Awaas Yojana (Gramin) (PMAY-G and also PMAY-R) for the rural section
  2. There are two main aspects of PMAY scheme
    1. The government will construct affordable houses in selected towns and cities using eco-friendly construction methods
    2. The Credit Linked Subsidy Scheme (CLSS) provides interest subsidy to the beneficiaries under PMAY-U if they avail home loan to construct or purchase a house.

Credit Linked Subsidy Scheme (CLSS) is implemented by Housing Urban Development Corp (HUDCO) and National Housing Bank (NHB). So, if you want to take home loan and avail this benefit, you should first find a bank which has executed MOU with either of these two key agencies.

Credit Linked Subsidy Scheme (CLSS) has been divided into 4 categories:

  1. Economically Weaker Sections (EWS)
  2. Low Income Groups (LIG)
  3. Middle Income Group I (MIG-I)
  4. Middle Income Group II (MIG-II)

CLSS for Economically Weaker Section (EWS) and Low Income Groups (LIG) overview

Particulars

EWS

LIG

Annual Income Up to Rs.3 Lakh Rs.3 Lakh to Rs.6 Lakh
Maximum Loan Tenure 20 years 20 years
Property Carpet Area 30 square meters 60 square meters
Interest Subsidy 6.5% 6.5%
Credit: BankBazaar

CLSS for Middle Income Group (MIG) overview

Particulars

MIG-1

MIG-II

Annual Income Rs.6 lakh to Rs.12 lakh Rs.12 lakh to Rs.18 lakh
Maximum Loan Tenure 20 years 20 years
Housing Loan Amount Eligible for Interest Subsidy Up to Rs.9 lakh Up to Rs.12 lakh
Property Carpet Area 120 square meters 150 square meters
Interest Subsidy 4% 3%
Credit: BankBazaar

Eligibility Criteria:

  1. Income group with annual income up to18 Lakh
  2. Under this scheme, a beneficiary is defined as a family having husband, wife and unmarried children. An adult earning member of the family can avail subsidy independently and will be treated as a separate household
  3. The beneficiary family/household should not own a pucca house in any part of India and has to buy a new house to avail this benefit.
  4. An adult female member should have the ownership of the new property or at least co-own the property
  5. The applicant must not have taken any state/central benefits under any sort of housing scheme from the Government of India ever.

How to Apply for PMAY online?

  1. Visit the official website http://pmaymis.gov.in/
  2. Find “Citizen Assessment” option in the menu tab
  3. Enter your Aadhaar card number
  4. Enter all the information in the application: Personal Details, Income Details, Current Residential Address and Bank Account Details
  5. Click the “Save” button once you complete the form. Then you will get a system generated number which would be required for future references
  6. Download and print the application form
  7. Submit the form to your bank or financial institution along with the required documents

Please feel welcome to post any of your queries on home loans in the comments section below.

Glossary:

Home Loan Eligibility Calculator

Home Loan EMI Calculator

 




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