What is Home Loan or Housing Loan? Home Loan or Housing Loan is an amount borrowed from a bank or a financial institution, to buy a house or an apartment. Home Loans are offered on a condition that it is repaid through Equated Monthly Installments (EMIs) over a fixed period of time. Rate of interest can be fixed or floating, as per the loan agreement. The amount borrowed as ‘Home Loan’ can be used only to purchase/construct a house/flat.
Why Home Loan?
It’s everyone’s dream to live in their own house. Having said that, not everyone can afford a house. You can buy a house by making the down payment and availing a home loan for the rest. It basically means that your bank pays for your house and you must pay back through EMIs over the loan tenure. For example, the total cost of the house is Rs 50 lakhs and you have just Rs 10 Lakhs at your disposal. In this scenario, you can make Rs 10 Lakhs as down payment and borrow Rs 40 Lakhs from a bank. Home Loan is the stepping stone to buy your dream house.
Home Loan enjoys tax exemptions. As per Section 24 of the Income Tax Act, a home loan borrower can avail tax deductions up to Rs 2 Lakh a year on home loan interest (EMI Interest component of home loan). As per Section 80C of the Income Tax Act, a home loan borrower can avail a tax deduction up to Rs 1,50,000 a year, on home loan principal amount. As per Section 80EE, first time home buyers get additional tax deduction of Rs 50,000 a year on home loan interest, subject to certain conditions.
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Features of Home Loan:
Below mentioned are the important features of Home Loan:
- Property: Property is referred to as the house/flat that a borrower intends to buy, through a Home Loan.
- Resale Property: These are the properties that are pre-owned. These properties are not purchased directly from the builder.
- Loan Security: An asset of yours would be given as collateral for the loan. If you fail to repay the loan, then the collateral pledged would be sold by the lender through an auction, to recover the loan (outstanding).
- Loan Margin: Most of the banks and financial institutions do not provide loan amount of 100% of the property costs. The borrower must make a down payment of at least 10-20% (this differs across banks) of the total value of the house. Loan margin is the difference between total value of the house and down payment made by the borrower.
- Loan to Value Ratio (LTV): This is the ratio of the total amount provided as loan to total value of the property.
- Loan Interest: Loan interest can be fixed or floating. The borrowers must clarify with the lender on the interest.
- Loan Tenure: Loan Tenure is the time period over which the borrower repays the loan through EMIs.
- Property Evaluation: Property evaluation is the process of estimating a property’s worth. This is done because the lender has to be sure on the property’s market value. If the borrower fails to repay, then the lender must be in a position to sell the property and recover the outstanding loan amount. Property Evaluation is done at an extra cost collected from the borrower.
- Equated Monthly Installments (EMI): Home Loan repayments are done through EMIs. EMIs contain both interest and principal components. EMIs are paid across the loan tenure.
- Processing Fee: This is a fee collected from the borrower to process his/her loan request. The process involves verification of the documents furnished by the borrower and to check his/her eligibility so that the loan is repaid.
- Loan Offer Letter/Sanction Letter: After property evaluation and document verification, if all criteria of the loan eligibility are met, then the lender issues an offer letter called Loan Offer Letter/Sanction Letter. This letter contains information related to loan amount sanctioned, rate of interest, EMI and tenure.
- Loan Disbursement: This refers to releasing the loan amount sanctioned to the borrower to purchase the property. Disbursements can be made partially/fully as per the requirements of the borrower.
- Post Dated Cheques: Usually 7-8 post dates cheques are collected. Post Dated Cheques are collected from the borrowers to ensure that they pay EMIs.
Types of Home Loans:
Following are the different types of Home Loans:
- Home Loan for Purchase: This kind of Home Loan is sanctioned to purchase a ready to move-in house/flat.
- Home Renovation Loan: This kind of Home Loan is sanctioned to reconstruct/renovate an already existing house/flat.
- Home Loan for Construction: These loans are sanctioned to construct a house on a land already owned by the borrower.
- Home Conversion Loan: These loans are sanctioned to those borrowers who have already availed a Home Loan and want to buy and move to another house/flat. The current home loan gets transferred to new home, depending on the eligibility of borrower and property.
- Land Loans: This kind of loan is sanctioned to purchase a plot.
- Stamp Duty Loans: This kind of loan is sanctioned to pay for the stamp duty charges at the time of property registration.
- Balance Transfer Loans: This kind of loan is sanctioned to the borrowers who want to transfer their loan from the current lender to a new lender.
- Bridge Loans: This kind of loan is sanctioned to borrowers to bridge a financial gap, when they wish to move to another house/flat by selling their current house.
SEE ALSO: What Is My Home Loan Eligibility?
Home loan Interest Rates:
Home Loan interest rate can be fixed or floating as per the loan agreement. Fixed interest rate has constant rate across the loan tenure, while floating interest rate varies with market fluctuations. Below mentioned are the factors influencing the Home Loan Interest Rates:
- REPO and Reverse REPO Rates: Repo Rate is defined as the rate at which RBI lends money to commercial banks against eligible securities. Reverse REPO rate is defined as the rate at which RBI borrows money from commercial banks. REPO and Reverse REPO rates depend on supply and demand.
- Marginal Cost of Lending Rate (MCLR): The Marginal Cost of Lending Rate refers to the minimum rate of interest below which a bank cannot lend. It is an internal benchmark or reference rate for the bank.
- Benchmark Prime Lending Rate (BPLR): BPLR is the rate at which the commercial banks lend money to credit worthy borrowers.
- Statutory Liquid Ratio (SLR): Every commercial bank has to deposit certain amount of money in the form of cash, gold, Government bonds with RBI, so that RBI can control bank’s credit expansion.
- Cash Reserve Ratio (CRR): Every commercial bank is mandated to deposit certain percentage of their NDTL. CRR stands at 4%.
Home Loan Eligibility:
There are certain criteria to be met by a borrower to avail a Home Loan which are mentioned below;
- Years of Service left
- Borrowing capacity
- Credit History
- Employment Type
- Financial Dependents
- Property Evaluation
- Down Payment
SEE ALSO: 13 Home Loan Terms You Must Know
Documents Required for Home Loan:
Different lenders ask for different set of documents for loan processing. General documents checklist is as mentioned below:
- Duly filled loan application form
- Recent photographs of the borrowers
- Identity Proof (Aadhaar, Voter ID, PAN)
- Address Proof (Valid Passport, Bank Passbook, Rental Agreement)
- PAN card
- Last 6 months bank statement
- Pay Slips
- Latest Form-16
- Last 3 years ITR
- Processing fee
SEE ALSO: Important Facts On Home Loans
Home Loan EMI Calculator:
Home Loan EMI calculator is a simulation designed by Home Loan lenders for prospective borrowers. Borrowers can use Home Loan EMI Calculator on the lenders’ website to get an idea on EMIs. Borrowers need to understand that this calculator would give an approximate value and not the actual value, and this works solely on the inputs entered. The final EMI would depend on the eligibility criteria set by the lender. All prospective borrowers are advised to check their approximate EMI before applying for a Home Loan.
Applying for a Home Loan:
Borrowers can apply for a Home Loan through online and offline modes. For offline application, the borrowers must visit the lenders’ branch and manually fill up and submit the application. Most of the lenders offer online application forms for Home Loans. In the online application process, most of the lenders send their Home Loan executives to prospective borrowers’ home for the documentation.
SEE ALSO: Does MCLR Make Home Loans Cheap?
Why do Home Loan applications get rejected?
There are numerous reasons behind Home Loan application rejection. The lenders are mandated by the RBI to mention suitable reasons to reject a borrowers’ loan application. Below mentioned are the general reasons behind the rejection of home loan applications:
- Age of the applicants
- Frequent change in employment
- Applying for higher loan amount with lower income
- Poor credit history
- Property proposed for purchase is under litigation or any other legal disputes
- Failure to produce necessary documents of the property.
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