Sunday, September 28, 2014

Things To Do – Before Availing a Home Loan


Last Week, a friend of mine here in Singapore was talking to a bank salesman about a home loan. I also happened to join this discussion with the salesman who was representing a leading bank that happens to give home loans for NRI’s from Singapore as well. During this discussion, the gentleman happened to elaborate on many of the eligibility criteria and with a little bit of digging, the rationale behind the same was also touched upon. So, I thought, why not share these details with all of you…


Why this Article is Important


Buying a home is a significant investment for most of us. Not all of us have enough cash in our bank accounts to make a full payment for the house. So, inevitably we end up taking up a home loan which is a 10 years or more financial commitment. Though we think about points like our monthly income before availing this loan, we may miss out on some of the finer aspects of the loan evaluation criteria and this might adversely impact our loan eligibility. So, why miss out on our dream home?

When should I do all this?

This is a very tricky question. You should start thinking about all these aspects of the loan evaluation at least 4-6 months prior to you actually sign-up for the home loan. Finding a good house is a lengthy process and for most of us, we identify a good house only after a few months of search. So, the moment you start thinking about buying a house, you must start thinking and planning for all these aspects…

Step 1 – Review your Credit Report

The first and most important consideration for any Bank is the “Credit Report” of the borrower. In India CIBIL is the entity that offers these credit reports. So, if you apply for a loan (any loan) the first think the bank would do is, request a copy of this report. A few weeks ago, I had written an article titled “Everything You Want to Know About Your CIBIL Credit Score- Explained!!!” which will help you understand what this credit score is and how you can improve it.

Once you have decided that you are going to buy a house, you should purchase your credit report from CIBIL and review it to make sure that your credit score is good. You must also review it to make sure that all the info in the report is correct. If your credit score is at least over the 700 mark (the closer it is to 900 the better) there is a good chance that your loan will get approved.

Note: Purchasing this credit report would cost you Rs. 470/-. Check CIBILs website for more details here: CIBIL - Apply Credit Report


Step 2: Clean up your Existing Loan Commitments

If you are someone who does not have any loans now, you can ignore this step. However, if you have taken a few loans, then you must do this.
It would be a good idea to close-off all (or at least part) of your loan commitments before signing up for the home loan. All banks will deduct your existing loan repayments (EMIs) from your monthly income before calculating your loan eligibility. Plus, the more the number of loans you have, the difficult it would be for you to obtain a loan. So, better close out your loans before the home loan agreement is signed.

Step 3: Review your Bank Balance

Have you spoken to any bank about a home loan? If you had, the bank would’ve asked you to submit at least 6 months of your Bank Statement, from the bank account where your salary is getting credited. (For NRI’s the NRE Account statement is also asked for, over and above your salary account statement from the country where you are employed).
You might be thinking, am giving you my payslip, employment records etc but why am I being asked for my bank statement?
Simple. The bank would like to know your spending habits and also check if you maintain sufficient balance to repay your loans. For ex: If you are availing a loan of 50 lakhs that require you to repay Rs. 60,000/- every month, the bank would like to check if you maintain sufficient balance. Someone who maintains an average of 50,000 rupees or more would have a greater probability of getting this 50 lakh loan in comparison to someone who maintains only 5,000 rupees.

Step 4: Review your Banking Habits

If you are someone who has the habit of timely repayment of bills and dues, you can ignore this step. If you are someone who issues cheques or has monthly EMI deductions from your bank account but, do not maintain sufficient bank balance, you may need to concentrate on this point heavily. Any bounced payment (Cheque/EMI/Bill Payment) would adversely affect your loan eligibility. No bank would grant a loan to a customer who has a history of missed payments. A Bank would expect you to clean up your habits at least over the past 6 months to 1 year so that they can trust you with a loan.

Step 5 – Review your Documents

Most banks request the same kind of documents from its customers for loans. The most important of them would be:

  1. Loan Application (Filled-in with Photographs)
  2. Address Proof (Telephone Bill, Electricity Bill etc.)
  3. Identity Proof (Passport, Driver’s License etc.)
  4. Latest salary slips – At least 3-6 months
  5. Tax Return Filings (Or Form 16) for at least the past 3 years (The more the better)
  6. Bank Statement – At least 6 months


In addition to the above documents, you would also need to submit copies of all property papers that you desire to purchase.

Tip: It is always recommended to verify the property documents available with the seller before entering into an 'agreement to buy'. Generally, banks do not process a loan application without the 'agreement to buy/ sell'. If you are not confident on the property documents, it is always advisable to consult a property lawyer well in advance. The lawyers analyze the chain of the property and help you in making the decision to buy or reject the property. They also help in execution of the sale/purchase transaction.

Some Last Words:

Getting a home loan is a lengthy process and banks would closely scrutinize your application before granting you the loan because it is a huge commitment. If you were a bank and someone is asking you for a 50 lakh loan, wouldn’t you closely evaluate the loan applicants details? The more confident you are, the more comfortable you would be to grant the loan – isn’t it?
So, as a customer, it is our responsibility to make sure that we submit all the necessary artifacts to improve the banks confidence.


Hope this article was useful to you. Happy Availing a Loan!!!

5 comments:

  1. Hi Anand...
    I borrowed home loan from XXXX bank for 10.70% floating rate of interest, now they are offering me to go for 10.25% fixed rate of interest for 6 months by paying some processing fee, after that it will become floating rate.
    Can you please suggest before I can accept this offer
    As I understand RBI is going to reduce % interest rates in coming days, may be that’s the reason banks offering reduced fixed rates for few months.

    ReplyDelete
    Replies
    1. What do you mean by fixed interest rate for 6 months only? If the option of reduced interest is resulting in a good saving (6 month reduced EMI minus the fee) then it could be an option. But, after 6 months what would be the rate of interest?

      A floating rate loan always follows the prime lending rate defined by RBI. Even for fixed interest options banks cannot charge too much. Usually the fixed rate is slightly higher than the floating. Am surprised you are getting a cheaper rate in Fixed...

      Delete
  2. Anand Thanks for the reply.
    I am already a customer & I have paid 1yrs home loan. (floating 10.70%)
    They asked me to pay around 6000rs as the processing fee to make floating into fixed rate of interest.
    By this my tenure will reduce by 7 to 8months (I can save around 1,65,000).
    After 6 month it will convert it into floating same as fixed rate of interest 10.25% as per banker information
    But my question is
    1. Why banks are offering at this time.
    2. Whether RBI is planning to reduce interest rates?
    3. Shall I accept the offer
    4. I heard that RBI is going to reduce by 100BPS, is that true?

    ReplyDelete
    Replies
    1. Answers:
      1. Probably because they want to attract new customers or offer a good deal to its existing customers. This Q I cannot answer with 100% accuracy
      2. As of now - there is not much news about it. RBI usually does not hike or reduce rate beyond 0.5% at any time. So, even if they increase/decrease the rate of interest, the impact on you will be marginal only
      3. Sure. if you are saving more than 1.6 lakhs, you should.
      4. Same as Q 2. No confirmation yet. If your loan is floating after 6 months, it will eventually get reset based on RBI's lending rates after 6 months. so, dont worry

      Delete
    2. To Add on - usually RBI does not introduce rate of interest changes out of the blue especially by big % figures, but if they do, there is a small chance that the rate of interest may go below the fixed that your bank is offering you. But, the chances of that are pretty low.

      Anyways - the decision is yours.

      Delete

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