We look at seven crucial aspects that home seekers should guard against, while availing home loans, to ensure that their borrowing does not turn into a burden in due course
Home loans have become an invaluable tool, for most people looking to buy a home. However, the process can turn into a nightmare, if the borrower commits certain mistakes while applying for the loan. In comparison to other loan products, a home loan usually has a very long tenure and the amount involved is enormous. Therefore, there is no room for mistakes. Given below are seven crucial mistakes that home seekers should be aware of, to ensure that one can avail of and service a home loan smoothly.
Mistake 1: Not having sufficient funds to make the down paymentrnUsually, banks provide home loans of up to 80 per cent of the value of the property, depending on the CIBIL score and repayment capacity of the borrower. This means that the borrower should contribute the remaining 20 per cent of the cost, as a down payment. For example, if the value of the property is Rs one crore, then, the bank will provide a maximum loan of Rs 80 lakhs and the remaining Rs 20 lakhs should be contributed by the borrower, as a down payment. The borrower first needs to provide the down payment, after which, the bank starts disbursing the loan. So, it is essential that the borrower is ready with this margin money, before applying for the loan.
Mistake 2: Applying for a bigger loan amount than you can repayrn“When financing your home, or any other purchase, consider your current financial situation. Ideally, your EMI outflow should not be more than 30-40 per cent of your income. Do not try for a bigger loan with a higher EMI, on the premise that you are due for an increment in six months. You will be in a fix, if the increment is lower than expected, or if there are additional expenses. Savings are also an area, where you should not cut corners. So, consider your overall current financial health when you borrow,” suggests Adhil Shetty, CEO, BankBazaar.com.
rnMistake 3: Selecting the wrong loan productrnThere are several types of home loan products in the market and the borrower must choose the most appropriate loan product, to get the maximum benefit in the long term. For example, banks offer floating rate home loans, fixed rate loans, semi-fixed rate loans, home loan with overdraft benefits, incremental EMI home loans and so on. The home buyer needs to figure out his/her own requirements and accordingly, select the appropriate loan product, as otherwise, one may land up paying unnecessary charges or find it difficult to repay the loan.
rnMistake 4: Taking a loan for a short tenurernBanks generally provide home loans for tenure of up to 30 years, depending on the eligibility of the borrower. There is no prepayment penalty on the home loan. So, if you take a home loan for 30 years and repay it in 10 years, then, you do not need to pay any penalty.
However, if you have taken a home loan with a tenure of 10 years and failed to repay an EMI, then, you may be liable to pay certain penalties and it will also negatively impact your CIBIL score. Hence, it is better to opt for a longer duration home loan.
rnMistake 5: Not comparing various banks’ offersrnNowadays, there are many websites, which allow you to compare the home loan products offered by different banks, on the basis of interest rate, charges, penalties, etc. Home loan seekers should avail of this facility, to avoid selecting the wrong loan product, which may put you in financial distress.
rnMistake 6: Ignoring one’s credit score, before applying for a home loanrnSome people commit the mistake of spoiling their credit score, by not repaying the EMIs for small debts like credit card bill or a personal loan. Once the credit score is spoiled, then, it weakens the chances of getting a home loan. So, it is essential to keep the credit score healthy, if you are planning to take a home loan.
rnMistake 7: Not taking insurance to cover risks associated with a home loanrnHome loan borrowers should take appropriate insurance cover, to protect their families from financial distress. “In case the borrower faces an unforeseen contingency, illness, death, accident or any kind of tragedy that leads to permanent disability and affects his ability to service the outstanding dues/EMIs, the home loan insurance can help his family to clear off the dues.
“Home loan insurance is important for the borrower, as it ensures that the dependents of the borrowers do not become homeless, in his/her absence or crisis,” cautions Anirudh Jain, business head – insurance, Centrum Insurance Brokers Ltd.
rnImportance of the loan agreementrnExperts point out that the essential clauses of a home loan, are usually in the fine print of the loan agreement but very few borrowers bother to read it and this oversight my come at a hefty price, later. One must read the loan agreement and sign it only if you find it appropriate. Otherwise, ask the lender to make the essential changes, or avoid taking the loan from that institution.