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2. Home Loans & Finance

Know all about the home loan process, paperwork, different types, tenures, EMI and interest rates, to choose the right home loan for you

The Loan Process

Step 1: Apply for a home loan and get the initial evaluation done.

Submit application documents with a processing fee
Bank evaluation based on credit history and documents.

Step 2: Bank Verification

If eligible for a loan, bring your documents to meet a bank official
If not eligible, you will lose your processing fee
Bank will verify all submitted documents
A representative will visit your workplace and residence to cross-check details
The purchase property will be evaluated
The property to be purchased will be evaluated
The bank will evaluate your repayment abilities
If approved, Bank will prepare an offer letter with conditions you should review

Step 3: Bank Approvals

Re-read the document, and get a legal opinion too, if you are unsure. There may be points that you can change or negotiate
Once you are sure, sign the loan agreement

Step 4: After Signing

Submit post-dated cheques
The bank will disburse the loan as a lump sum payment (usually for a ready-to- move property) or in installments (for an under-construction flat)

You have to pay for the loan application to be reviewed, even if you don’t get approved for the loan in the end

Loan Document Checklist

There is a lot of paperwork for loans.

Loan application – obtained from bank or financial institution
Processing Fee (non-refundable between 0.25% and 0.50% of the loan amount)
Photographs – make sure you have at least three
Identity proof – PAN card, driver’s licence, Aadhar card or passport
Address proof – driver’s licence, passport, recent telephone or electricity bills or Aadhar card
Proof of Salaried Income – copy of income tax returns (last three years) and original salary slips
Proof of business existence if Self-Employed
3 years Income Tax Returns with computation of Income if Self-Employed
3 years CA Certified Balance Sheet and Profit & Loss Account if Self-Employed
Photocopies of challans showing payment of Advance Income Tax if Self-Employed
Bank statements or passbooks (of the last six months)
CIBIL (credit) score will be checked by the bank
After submitting the original documents - Take Acknowledgement letter from Bank

Loan Pre-Approval

There are advantages and disadvantages of getting a loan pre-approval:

Advantages

Better negotiation with the builder as you have a surety of your buying capacity
The process of actual disbursement becomes very fast once you finalize a property
The bank person helps you decide the right property( in terms of legal paperwork and the kind of approval a particular project has). However, you shouldn’t rely on the bank’s due diligence alone – do your own checks as well.
Only the property papers need to be submitted and if it’ s all okay, the loan gets disbursed

Disadvantages

The pre-approval is valid for 3 to 6 months for different banks, after which it collapses and the user need to pay processing fee again
Sometimes you finalize a project that is not approved by the bank where you have a pre-sanction, then it takes time for the bank to approve the project. If the project is rejected, you might need to search for a new project or loan

Credit History

You can get your credit score fixed by paying down any existing debt you may have and paying EMIs and credit card dues on time
You can also build up your credit score by getting a secured credit card (against security of your fixed deposits)
Even making too many inquiries for loans, can make you seem credit hungry and reduce your credit-worthiness
Your credit history can affect whether or not a bank or non-banking financial institution will give you a loan

Choosing a Loan

Points to consider before deciding on a loan offer.

Check for the loan requirement and the type of approvals your property has – HFCs (Housing finance companies) offer higher eligibility and also tend to do properties with lesser approvals in place.
Look past interest rates - An institution offering low rates may have a clause in which rates increase every six months or year. Find out everything about the loan agreement before you decide.
Know the terms of repayment - Apart from the standard EMI agreement, you should also know what will happen in case you want to pay off the loan at one go, speed up the payments, or transfer it into someone else's name (if you sell the house)
Check the hidden charges - Account for processing fee, valuation fee, Pre-payment charges, and other miscellaneous charges/fees before signing.
Look for discounts and concessions/ in which bank is your saving account - Some financial institutions offer concessions (to senior citizens and women, for example) while others might waive processing fees and offer other discounts. Don't just look at rates, but offers and discounts too.

Before you apply for a loan, read the ‘fine print, all related agreements,’ and talk to bank officials about what you can do to change how much you will be paying as a down payment and what it will mean with regards to your loan.

Loan Offer Letter

When the bank draws up an offer letter, consider these terms before signing the document.

Loan amount sanctioned
Interest rate
Whether floating or fixed or mixed interest rate
If the rate will change over time
In how many installments the bank will disburse the loan
EMI amount
Loan tenure - in how long the loan must be repaid
Mode of repayment
Schemes or offers applicable
Terms and conditions of the loan

About EMI

You repay a loan in monthly installments.

Each month you repay the loan by paying an Equated Monthly Instalment - EMI. The EMI consists of both, the principal (the amount you borrowed) and interest (the fee the bank charges to loan the cash). Initially, your EMI will mostly be to repay the interest. As time passes, the principal repayment component increases until your loan is paid off. Your repayment plan affects your tax benefits since there are different tax benefits you can claim for interest and principal repayments. Banks consider the maximum EMI one can pay by using a factor called FOIR (fixed obligation to income ratio). It\'s usually between 50-60% of the net take- home salary. E.g. If Priya has Rs 1 lakh monthly take-home salary, she can pay Rs. 60K of EMIs (combined for home, automobile, PL etc.)

Banks consider the maximum EMI one can pay by using a factor called FOIR (fixed obligation to income ratio).It’s usually between 50%to 60% of the net take home salary. For e.g. If Priya has Rs. 1L monthly take home salary, she can pay Rs. 60K of EMIs (combined for home, automobile, PL etc.)

EMI Calculator

Enter Value of Property (Min: Rs. 1L)

Pre-EMI vs EMI

For under construction properties, you can get an EMI or Pre-EMI loan:

EMIs

Pay larger amounts over a shorter period of time, less money in absolute terms in the end compared to a pre-EMI.

Pre-EMI

You pay smaller amounts over a longer period of time, more money in absolute terms in the end compared to an EMI. You don’t have to pay the full EMI until the entire loan amount has been disbursed or until you take possession of the property. Where you have availed only a part of the loan, you pay only the interest on the amount disbursed. This interest is called pre-EMI interest (PEMI) and is payable monthly until the final.
Disbursement is made and then the EMIs would commence.
The borrower is not subject to the tax exemption on the pre-EMIs paid until the completion of the property.

Example to explain the above

Let’s assume a loan has been sanctioned for Rs 80 lakhs but since it’s an under- construction project, demand from the builder will depend on the level of construction. Assuming the bank disbursed Rs 10 lakhs initially, then, the applicant has the option to pay the pre-EMI - the interest payable on Rs 10 lakhs as a loan amount - every month till the next disbursement happens and the interest gets added. So, the principal outstanding is not getting reduced till the time of possession. In such cases, the user is not burdened with a heavy EMI right away and since with time, his income will also increase, hence this is preferred by many customers who are exhausting their maximum eligibility. In the second method, the consumer will start paying the EMI considering a loan amount of Rs 80 lakhs even if the disbursement has happened for only Rs 10 lakhs (regular EMI). This way, the loan will close early and hence, the total cost of the loan will be less as compared to the pre-EMI method. This is preferred mainly by people who have sufficient monthly income to pay complete EMIs. Switching from Pre-EMI to EMI in the mid-term prior to possession- It is recommended to not wait till possession to start the EMI. In a situation where say, you have drawn up to 95% of the loan and the final 5% is payable on possession, but the project is delayed by 6 months, which is a common phenomenon in India, you land up paying Pre-EMI on almost the entire loan amount for 6 months, which is actually close to the EMI amount itself. Your acquisition cost shoots up and no repayment of the principal or reduction in the tenure happens! So, switching to EMI mode after drawing upto 70-75% of the loan amount is recommended. However, not all lenders allow that. You will need your adviser to structure this for you.

Interest Rates

ROI - Your interest on loan consists of two parts. One is the Base Rate and another part is Spread Base rate - the minimum lending rate, below which banks can’t give you the loan. Spread - This is your final rate of interest after adding some % to the Base Rate. It is calculated based on the tenure risk, credit loss, profit requirement of bank, operating cost of the bank and risk assigned with individual customer. So each bank’s Base rate may be fixed for all customers. But remember that you may end up with either paying high interest rates or low, based on the spread bank charges to each individual. There is no cap on how much should be spread on and above the Base Rate.

Even though the RBI says the spread must be constant over the tenure of the loan but remember to check it whenever the raise in your loan EMI. You need to verify whether the raise in EMI is due to hike in Base Rate or Spread.

Warning: Some banks change the interest rates in the middle of a loan. A bank may offer a fixed rate, then floating rate later , or offer a “teaser” rate then change the rate - so carefully read the loan agreement.

Fixed vs Floating Interest Rates

Suitable for a long tenure (i.e. more than 20 years)
Ideal, when the interest rate is expected to fall
Opt for this scheme when income flow is adequate to service the rate fluctuation
Suited to loan borrowers who can take risks. (For example, borrowers aged 30-35 years)

Suitable for short/medium-term
Ideal, when the interest rate is expected to rise
Opt for this scheme when income flow is not expected to grow
Suited to loan borrowers who do want to take risks. (For example,borrowers aged 50 years)

Suitable for medium-term
Ideal, when the interest rate is expected to rise in the short-term and then fall
Opt for this scheme when income flow is not expected to grow
Suited to loan borrowers who do not want to take risks