Owning a new home is a substantial achievement for most people as it establishes a sense of security and stability. Financing the purchase of your new property using a home loan has numerous benefits. It marks the beginning of a new phase in life that comes with financial responsibility. However, timely repaying the loan amount will help you build a strong credit history and make you eligible for better terms and bigger loan amounts for future endeavors. Therefore, it is crucial to learn everything you can about home loans.
Let’s take a quick look into what is a home loan and how you can benefit from it.
What is home loan?
Let’s take a look at what is a home loan, the home loan is a secured loan that provides the borrower with the funds needed to buy a home. Most lenders provide home loans upto a maximum of 90% of the property’s current value, depending on the borrower’s eligibility. The borrower has to arrange the remaining funds pledged as a down payment to avail of the loan. Getting a home loan today is possible online. Lending companies have online processes to make loans more accessible.
Understanding home loan eligibility
Eligibility criteria for home loans can be explained as minimum requirements that applicants must meet to be eligible for the loan amount. Different lending parties can have varied eligibility criteria. However, the majority of the eligibility requirements are identical. Matching all the eligibility criteria set can help get favorable loan terms and shorten the approval cycle. Let’s take a quick look into the standard eligibility criteria for these loans.
There is a minimum age criterion set by home loan providers that require the borrowers to be over and below a certain age. Usually, the age range is between 21 (when filing out the loan application) to 60 years (when loan matures). The maximum loan tenure is also decided based on the applicant’s age. Therefore, due to this requirement, older applicants might not be eligible for a higher loan tenure.
A CIBIL or credit score defines your creditworthiness in the market in quantitative terms. It is a three digital score assigned to individuals based on their credit history. Most financial institutions offering home loans require prospective borrowers to have a credit score over 700 points. Those with higher scores may be able to negotiate better terms on their loan (subject to other criteria).
Minimum monthly income
One of the most important eligibility requirements is related to the income earned by the loan applicant. A minimum income limit is prescribed for applicants, depending on where they reside and the nature of their employment. The exact amount can vary depending on the lender’s policies.
Debt to income ratio
Another important factor that affects your eligibility for home loans is the debt-to-income ratio. It measures your existing loan liabilities in the form of monthly EMIs. It is calculated by dividing your monthly EMI payments by your total monthly income. Experts recommend keeping the debt to income ratio lower than 30% to get easy approval on your loan applications and to be able to negotiate better terms such as higher loan amounts, lower interest rates, etc.
Important terms related to home loans
Here are some key terminologies related to home loans that you must be aware of.
1. Principal loan amount
The principal loan amount is the total amount borrowed to purchase the home. It is the base amount on which interest rates are applied to compute the interest fees. It is usually between 75% to 90% of the property’s initial value.
2. Down payment amount
The borrower pays the down payment amount in the beginning to get the loan approval. Usually, it is in 10% to 25% of the property’s value.
3. Interest rate
The interest rate determines the interest charges to be paid by the borrower. It can vary based on the lender’s policies and the applicant’s credit profile. Also, there can be two types of interest rates, i.e., fixed and floating.
4. Processing charges
All home loan approvals require a processing fee paid by the borrower to avail of the loan amount. It can vary based on the lending institution you are borrowing from.
In addition to the details mentioned above, you also need to know the documentation requirements for home loans; check it on the lender’s website. It is also easier to calculate EMIs using an online home loan EMI calculator.
Another thing to remember besides the regular documents for loans, home loan documentation also requires a property valuation document from the bank and an allotment letter from the housing board.