Five Key Checks Every Borrower Should Make Before Applying For A Home Loan

With home loan interest rates from several lenders — especially public sector banks and select housing finance companies (HFCs) — now dipping below 8 per cent, many individuals may be encouraged to take a step toward their dream of owning a home. However, given the longer repayment tenures of up to 30 years and the large loan amounts involved, it becomes essential for prospective borrowers to prepare thoroughly before committing to such a significant financial responsibility.

Here are five key checkpoints to go through when planning to apply for a home loan, whether now or in the near future:

1. Plan Your Down Payment: The Reserve Bank of India’s norms allow home loan lenders to finance up to 75-90 per cent of a property's value through a home loan. Thus, a minimum of 10-25 per cent of the property’s cost has to be contributed by the loan applicant from his own pocket in the form of down payment. The final proportion would be arrived at as per the lender’s risk assessment of the borrower’s credit profile and the borrower’s ability to make higher contributions.

Therefore, one should always aim at contributing a higher proportion from one's own pocket for twin benefits. Doing so will reduce the overall interest cost of the home loan and increase the chances of loan approval. However, borrowers must not overstretch their finances or compromise other crucial financial goals in an effort to make larger down payments. Doing so may force them to avail costlier loans in the future and, thereby, severely affect their financial fitness.

2. Review Your Credit Score: Most lenders consider a credit score of 750 or above as ‘good’. Borrowers with such scores generally enjoy higher chances of loan approval, and many lenders now offer preferential interest rates to those with strong credit profiles. Therefore, prospective home loan applicants should review their credit reports before applying. This helps individuals with lower scores identify issues, take corrective steps to improve their creditworthiness, and then apply for a home loan with better approval odds and potentially lower interest rates.

3 Assess EMI Affordability: Loan applicants' fixed obligation to income ratio (FOIR) is another vital factor considered during the loan approval process. This ratio is the proportion of income currently being used for making debt payments like credit card bills and loan EMIs. The lower the ratio, the higher are the chances of getting the home loan approved. Most home loan lenders prefer lending to those with FOIR below 50 per cent (including the new loan’s EMI).

Hence, ensure that your FOIR remains below 50 per cent before submitting a home loan application. If not, then first consider to bring down your existing EMI by prepaying or foreclosing some of your existing debts. This will reduce the overall FOIR and, thereby, improve the loan approval chances.

4. Evaluate Multiple Lenders: Interest rates, processing fee, LTV ratio, tenure and the loan amount offered can vary widely depending on the lender and risk assessment of home loan applicants. Hence, prospective home loan applicants should aim at comparing home loans offered by as many lenders as possible before making the final loan application.

The easiest way to do so is by visiting online financial marketplaces to choose the most suitable option from a wide spectrum of lenders as per your loan requirement and eligibility criterion like credit score, monthly income, job profile, employer’s profile, etc.

5. Maintain A Sufficient Emergency Fund: Ideally, an emergency fund should amount to at least 6 times of your mandatory expenses like loan EMIs, insurance premiums, rent, etc. Having an adequate emergency fund would help in continuing with loan repayments in case of loss of income arising from joblessness or disability.

The prospective home loan borrowers can also opt for home loan variants like home loan interest saver or smart home loan products to ensure liquidity for dealing with unforeseen financial emergencies. The interest component of such loans is calculated after deducting the monthly average balance of a loan-linked current or savings account from the loan’s outstanding principal. Borrowers are allowed to deposit surplus funds in the linked account and withdraw from it as per their liquidity or cash flows. This allows the home loan borrowers to reduce their interest cost during situations of having surplus funds and withdraw those surplus funds when faced with unforeseen exigencies or constrained cash flows.