Buying your own house is like a dream for a common man because a huge amount has to be paid to fulfill it. A home loan is a great way to turn this dream into reality. But when you go to the bank for a home loan, the bank checks your eligibility against some parameters. These include your CIBIL score, income, age, job stability and most importantly, your ability to repay the loan.
Based on all these factors, the bank decides how much loan can be given to you and how much interest can be offered. But if you want the bank to approve the amount you want as a loan, then you should complete your homework before applying. If you make 5 preparations before taking a home loan, then you will decide how much loan you need, not the bank.
1. CIBIL Score: The first step of your trust (CIBIL Score)
In the world of home loans, CIBIL score is your biggest identity card. This is a three-digit number (between 300 and 900) that shows your financial discipline and history of repaying loans. Banks consider it a measure of your credibility.
Why is it important?
The better your CIBIL score, the more reliable a customer you are in the eyes of the bank. A score of 750 or more is considered very good. A good score gives the bank confidence that you will pay the EMI on time.
How is it beneficial?
A strong CIBIL score not only increases the guarantee of loan approval but also gives you the power to negotiate on interest rates. Banks often offer better interest rates to such customers.
How to improve?
If your score is low, don't panic. Start paying your credit card dues and other loan EMIs on time. Avoid applying for loans at multiple places at the same time. A few months of Disciplined Financial Behaviour can improve your score.
2. Debt-to-Income Ratio (DTI): Calculation of the ability to repay the loan
This is a very important factor that banks look at very seriously. Debt-to-Income Ratio tells what percentage of your monthly income is going towards paying the EMI of existing loans (such as car loan, personal loan, credit card bill).
How is the calculation done?
Its formula is very simple- (Total of all your existing monthly EMIs / Your total monthly income) * 100
For example
Suppose your monthly income is Rs 80,000. You have a car loan running whose EMI is Rs 10,000, and the credit card bill comes to Rs 5,000. So your total monthly EMI is Rs 15,000.
Your DTI ratio will be: (15,000 / 80,000) * 100 = 18.75%
What the bank wants: Banks generally prefer customers whose DTI ratio is not more than 40% including the proposed home loan EMI. The lower your DTI, the more confident the bank will be that you will be able to repay the new loan EMI easily, and the higher amount the bank will be able to offer you.
What to do
If you have a small personal loan or consumer loan, try to repay it before applying for a home loan. This will improve your DTI ratio.
3. Down payment: The key to winning the bank's trust
The down payment is the amount that you pay out of your pocket while buying a property. The rest of the amount is given by the bank as a loan. As per the rules, banks cannot give a loan of 100% of the property price. You have to make at least a 10-20% down payment.
Benefits of a higher down payment
If you are prepared to make a down payment of more than 20%, then there are many benefits to it.
Bank's trust: A Higher down payment reduces the risk to the bank. This makes the bank feel that you are financially strong, and it easily approves your loan.
Less interest burden: When you make a higher down payment, you have to take a lower loan amount. This makes your EMI smaller and you save lakhs of rupees in the form of interest over the entire loan period.
Better interest rate: Many times, banks also offer better interest rates to customers who make a higher down payment.
4. Do your homework: How to choose the most beneficial deal
Never apply for a home loan by going to the bank first. This can be your biggest mistake. A little research is very important to get the right deal.
Compare: Find out about the home loan offers of at least 4-5 banks and housing finance companies (HFCs). Compare not just the interest rate but also the following:
Processing fees: This can range from 0.5% to 1% of the loan amount.
Prepayment charges: Will there be any charges for prepaying the loan?
Other hidden charges: Such as legal fees, technical valuation fees, etc.
Negotiate: When you have quotations from other banks, you can negotiate for a better deal from your preferred bank. You can also ask for a reduced or waived processing fee by citing your good CIBIL score and strong financial profile.
5. Documentation: The secret to a hassle-free loan
The home loan process involves a lot of paperwork. If your documents are ready and organized, the process can be completed much faster and without any hassles.
Keep these documents with you.
Proof of identity and address: PAN card, Aadhaar card, passport, voter ID.
Proof of income
For salaried persons: Salary slip of last 3-6 months, Form-16 of 2 years, Appointment letter.
For businessmen: Income tax returns (ITR) of the last 3 years, including computation of income, balance sheet, and profit-loss statement (certified by CA), business registration certificate.
Bank statement: Bank statement of the last 6-12 months showing your salary or income.
Property papers: Agreement to Sale of the property you are buying, a copy of the title deed and approved building plan.
Disclaimer: This content has been sourced and edited from Zee Business. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.
