Homework before you buy your first home!
Anxiety, cheer, joy, worry, nerves, confusion, clarity, lack of clarity – these are the range of emotions that engulf us the moment we start thinking of buying our first home.
Irrespective of our financial standing, a first home has a very special emotional place in our heart. Then, why should it be a cause for anxiety! The reason is obviously the housing loan that we need to apply for buying the house. Questions that arise: how much will I get as a loan? What will be the paperwork? Could my application be rejected? What if I get a raw deal on the interest rate? So on and so forth.
Anxiety buster: Homework for the home loan
A little homework can go a long way in not only alleviating your anxiety, but also in ensuring you get a good loan. Here are a few fundamentals that will help you move into your new home in high spirits…
The Down Payment dilemma
Most banks and housing finance companies fund only upto 80% of the cost of the house. It means that we have to arrange for the balance 20%. The best way to do this is to have accumulated sizeable savings, which can be used for paying the down payment. In fact, if you have cash, it is better to make as big a down payment as possible. You straightaway save on interest.
What if I have no cash on hand? What do I do for the down payment?
Ideally, one should not take a home loan if you have not yet saved even for the down payment. Nevertheless, in situations where it is not possible, see if any of the below ways can help you:
1. Bridge Loans – Many employers offer bridge loans at minimal interest to help employees buy assets. Enquire if your employer can give you a bridge loan.
2. Request the builder – Some promoters/builders can be magnanimous enough to let you pay a minimal down payment and pay the balance later. The key is to ask.
3. Jewel Loans – If there is gold jewelry in the house, you could encash it as a loan to tide over the immediate need. Simultaneously we need to be aware that the interest will be an extra burden!
4. Check your investments – if you have investments, which are giving returns at least 2% lesser than the interest rate being charged on the loan, it is better to withdraw the same and use it for the down payment.
Credit rating and eligibility dilemma
Knowing how a bank calculates your loan eligibility will help you put things in place before you apply for the loan.
Principally every lender looks at a borrower in terms of two perspectives:
a. Ability to repay – this is decided by looking at your current income, other income sources, monthly cash flow (to decide whether you can service your EMI and still live a good life style), age to retirement, job profile, employer profile etc.
b. Intention to repay – this is decided based on your history of loans/ credit cards with the same lender or other lenders. Your CIBIL score will be a big indicator of the same.
How do I ensure that I get a good rank for the “Ability to repay” criteria?
a. Good income is the main criteria. This is checked based on your salary statements or income tax filings. In case you are expecting a hike or bigger profits, apply for the loan after you get a hike or after having shown higher profits on your returns.
b.Try to reduce major regular cash out flows from your main account. Examples could be, the EMI on a car loan (close the loan), Rent payments to your landlord (use another account/pay in cash).
c. Another way to shore up the income criteria is to have a co-applicant. Father-Son, Unmarried daughter-father, brother-brother, husband-wife are possible combinations of co-applicants.
d. Always ensure that you maintain a bank account, which has good cash flows into it, minimal out flows and is devoid of cheque bounces or bank charges. Use this account when applying for the loan.
How do I ensure that I get a good rank for the “Intention to repay” criteria?
If you have had a good record of a past loan or good repayments on your credit card, it will give you a higher rating. Also, be sure to get a copy of your CIBIL rating to know what your credit rating is. In case it is on the lower spectrum, try to wait for a few months and rectify it by streamlining payments and clearing any outstanding payments with other lenders.
At times, you might have closed a loan just a few months ago and the EMI might reflect on the bank account. This could reduce your funding eligibility. Attach a copy of the closure statement of that loan while applying for the new loan. It also works as an affirmation of your intention to repay.
Another way to increase your loan eligibility on this front is to have a guarantor whose credit profile will provide you with a better loan option.
What if I get a raw deal on the loan, especially interest rates and charges?
Keep the following pointers in mind to get the right deal on your home loan.
a. The “Best deal” or the “cheapest deal” might not necessarily mean it’s the “right deal”
b. Avoid lesser known lenders while applying for loans
c. Compare at least 4-5 different lenders and rate them on final cost of loan, service, ease of applying, ease of repayment and references from past borrowers
d. Use some of the online portals to compare parameters like interest rates, charges etc.
e. Study and understand the various clauses applicable for each lender. For example – reset, fore-closure etc.
f. Choose lenders who have lenient regulations for prepayments.
g. With the kind of competition and the base rate rule in place, the maximum you can get by bargaining could be 0.25 to 0.5, but there is always a chance that this might be negated in the next rate revision. Remember rate reset is applicable for floating as well as fixed interest loans.