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Home loans demystified

Friday, December 01, 2017

These days, it has become very easy to get finance or loans for buying homes almost anywhere in the country.  On one hand, it has helped the consumer to realise his dream much quickly as the banks and financial institutions do not ask for too many proofs or take more than ten days to clear applications. But before going to take a home loan, one should be clear about the basics of home loan. We bring you some important aspects in a simplified Q&A format.

Q.What is the maximum amount of housing loan available?
A.
You can avail of a maximum of 80 per cent of the cost of the property, including the cost of land.

Q.What is the amount I can borrow and what are the criteria?
A.
Generally, you can borrow up to 2.5 times your gross annual income. But equated monthly installments (EMIs) usually should not exceed 35% of your gross monthly income. The actual amount of loan will vary across the individual companies. Housing Finance Companies (HFCs) primarily look at your capacity to repay the loan installments on time. They assess the repayment capacity of you and co-applicants (spouse or parent), if any, based on annual income, assets and liabilities, savings history, financial and occupational stability, age and the number of dependents.

Q.When or how or where can a loan application be made and how long does this take to be processed?
A.
A loan may be applied for, after one has entered into an agreement with the builder or seller and has paid the earnest money to the builder or seller to purchase the dwelling unit. A loan can be applied only at the area or unit office where the proposed properly is situated. In the case of resale, the loan is disbursed in a single installment, with the least time lag, provided all the requirements have been complied with expeditiously. In the case of construction, the loan will be disbursed in installments depending upon the progress of construction and on the requirements being complied with. One can apply for a loan even before one has located a flat under our Letter of Intent scheme, for finding out his loan eligibility. If you have not yet bought the house or flat, consider buying one from the list of projects approved by a housing finance institution or bank. Buying a flat in a project approved by them will cut down procedures and the loan sanction and disbursement will be expedited.

Q.What is the security for the loan?
A.
The security for the loan is the first mortgage of the property to be financed, by way of deposit of the title deeds, subject to local laws. The borrower is also required to furnish one or two guarantees from people of sound financial standing.

Q.What is the period in which I will have to repay the loan?
A.
The loan will generally have to be repaid in a period of between five to 20 years, but definitely before you retire. A few HFCs also offer a 25-year repayment period, usually at a higher interest rate.

Q. Is it better to opt for a fixed or a floating interest rate?
A.
In the case of falling interest rates, a floating rate loan is a better option but when the interest rates are rising, opt for a fixed rate loan. If you go in for a fixed rate loan, you will know in advance what your EMIs will be. This will help you in your financial budgeting. However, if you opt for a floating rate, you may not be able to budget properly.

Q.Basically, what types of loans are available for real estate market?
A.

Home Improvement Loan
External work like structural repairs or waterproofing and internal work like tiling, plumbing, electrical work painting, flooring, etc., remains to be done even after you've bought the house. This is when a home improvement loan comes in handy.

Home Extension Loan
You could avail of this loan if you want to build a floor or expand it but only after you obtain the requisite approvals from the municipal and town authorities.

Home Conversion Loan
Simply put, this loan enables you to transfer your current loan (which you took to buy your house) to the new house, thereby providing you with additional finances for the incremental cost of the new house. Which means, you can move to your new house without having to pre-pay your existing loan.

Land Purchase Loan
If you've opted to invest in land instead of buying a flat in town, you could apply for a land purchase loan. You could later apply for a construction loan separately to build your dream home on the land.

Bridge Loan
In short, bridge loans are short-term finance loans that cover the period till you sell off your old house. To elaborate slightly, supposing you plan to buy a new house (which you've already found) and want to sell the one you're currently living in but are unable to find a buyer, a bridge loan proves useful. Repayment of a bridge loan can be done through a lump sum or in installments.

Refinance Loan
This simply means that a housing finance company gives you a home loan to repay your earlier debt. But the condition is that the earlier debt shouldn't be over six months. A refinance loan therefore works out cheaper when your present house has entailed a borrowing from other sources such as friends, provident funds, etc.

Balance Transfer (Swap) Loan
A balance transfer loan is really useful when interest rates fall even as you're still repaying your home loan. And if you've opted for fixed - interest - rate repayment terms, you'll be paying a higher rate of interest. What you could do is get your existing loan refinanced (usually by another finance company). The new lender will repay your existing loan and give you a new loan at the current, lower rate of interest. You might have to face a pre-payment penalty on your old loan, but it will be worth it if the new EMI (based on the new, lower interest rate) ensures sufficient savings.

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