How to get a Home Loan from the Bank of my choice?

We all dream of having our own home. A home provides security, control, belongingness, identity and privacy. To fulfill this dream, home loan is a great form of financial assistance.

Home loan is mainly taken for a new purchase. It can also be opted to renovate, repair, or construct a home. Home loan is a secured type of loan in which the property to be purchased/constructed serves as the collateral.

As per RBI guidelines, no lender (Banks or NBFCS) is allowed to offer 100% home financing. We are required to make a down payment of at least 10%-20% of the total property’s purchase price.

For example, if one wants a loan amount of ₹50 lakhs then he/she have to make a down payment of ₹5 lakhs to ₹10 lakhs.

Home Loan Eligibility Criteria

Any individual, who wants to avail a home loan, must fulfill the following conditions:

Loan Eligibility amount (in lakhs)

Per lakh EMI is a pre-decided EMI value by the bank. It mainly depends on the tenure and interest rate. Assuming an interest rate of 7% per annum and tenure of 30 years, it may be in the range of ₹ 650 – ₹ 700.

Let’s say that a person has a monthly income of ₹50,000. He/she has an ongoing EMI of ₹10,000. Then he/she will be eligible to get a loan amount of ₹ 23 lakhs at a rate of 7% for a tenure of 20 years.

Factors affecting Home Loan eligibility criteria

Loan Tenure
It is the length of the loan contract. For home loans, it may vary from 10 years to 30 years. The longer the tenure, the higher is the interest that the bank earns from you.

Monthly income
If income is high, one can comfortably opt for a shorter tenure as capacity to repay will be higher. A person with low income should opt the longer tenure so that the EMI amount fits his/her pocket.

Interest Rate
The home loan interest rate can be fixed or floating throughout the tenure . Floating interest rate changes depending on the prevailing market conditions. Currently in India, no lender offers a fully fixed rate. We can say that 8.3% variable means 8.8% to 9% fixed rate of interest.

Other EMIs
Ongoing loan repayments may decrease the loan approval chances and loan amount.

Type of property
Ready to move properties will have a one time release of the loan amount. Under construction properties will have a stage wise release of loan amount.

Credit Score
TransUnion CIBIL is a organization which provides a 3 digit credit score to an individual that indicates his credit worthiness. This score is called CIBIL score. CIBIL score is mainly based on Repayment history, high credit utilization, multiple enquiries and credit mix. Better CIBIL score means cheaper loans and faster approval and vice-versa. 

Qualification
Qualification like B.Tech, MBA, CA or MBBS ensure a faster and cheaper loan. Unstable job profiles like BPO/KPO may have a negative impact on the interest rate and approval process.

Family Background and expense pattern
If the candidate belongs to a financially unstable family, availing loan becomes a tough option. Lesser number of dependent family members benefit in faster loan approval at a cheaper interest rate.

Steps involved in throughout loan approval process:

STEP 1: Finalize Property

• Ready to move in Property: Loan is disbursed in one shot. There is a benefit of immediate possession and zero rent liability. The cost of property is higher and the risk associated with buying is lower.

• Under construction Property: Loan will be disbursed in stage wise manner. Buyer will have to wait for 3 to 5 years to move in. It becomes tough for buyer to manage both EMI and present rent together at the same time. These properties are cheaper and has higher associated risk.

STEP 2: Loan application

• Enquiry:
  • Comparing interest rates online
  • Make an enquiry online or visit directly at the bank.
  • One should negotiate for the optimum (best possible) interest rate

• Processing Fee and other charges:
  • Processing fee:– 0.25% – 1% of loan amount.
  • Legal and technical due diligence charges:- Investigation of financial records is performed by lender to confirm the facts of the transaction under consideration. One should have knowledge about these charges as well.

• Documents:

STEP 3: Due diligence by bank

• Financial Check:
  • Bank statement is scrutinized for transaction related to business activity, savings, credit and investment
  • Average bank balance
  • Cheque returns and cheque bounces
  • Other loans and liabilities
  • Net income to calculate loan eligibility
  • CIBIL score: Credit and repayment record. 750+ score is considered good.

• Field investigation:
  • Verification of residential address and contact details.
  • Employer credentials like company address, organizational stability

• Technical due diligence:
  • Physical visit to property to assess condition, construction quality, encroachments etc.
  • Property valuation by an approved valuer (third party).
  • For under construction property,
  • (a) stage of construction and satisfactory progress (b) quality of construction (c) approved layouts and building plans.

• Legal due diligence:
  • Title check-legal ownership and no encumbrances
  • Property documents like title document (sale deed), possession certificate, agreement for sale
  • For under construction properties, Land title check of builder, allotment letter, builder buyer agreement, if project already approved by bank (APF code)

STEP 4: Credit appraisal and loan sanction

• After the due diligence, maximum EMI repayment capacity is decided
• Maximum loan eligibility is calculated based on LTV ratio (80%-90%), credit score, income, age, experience, employer, nature of business etc.
• Sanctioned loan amount is now communicated to the buyer.

STEP 5 : Offer letter and Acceptance

With the completion of all enquiries and verifications, the bank sends the offer letter with following details:

• Sanctioned Loan amount
• Rate of interest (fixed or variable)
• Tenure of loan
• Sanctioned Loan amount
• Rate of interest (fixed or variable)
• Tenure of loan
• Mode of repayment-ECS (electronic clearance system) or post dated cheques.
• Special Scheme (if any)
• Validity of offer
• Terms and conditions

Acceptance: This includes final mentioning of the loan amount. The buyer needs to sign the offer letter and send a copy back to the lender.

STEP 6 : Loan agreement

• All borrowers need to sign the loan agreement.
• PDCs: Post Dated Cheques equivalent to loan amount are collected by the bank as security.
• For under construction property,
  • tripartite agreement between Bank, borrower and builder is signed.
  • Loan disbursement as per the construction stage is paid directly to the builder.
  • Original documents are to be handed over to the bank.

STEP 7 : Sale deed and DD handover (for ready to move in property)

• Lender ensures that the individual has paid down payment amount (eg. 20% of the total loan amount).
• Sale deed is registered at Sub-Registrar’s office.
• Loan amount DD is handed over to the seller.
• Bank collects original property documents and provides receipt for the same.

REFERENCES

• Paisa Bazaar
• HDFC
• reuters.com
• YouTube

Hope this article would be helpful for your future home purchase/construction plans. If you are looking for your next home in Bangalore to settle into, please look for the options at settlin.in. If you have any queries about the process, we will love to sort it out for you. Feel free to ask in the comments.

If you have already availed a home and would want to share your experience, do tell us about the same in the comments section.

Happy Settlin’!