Home Loan: Here is a guide to home loan - How to Apply for, Calculate the Cost, Switch and Pre-close

By:Supriti Chatterjee 2018-10-17

It is pretty confusing to understand and consider taking a home loan.

We generally have a lot of queries, So here are the answers to almost all your queries regarding Home Loans

Loan Eligibility Criteria

The amount of loan that you will be eligible for depends on your repaying capacity. The banks closely assess your loan repayment capacity before sanctioning a loan. Your repayment capacity is dependent on your monthly income and other factors such as total monthly income/surplus minus monthly expenses. Also other factors are taken into consideration like spouse’s income, assets, liabilities, stability of income, etc. 

The bank undertakes all necessary measures to make sure that you're capable of repaying the loan on time. The higher the monthly disposable income, the more will be the loan amount that you will be eligible for. The tenure and interest rate are other key elements that determine the loan amount. Also the banks fix an upper age limit for home loan applicants and you need to fall under the criteria to be eligible for the loan.

What is the maximum limit of loan amount that can be borrowed? 

The down payment amount is generally 10-20% of the home's purchase price. The remaining, 80-90% of the property value, is financed by the lender. The total financed amount is inclusive of registration, transfer and stamp duty charges. 
The lender calculates the maximum eligible amount but it is not necessary to borrow that amount. You can even borrow a lesser amount based on your needs. Always keep in mind it is better to arrange for the maximum down payment amount and limit the loan as it reduces the interest cost.

Is a co-applicant required for a home loan? 

Yes, in most cases it is mandatory to have a co-applicant. If you have a co-owner of the property in question, it is necessary for him/her be the co-applicant. In case you are the sole owner of the property, any of your family members shall be the co- applicant. 

What documents are required for loan approval? 

Documents needed for a home loan can be categorized as:

  • KYC DOCUMENTS- These includes your identity and address proofs like a valid passport, voter ID card, Aadhaar card, etc.

  • CREDIT/INCOME DOCUMENTS- If you are employed, you will have to present your salary slips of the last 3 months; if you own a business or are self-employed, you can submit income tax returns and the computation of your income of the last 3 years.

  • PROPERTY DOCUMENTS- These include the agreement to sell, the title deeds, etc. The lender does a due diligence on the property on the basis of these documents. You need to submit the property documents in original to get your home loan approved. Also make sure that the lender offers you safe storage and easy retrieval of your property documents after you repay the loan.


What is sanctioning and disbursement of loan? 

Based on the documents, the bank decides as to whether or not you can be given the loan. If your loan is sanctioned, the bank will provide you with a sanction letter mentioning the loan amount, tenure and the interest rate, along with the other terms of the home loan.

You Might Like To Read Applying for Home Loan: Things to Know
 

When the loan is actually given to you, it amounts to disbursement of the loan. This happens only after the bank is done with conducting technical, legal and valuation exercises. At the disbursal stage, you need to present the allotment letter, photocopies of title deed, encumbrance certificate and the agreement to sell papers. The interest rate shall be applied from the date of disbursement, and not as per the sanction letter. In case of any changes, a new sanction letter gets prepared. 

How will the disbursement take place? 

The loan can be disbursed in three separate installments or can be given in one single installment. Pre-EMI is a concept that is applied to under construction properties. In the case of Pre- EMI, you get your loan disburse in stages based on the installment amount, that you need to pay the developer. You are usually required to start paying only the interest on the disbursed loan amount. If you are willing to start principal repayment right away, you may consider to tranche the loan and begin paying EMIs on the cumulative amounts disbursed. In case of a fully constructed house, the disbursement is made in full. 

What are the interest rate options? 

Most home loan companies provide a housing loan ranging from 75 to 90 percent of the property cost, depending on your loan value. So if the property is estimated at Rs 60 lakh by the lender, you can avail a maximum loan of Rs 50 lakh (80% of the property cost for loan amount up to Rs. 75 lakh), subject to your home loan eligibility. If you include a co-applicant with you, his/her income shall be considered by the lender to increase the loan amount. The co-applicant may be a family member such as your adult child, parent or spouse. The remaining payment towards purchase of the property has to be contributed by you. For example, if the cost of the property is Rs 50 lakh and you have been authorized a home loan of Rs 35 lakh, the remaining 15 Lakhs has to be given by you. The best way of checking your eligibility for home loan on your own is by using a housing loan eligibility calculator.

Can you pre-close your loan ahead of schedule? 

Yes, you can pre-close the loan ahead before the original tenure ends. If you are on a floating interest rate, no charge will be applicable. If you are on a fixed rate, you may have to give a certain charge.

What is marginal cost of funds based lending rate (MCLR)? 

A new method of bank lending called marginal cost of funds based lending rate (MCLR) was introduced after April 1, 2016. As per the MCLR mode, the banks have to analyze and announce overnight, one month, three months, six months, one-year, two-year, three-year MCLR rates each month. The actual lending rates are determined by adding the components of spread to the MCLR. So a bank with a 1-year MCLR of 8% may keep a spread of 0.5%, thus the actual lending rate becomes 8.5%. 
 

How does my loan outstanding change? 

As you pay the principal amount each month, the loan outstanding also reduces each month and you shall further pay the interest only on the reduced loan outstanding. Most banks pursue the monthly reducing basis approach. 

What is part prepayment of home loan?

Partial prepayment is any payment that a borrower makes in addition to the regular EMIs. It helps in reducing the outstanding principal amount as interest gets calculated on the reduced principal. Prepayment helps in reducing the total interest as the loan tenure gets reduced.

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