How Do Home Loans Work In India?
Almost every prospective homebuyer applies for a home loan. It is an important decision, and the financial investment it requires is huge. In order to sail through the process easily, you must have a clear understanding of the lending industry in India. All the Public Sector Units (PSUs), Private banks, Foreign banks and Non-Banking Financial Companies (NBFCs) offer home loans. The norms governing home loans may vary from lender to lender, but the basic criteria of lending are largely the same.
MakaaniQ tells you how home loans work in India.
- Every bank and financial institution list the rate of interest for various home loan products on their websites. Visit as many websites as you can to compare the features and benefits and drawbacks of home loan products. Select the one that suits your need the best.
- If you think that home loan fund 100 per cent of the cost of your dream home, then you do not understand how home loans work. Banks fund only up to 80 per cent of the market value of the property. You must arrange 20 per cent or more of the cost of your home.
- Most projects of developers are approved by banks. So, when you shortlist the property/ flat of the particular project, just make sure that you know which all banks have approved this particular project. This will make the home loan appraisal process less time consuming. No technical or legal verifications of the property will be required. But for home loan products and schemes like Resale, Balance Transfer, Loan Against Property, Top-up loans etc., legal and technical verifications are necessary to assess the loan amount.
- The home loan appraisal/process starts with an evaluation of the loan application form, documents, and property papers. So, make sure you have all the originals and photocopies ready. Visit the shortlisted lender's website and learn what all relevant documents are required for the kind of home loan product you want. If there are discrepancies, keep the supporting documents ready.
- Home loans have substantial tax benefits under Section 80C, Section 24 and Section 80EE. You must be aware of this, to apply for tax deductions while taking a home loan.
- Your home loan eligibility will be calculated based on your profession or the kind of job you are holding. For example, for the salaried class, net salary will be the criteria for calculating home loan amount eligibility. Home loan eligibility is based on the past three years' income tax returns in the case of businessmen/professionals (i.e. the Self-employed class). Bank may consider 50 to 70 per cent of the net income to arrive at the home loan amount you are eligible to.
- Depending on the margin money you contribute and the type of home loan product you opt for, you will be asked for to apply for home loan insurance. Keep in mind that home loan insurance is not mandatory. However, you must understand the benefits of the home loan insurance. You must apply for it only if you feel that it will avert a risk. Home loan insurance increases the cost of your credit.
- Last but not the least, if you think that rate of interest is the only cost of credit you have to bear, think again. You must consider these additional costs while comparing interest rates offered by various lenders — Processing fee, CERSAI (Central Registry of Securitisation Asset Reconstruction and Security Interest) charges, administration and conversion fee, pre-payment and late payment charges etc. It makes financial sense to take a decision considering all home loan overheads.