How to apply for a home loan?

Buying a house is one of the top life goals for many people as it ensures a secure life compared to living on rent. However, purchasing a property involves significant funds. Opting for a home loan is a smart way to finance your house purchase, as it offers benefits such as a long repayment tenure through monthly EMIs, tax benefits, etc. In India, home loans are offered by numerous banks and housing finance companies. The basic process of home loan application remains the same. In this guide, we bring you some useful tips when opting for a home loan and explain how to apply for a home loan.

What is a home loan?

A home loan is a type of loan offered to borrowers by banks and financial institutions such as a housing finance company for the purchase, construction or renovation of a residential property. The loan is offered at a specified interest rate and must be paid by the borrower within a specified period through small instalments called Equated Monthly Instalments (EMIs). A home loan is a secured loan that is backed by collateral. That is, the house one is planning to purchase serves as collateral and provides security to the bank if the borrower defaults on the loan. When opting for a home loan, the property is mortgaged with the lender till the borrower repays the entire loan amount.

Types of home loans

Banks and financial institutions offer different types of home loans, such as:

• Basic home loan: These types of home loans are offered for the purchase of a new residential property such as an apartment, flat, villa, resale property, etc. from a developer or a development authority. Such loans can be used to buy under-construction or ready-to-move properties.
• Home construction loan: Home construction loans are designed to provide funds for those who own a plot and plan to construction a house on the plot. One can avail of this type of loan in one go or in instalments.
• House renovation loan: Those who already own a house and plan to renovate it can opt for a home renovation loan that can be used for painting, tiling, roof repairs, etc.
• Home extension loan: Those who have permission to extend their house, such as building additional floors or rooms, can opt for a home extension loan for construction.
• Plot loan: Anyone who wants to invest in a plot of land to build their house can apply for a plot loan.
• Balance transfer loan: If a home loan borrower wants to transfer their existing home loan from one lender to another, then they can apply for a balance transfer loan offered by numerous banks and financial institutions and get benefits such as lower interest rates, flexible repayment terms, etc.

Importance of home loan

Given the high prices of properties, opting for a home loan becomes necessary as it will fund nearly 80% of the property cost. Since the repayment of the loan can be made in monthly instalments, it simplifies the homebuying process and puts less of a burden on one’s finances. Besides, paying EMIs puts less strain on one’s budget compared to paying rent which is higher in many cities in India.

Tax benefits on home loans

The government, aimed at encouraging people to buy a house, provides tax benefits. A home buyer can avail of tax deduction on the principal and interest paid on the home loan. A deduction of up to Rs 1.5 lakh is allowed under Section 80 C of the Income Tax Act, 1961, in a financial year, while a deduction of up to Rs 2 lakh is allowed on the interest portion under Section 24B of the Income Tax Act, 1961.

Who is eligible for a home loan?

Those opting for a home loan have to meet certain requirements based on which the lender decides their eligibility for the home loan. The eligibility criteria may differ from lender to lender. However, these are broad parameters based on which the eligibility is decided:

• Nationality and place of residence: The home loan borrower should be a citizen of India and their place of residence should be in India.
• Age: The current age and the remaining working years are crucial factors for a loan borrower as they determine their capacity to pay the loan. The younger a person is, the higher the chances of getting a loan at a lower interest rate.
• Employment status: This refers to whether the person is a salaried employee or self-employed. The income and age criteria for both individuals differ.
• Credit score: The credit score (CIBIL score) is considered as a measure of an individual’s creditworthiness. A credit score above 725 is considered good and increases one’s chances of getting a higher loan amount and longer repayment tenure.

Click to know more about home loan eligibility criteria

How to apply for a home loan?

Submit home loan application

Once you have selected the home loan lender, start the application process by filling out the home loan application form. This will require you to furnish relevant details such as name, address, contact information, education details, employment and income details, etc. If the applicant is seeking additional financial assistance, they must provide proof to the lender.

Details one needs to fill in the home loan application form:

• Personal details such as applicant’s name, phone number, etc.
• Residential address
• Monthly or yearly income
• Educational details
• Employment details
• Property details
• Estimated cost of the property
• Current means of financing the property

Provide supporting documents

The home loan application has to submit supporting documentation, which include:

• Identity proofs (PAN card, Aadhaar card, Voter ID, driving license, etc.)
• Address proofs (Aadhaar card, utility bills, etc.)
• Salary slips (recent three months)
• Employment proofs
• Bank statements (recent six months)
• Form 16
• ITR of recent two years and other income documents in case of self-employed individuals

Click to know more about legal and technical verification in home-loan processing

Processing fee payment and document verification

After the submission of documents, the lender will begin loan processing and may send a representative to visit the applicant’s home to complete the formalities. The applicant has to pay a processing fee, an amount that the bank uses to maintain the applicant’s loan account. This includes processing paperwork such as IT certificates, post-dated cheque, etc. every year. The processing fee varies from 0.25% to 0.50% of the requested loan amount. For example, if the applicant has applied for a home loan of Rs 20 lakh, the processing fee will range from Rs 5,000 to Rs 10,000. Commission charges apply for the agent handling the applicant’s home loan process, which is taken from the processing fee paid by the applicant. Most banks have a proper fee structure, which can be negotiated. Some banks do not charge processing fees but it could lead to higher interest rates, stamp duty and other legal charges.

During the verification process, lenders will also assess the applicant’s creditworthiness and conduct a detailed enquiry into the applicant’s credit score. The bank also checks the references given by the applicant in the form. Applicants should ensure all the documents and details they have provided are genuine and any fake or incorrect information is not acceptable and could lead to legal hassles. If all the documents are in order and the applicant’s meets the criteria, the bank will process the loan application. The process may take a maximum of one to two working days.

Loan approval and sanction letter

After the verification is successful, the lender will send a sanction letter to the applicant. This is proof that the person is eligible for the loan. One should note that a sanction letter is not the legal approval of the loan and there are formalities to be completed till the loan is disbursed. The sanction letter includes details such as loan amount the applicant is eligible for, the interest rate offered, whether it is fixed or variable interest rate, repayment terms, etc. The applicant has to sign the letter and send it to the lender. A one-time fee must be paid at this stage.

Legal and technical verification

Before lenders process the loan application, they conduct proper legal and technical verification besides examining the applicant’s creditworthiness. Legal verification involves the verification of the original property papers, including the title deed, seller details, no-objection certificates (NOCs), etc. Usually, the lender will send an expert team to examine the property and its related documents to find out its legal standing. The second type of verification is a technical assessment, where the lender inspects the property. A team of technical experts visit the property and check its physical condition, specifications and market value, etc.

Disbursement of funds

If the lending institution is satisfied with the verification conducted, it will approve the home loan application and a final agreement letter will be sent to the applicant. After the disbursal of the loan, a welcome kit and a detailed housing loan EMI schedule will be shared with the applicant.

Tips to ensure a seamless home loan application process

Maintain good communication with lender

Choose a lender that provides you with the best home loan product matching your needs. It is essential to keep open communication with your lender and update them about any changes in your contact information and financial situation. You may seek advice when required.

Avoid major financial changes during the process

It is important to keep track of your finances to ensure you are able to manage the EMIs effectively. Do not borrow additional funds and avoid making major financial changes such as changing job or undertaking any huge investments. Instead, focus on increasing your income by considering part-time work, selling unused assets, etc.

Keep an eye on interest rate trends

It is crucial to keep a track of the interest rate trends as it will impact the home loan EMIs. When interest rates fall, the lender may allow you to lower EMIs or reduce the tenure. Home loan interest rates are influenced by the decisions taken by the Reserve Bank of India (RBI) in deciding policy rates. The Repo Rate is the interest rate at which RBI lends money to commercial banks and any changes in Repo Rate will impact the interest rate on one’s floating rate home loan.

Be aware of the other charges

Home loan processing fee typically ranges from 0.25% to 0.50% of the loan amount. Besides these charges, home buyers need to be aware that there are several hidden expenses involved in the process. These may include any prepayment penalty that is applicable when a borrower pays off the home loan early. Late payment fees may be levied if the EMIs are not paid on time.

What is a pre-approved home loan?

Getting a pre-approved loan is another option available to potential home buyers, which refers to an in-principal approval based on the person’s repayment capacity. One can apply for this loan even before they finalise a property deal. This type of loan is approved based on a few mandatory documents that the applicant must submit. One of the main benefits of a pre-approved loan is that it simplifies the final loan disbursal process since most of the verification is done at the early stage. After the property is finalised, the application must submit the property documents and complete other formalities based on which the sanctioned loan will be disbursed.

Financial planning tips before opting for a home loan 

• Assess financial health: Before opting for a home loan, it is crucial to assess one’s financial situation. This includes considering one’s income, debts and other liabilities, etc.
• Reduce debt-to-income ratio: Most lenders consider the loan applicant’s debt-to-income ratio, a metric that compares one’s monthly debt to gross income. It is used to evaluate how well the individual manages their debt. A lower debt-to-income ratio indicates the person is in a better position to manage new credit.
• Improve credit score: When processing home loan applications, lenders take into consideration the person’s credit score. By clearing one’s credit card bill dues and existing loans on time can help in maintaining a good credit score.
• Decide budget: Purchasing a house involves several expenses such as the property’s actual cost, GST, stamp duty and registration charges, brokerage fee, legal documentation charges, interior designing, etc. More importantly, one must consider the budget for paying regular EMIs that will continue for some years. Hence, one should calculate the budget to decide how much they can afford.
• Future planning: It is wise to take into account the expenses one would incur in the future, especially considering the regular EMI payments to be made. Experts suggest keeping a margin of three months’ EMI as a reserve.
• Plan for downpayment: According to the Reserve Bank of India (RBI), home loan lenders can only provide up to 80% of the property value for properties with costs between Rs 30 lakh and 75 lakh.
• Gather documentation: Be prepared with the requisite documents before you apply for a home loan. These include your income proof certificate, age proof, educational certificates, bank statements, property details, etc.
• Research and compare options: Explore the home loan options to find the right home loan based on your needs. For this, make sure to compare different lenders as they differ in terms of interest rates, loan tenures, and repayment options they would offer. Besides, there are special home loan schemes available for women and government schemes like Pradhan Mantri Awas Yojana (PMAY) with low interest rates.
• Check interest rates: Home loans are available with fixed or floating interest rates. Typically, fixed rates provide stability, while floating rates are suitable for ensuring savings in case interest rates drop.

Read this article to understand how you can financially prepare yourself to buy a house

Housing.com News Viewpoint

When deciding to go for a home loan, the foremost task is to select the right lender. Thus, it is essential to research the available options to find the best option that suits your financial needs. Nowadays, one can compare different lenders online and find the best option based on affordability and other parameters. Besides, the potential buyer should be aware of the eligibility criteria, including the credit score. Make sure to keep the necessary documents handy to avoid any hassle.

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