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What is the right time to apply for a home loan?

You can apply anytime after you have decided to purchase or build a property, even if the property has not been identified or the construction has not begun. Moreover, you can also apply for a loan even if you want to renovate or extend your home.

How do I proceed with an application?

You need to contact a Housing Finance Company (HFC) with your latest salary slips and TDS Form 16 of the last two financial years and those of your co-applicant, if any. After studying the documents and your details the loan officer will informally tell you the loan amount you are eligible for and the terms of the same. You need to submit the application form along with the required documents. On receiving the application form, the HFC reviews it, asks questions wherever necessary and conveys its decision to the applicant. You are advised to visit more than one company since you are likely to get better terms/ larger loan amount if you shop for the best deal.

What are the different home loans available in the market today?

There are various home loans available:

  • Home Purchase Loans:
    This is the basic home loan for acquiring a new home.
  • Home Improvement Loans:
    These loans are given for implementing repair works and renovations in a home that has already been purchased by you.
  • Home Construction Loans:
    This loan is available for the construction of a new home.
  • Home Extension Loans:
    This is given for expanding or extending an existing home. For example addition of an extra room etc.
  • Home Conversion Loans:
    This is available for those who have financed the present home with a home loan and wish to purchase and move to another home for which some extra funds are required. Through a home conversion loan, the existing loan is transferred to the new home including the extra amount required, eliminating the need for pre-payment of the previous loan.
  • Land Purchase Loans :
    This loan is available for purchase of land for both home construction or investment purposes
  • Bridge Loans:
    Bridge Loans are designed for people who wish to sell the existing home and purchase another. The bridge loans helps finance the new home, until a buyer is found for the old home.
  • Balance Transfer Loans:
    Balance transfer loans help you to pay off an existing home loan and avail the option of a loan with a lower rate of interest.
  • Refinance Loans:
    This loan helps you pay off the debt you have incurred from private sources such as relatives and friends, for the purchase of your present home.
  • Stamp Duty Loans:
    This loan is sanctioned to pay the stamp duty amount that needs to be paid on the purchase of property.
  • Loans to NRIs:
    This is tailored for the requirements of NRIs who wish to build or buy a home in India. EMI is the Equated Monthly Installment payable till the loan is paid back in full. It consists of a portion of the interest as well as the principal. Some of the incentives offered by lending institutions are :
    • Some companies sanction the loan without requiring you to identify property as a pre-requisite for eligibility.
    • Free accident insurance
    • Discounts
    • Waiving of pre-payment penalty
    • Waiving of processing fee
    • Free property insurance

At the time of application, what are the documents required?

The basic documents that the financiers require at the pre-approval stage are:

  • Proof of Age
  • Copy of Bank A/C statements for the last 6 months
  • Copy of latest credit card statement
  • Passport size photograph
  • Signature verification from your banker

If you are salaried, you need to produce:

  • Salary and TDS certificate
  • Latest pay slip
  • Letter from employer

If you are self-employed you require:

  • Your business track record
  • Copy of audited financial statements for the last 2 years

At the disbursal stage (for property already located), you need to submit:

  • Allotment letters
  • Photocopies of title deeds
  • Agreement to sell
  • Encumbrance certificate

For self-construction:

  • Approved plans and clearance certificates along with estimates

Is it possible to take a loan for construction in one city while working in another?

Yes, it is possible for one to avail a loan for construction in one city while working in another. The HFC's generally service this loan after getting details of the plot legally verified.

How much time does it take for an application to be processed and the loan sanctioned?

It takes around fifteen days for the application to be processed provided the documents are in order. It takes another week for the company to check out the property papers and make the disbursement.

How much is the maximum amount I can borrow?

Generally home loans are made available for in the range of 75%-85% of the asset value. The amount of the loan however, varies from institution to institution and it may vary from Rs.1 lakh to Rs.1 crore.

How do HFCs derive the maximum amount?

The maximum amount which one can borrow is a function of many factors which includes primarily the purpose of the loan. In addition, ones residential status whether an Indian resident or a NRI also has a bearing on the maximum amount of loan that can be borrowed. An Indian resident can generally borrow up to 85% of the property cost.

How does an HFC determine my loan aligibility?

The HFC'c primary concern in determining the loan eligibility is that you are able to comfortably repay the amount you borrow. Repayment capacity is determined by taking factors such as age, income qualifications, number of dependants, spouse's income, assets, liabilities, stability and continuity of occupation and savings history in consideration.

What are my repayment period/tenor options?

Repayment period/tenor options generally range between 5 to 15 years. Some HFC's have the option of a 20-year repayment period, usually at a higher interest rate. Though as a non-resident, you can avail of a loan only for a maximum period of 7 years.

What Collateral Securities do HFCs take?

Housing Finance Companies generally take few additional securities called collateral securities. These may be in the form of guarantee from one or two persons, assignment of life insurance policies, deposit of shares, and units or other securities. These additional securities are taken with the anticipation that if for some reason a loan is not paid back then recourse may be taken to such securities rather than depending upon the mortgage of the property which is usually the last resort. Guarantors, when alerted, become very effective persons in prevailing upon the borrowers to fulfill their obligations.

What are the interest rates offered and their range?

The interest rates may vary from institution to institution and generally range between 12.5% to around 16%.

What do you mean by fixed rate of interest?

Some HFC's have fixed rate of interest which means that the interest rates remain unchanged for the entire duration the loan. This basically means that you do not benefit, even if the rates of interest drop in the market.

What do you mean by floating rate of interest?

This is the rate of interest that fluctuates according to the market lending rate.

What and when are the fees and charges payable?

Home loans are usually accompanied by the following extra costs:

  • Interest Tax : is the tax payable on the interest paid on a home loan and not the principal. This tax is sometimes included in the interest rate of the loan, or may be charged separately as interest tax.
  • Processing Charge : It's a fee payable to the lender on applying for a loan. It is either a fixed amount not linked to the loan or may also be a percentage of the loan amount. The loan amount received by you can be less than the processing fee.
  • Prepayment Penalties: when a loan is paid back before the end of the agreed duration a penalty is charged by some banks/companies, which is usually between 1% and 2% of the amount being pre paid.
  • Commitment Fees: Some institutions levy a commitment fee in case the loan is not availed of within a stipulated period of time after it is processed and sanctioned.
  • Miscellaneous costs: It is quite possible that some lenders may levy a documentation or consultant charges.
  • Registration of mortgage deed.

What are the fees and charges payable and when are they payable?

The first mortgage of the property to be financed, normally by way of deposit of title deeds is usually the security for the loan. The title should be clear and marketable. Some HFCs may also require collateral security like the assignment of life insurance policies, pledge of shares, NSCs, units of mutual funds, bank deposits or other investments.

What are the tax benefits available to me?

Tax benefits available are as under: (a) Exemption under Sec 88 of IT Act (Rebate) for repayment of principal upto Rs.10, 000/-. (b) Deduction under Sec 24 of IT Act for interest payment on housing loans upto Rs. 75,000/- (in respect of self-occupied house property acquired or constructed with capital borrowed on or after 1.4.99, and acquisition or construction whereof is completed before 1.4.2001. Tax benefits vary in case of rental.

Who can be a co-applicant?

Co-Applicants are the co-Owners of the property for which the financial assistance has been sought. Usually joint applications are from : husband-wife, father-son or mother-son.

How does an HFC calculate the interest on my loan?

HFCs generally follow the yearly reducing-balance method, which accounts for your principal repayments only at the end of their financial year. Hence, you pay interest on the principal that you have already returned to the HFC. The effective interest rate is thus higher than the quoted interest rate by around 0.7%. Banks and some HFCs, in contrast, follow the daily or monthly reducing-balance method, which results in a lower interest burden.

On what basis are the interest rates calculated?

In India the interest on home loans is usually either calculated on monthly reducing or yearly reducing balance. Monthly reducing : In this system the principal on which you pay interest reduces every month as you pay your EMI. Annual Reducing : In this system the principal is reduced at the end of the year, thus you continue to pay interest on a certain portion of the principal which you have actually paid back to the lender. Which means the EMI for the monthly reducing system is effectively lesser than the second system of calculating interest.

What is an EMI?

EMI or Equated Monthly Installments refers to the fixed sum of money that you will be paying to the housing finance company every month. The EMI comprises both interest and principal repayment. The size of the EMI depends on the quantum of loan, interest rate applicable and the term of the loan.

How is monthly reducing EMI different from yearly reducing EMI?

The EMI for the monthly reducing system is effectively lesser than the Yearly reducing system of calculating the Interest. Since in the Yearly Reducing EMI system of calculating EMI the principle is reduced at the end of the year, thus you continue to pay interest on a certain portion of the principle which you have actually paid back to the lender.

Is it possible to pay my loan ahead of schedule?

Yes, it is possible to pay your loan ahead of schedule. However, it must be noted that housing finance companies charge a fee for early redemption of loan. This fee can vary between 1-2% of the loan amount being prepaid.

Do I need to insure the property?

Yes, you will have to ensure that the property is duly and properly insured for fire and other appropriate hazards, as required by the HFC during the period of the loan and will have to produce evidence each year and/or whenever required by the HFC. The HFC will be the beneficiary of the insurance policy. This is an added cost that will add to the final cost of purchase of the property.

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