Faqs

Things to know before taking home loan

  • Check your home loan eligibility
  • Know the types of home loans you can avail
  • Get your home loan pre-approved
  • Assess –
    • the loan amount available
    • the cost of loan
    • the EMI payable
    • the loan tenure
  • KYC, Income and Original Property documents need to be submitted for loan disbursal
  • Ensure safe storage and easy retrieval of property documents with the lender
  • Purchase a loan cover term assurance plan
  • Be regular in paying EMIs

Owning a house is one of the biggest financial decisions that you and your family will ever make. For most first-time home buyers, availing a home loan is the only way they can bring alive their aspirations of home ownership.

If you are planning to take a home loan, it’s important to understand all about it; after all, it’s a commitment that will run into years till you can repay the entire loan amount. Here are 10 things you should know before you apply for a home loan:

Should I buy or continue to take on rent?

While owning a home is typically the dream of every Indian, you should do the math properly, if you think it’s a profitable long-term investment.

While owning a home is typically the dream of every Indian, sky-rocketing property prices especially in metros have led people to opt for renting rather than buying. However, for people who can afford to buy a house, the choice between buying and renting is always a tough one. In the Indian context, it is observed that people who can afford to buy a house tend to put more weightage on owning a house and renting is mostly a compromise. There are definite advantages and disadvantages of both the options, and some of the advantages are summarized as:

Advantages of owning a home over rental accommodations:

# It gives a sense of security and pride of home ownership.

# Rent is an expense that is incurred every month without creating any physical asset. Paying EMI, however, has dual benefits; it not only provides for a one month of shelter, but also increases the proportional ownership in the house.

# With renting you often have to relocate which entails a lot of wasted time, money and energy, but that is not the case with owning.

# Real-estate investment is a safe investment backed by a real asset which has potential of capital appreciation and tax benefits.

Advantages of renting:

# Renting does not overburden one with EMI payments, house tax and other legal issues that are part and parcel of property ownership.

# Renting generally gives a feeling of lower liability. In metro cities you can rent a house worth Rs 50 lakh for only Rs 10,000-15,000 a month. At the same time, if you buy a home at the same cost, you have to shell out anywhere from Rs 30,000 – 40,000 as an EMI (equated monthly installment).

# One can rent closer to work or closer to good schools, but the same properties may or may not be affordable or within one’s budget.

The choice between renting and owning is a tough one. Only a careful analysis would help one to reach a proper conclusion. Let’s try to understand the financial implication of renting vs owning through an example of a person who wants to own a property in the NCR region. The first step is to calculate the capital needed to buy a ready-to-move-in flat in Delhi/NCR in a residential project assuming the market price is Rs 50 lakh. The down-payment and associated transaction costs have to take care of upfront, the following table lists all the costs associated with a property purchase.

From the above table, it is clear that a capital outlay of Rs 5,940,000 is required to own a property in the NCR region. After 20 years your investment value would be Rs 21,139,546 considering an 8 per cent annual appreciation in home prices after accounting for all the maintenance and transactional costs over the entire duration. To compare owning vs renting, the first step is to calculate the investment returns on the down-payment and other related costs that one incurs upfront while buying the house. The second step is to calculate the investment returns of the difference between the EMI payments and the rent over the entire duration of ownership. The down payment for the house is Rs 10 lakh and other capital outlay is Rs 9.4 lakh. Therefore, the total onetime lump-sum capital outlay is Rs 19.4 lakh. In this example, the returns on the lump-sum investment are assumed to be 12% and the returns on the monthly investments are assumed to be 14%. At the end of twenty years if one opts for renting, he/she would have accumulated Rs 3.59 crore, which is approximately Rs 1.5 cr higher than the value of the property at the end of the 20 years as shown in the table below:

With renting you often have to relocate which entails a lot of wasted time, money and energy, but that is not the case with owning.

While owning a home is typically the dream of every Indian, sky-rocketing property prices especially in metros have led people to opt for renting rather than buying. However, for people who can afford to buy a house, the choice between buying and renting is always a tough one. In the Indian context, it is observed that people who can afford to buy a house tend to put more weightage on owning a house and renting is mostly a compromise. There are definite advantages and disadvantages of both the options, and some of the advantages are summarized as:

Advantages of owning a home over rental accommodations:

# It gives a sense of security and pride of home ownership.

# Rent is an expense that is incurred every month without creating any physical asset. Paying EMI, however, has dual benefits; it not only provides for a one month of shelter, but also increases the proportional ownership in the house.

# With renting you often have to relocate which entails a lot of wasted time, money and energy, but that is not the case with owning.

# Real-estate investment is a safe investment backed by a real asset which has potential of capital appreciation and tax benefits.

Advantages of renting:

# Renting does not overburden one with EMI payments, house tax and other legal issues that are part and parcel of property ownership.

# Renting generally gives a feeling of lower liability. In metro cities you can rent a house worth Rs 50 lakh for only Rs 10,000-15,000 a month. At the same time, if you buy a home at the same cost, you have to shell out anywhere from Rs 30,000 – 40,000 as an EMI (equated monthly installment).

# One can rent closer to work or closer to good schools, but the same properties may or may not be affordable or within one’s budget.

The choice between renting and owning is a tough one. Only a careful analysis would help one to reach a proper conclusion. Let’s try to understand the financial implication of renting vs owning through an example of a person who wants to own a property in the NCR region. The first step is to calculate the capital needed to buy a ready-to-move-in flat in Delhi/NCR in a residential project assuming the market price is Rs 50 lakh. The down-payment and associated transaction costs have to take care of upfront, the following table lists all the costs associated with a property purchase.

From the above table, it is clear that a capital outlay of Rs 5,940,000 is required to own a property in the NCR region. After 20 years your investment value would be Rs 21,139,546 considering an 8 per cent annual appreciation in home prices after accounting for all the maintenance and transactional costs over the entire duration. To compare owning vs renting, the first step is to calculate the investment returns on the down-payment and other related costs that one incurs upfront while buying the house. The second step is to calculate the investment returns of the difference between the EMI payments and the rent over the entire duration of ownership. The down payment for the house is Rs 10 lakh and other capital outlay is Rs 9.4 lakh. Therefore, the total onetime lump-sum capital outlay is Rs 19.4 lakh. In this example, the returns on the lump-sum investment are assumed to be 12% and the returns on the monthly investments are assumed to be 14%. At the end of twenty years if one opts for renting, he/she would have accumulated Rs 3.59 crore, which is approximately Rs 1.5 cr higher than the value of the property at the end of the 20 years as shown in the table below:

It is amply clear from the example that renting turns out to be a better option. However, this may not be true in all market conditions. Indian real estate market is going through a period of slump with all major metros and Tier-I cities showing softness in property prices. For homebuyers who are interested in owning a house, it is recommended that unless they are buying a house for primary residence, investment in real estate at this point does not make sense. The return or efficacy of owning vs renting is largely dependent on market conditions. In rapidly-rising real estate markets, owning makes more sense. On the other hand, when there is not much room for property price appreciation, renting is perhaps a better option.

What are the different types of home loans available in India?

Basis the different requirements for housing loans and varied customer profiles, the types of home loans available in India are –

  • Home construction loan
  • Loan for plot/land purchase
  • Home loan balance transfer
  • Top-up loan
  • Joint home loan
  • Loans under the Pradhan Mantri Awas Yojana scheme
  • Home loan for –
    • Women
    • Government Employees
    • Advocates
    • Bank Employees
    • Private Employees

Ten questions to ask yourself before taking loan.

It’s easy to get a loan these days; money is available for everything, right from homes to weddings. But, it is important to make the right choice from among the various options available. Here are 10 questions you can ask yourself and the bank before signing the loan agreement:

1. How much is the down payment?
In any kind of loan, banks usually finance only up to 90% of the amount. The rest, called margin money, has to be put in by the borrower. The extent of the loan varies between 80-90% of the total amount. So, figure out how much money you will need upfront.

2. Can I afford the EMI?
It is the standard practice of banks to cap the EMI at 45% of the gross monthly income. This, however, is just a broad figure. The EMI also depends on a host of non-income factors such as other loans, dependents in the family, etc. So, if there are dependents and if you are already servicing a loan, the bank may lower the EMI to 30% of your gross monthly income. But, for people whose income
base is small, even 35% can be a burden.

3. When is the EMI date?
Once the bank fixes the EMI date, it cannot be changed during the entire tenure of the loan. So, fix a date where you can pay off the monthly outgo without much discomfort.
4. What are the other charges?
Interest rate is not the only cost borne by a borrower. A loan has a processing fee or an administrative fee, which is either a fixed amount or a certain percentage of the loan amount (usually between 1.5-2%). Also, see if the bank charges an application fee. Some banks, especially in the case of home loans, claim that they do not charge any ‘processing fee for work done by the bank’. This implies that you have to pay valuation fees, stamp duty and lawyer fees. This increases the outgo.
5. How is the interest rate calculated?
You may approach three banks for the same loan and they may all charge an interest rate of 9%. But, if you actually compare the EMIs, it might vary. Reason: Different ways of computation. The type of reducing balance method applied or the ‘rests’ in the loan determine the effective cost. The ‘rests’ could be annual, quarterly, monthly or daily. The shorter the ‘rest’, the better is the deal. When the interest is calculated on monthly rests, the principal on which the interest is charged reduces every month. This results in a significant saving over the tenure of the loan. Thus, always compare the EMI of various financiers with a similar amount and tenure.
6. What is the cumulative interest payout?
If you are contemplating a ‘own finance’ versus borrowing decision, this could be useful. For instance, if you apply for a car loan of Rs 5 lakh for a period of five years at 10%, you can end up paying more than Rs 1.37 lakh as interest over  the loan tenure. Total interest outgo over a long period increases your effective cost of acquisition. Take this into account.

7. Is there a prepayment penalty?
You may always want the option to prepay your loan, especially if you are rewarded with a one-off payment from sale of shares or just a bonus. Banks levy a prepayment penalty of 0.25-2% depending upon the nature of the loan. In such cases you can partly pre-pay your loan. Then you can save on the penalty and also reduce the repayment burden.

8. Is your bank offering a better rate?
The golden rule is, always approach your bank. Often it gives a discount of up to 0.5% in the interest rate if you have a good credit history or it may waive off the processing fee or the administration fee.
9. Do you get free insurance?
Some banks bundle loan products by giving free insurance cover. For instance, if a borrower opts for a home loan, he/she could get a free insurance cover. In case of personal loans, private banks insist that a loan cover be taken. Such cover on loans not only ensures repayment if the borrower dies but can also be useful when one faces a financial crunch.

10. Are there tax benefits?

It’s nice to know that you get a tax break on some loans. But only two loans offer tax benefits – education loan and home loan. Personal loan or vehicle loan don’t carry tax benefits. Tax breaks lower the effective cost of borrowing and can be useful.

What documentation I typically need for home loan?

Documents needed for a home loan can be categorized as:

KYC DOCUMENTS:

These include your identity and address proofs. Some documents that you can submit for this requirement include a valid passport, voter ID card, Aadhaar card, etc.

CREDIT/INCOME DOCUMENTS:

These documents help the lender assess your loan eligibility. If you are employed, you can submit your salary slips of the last 3 months; if you are self-employed, you can submit income tax returns along with computation of income of the last 3 years.

PROPERTY DOCUMENTS:

These documents include the agreement to sell, the title deeds, etc. The lender does a due diligence on the property based on these documents.

While you need to submit your KYC documents and credit/income documents along with the home loan application to avail the home loan approval, you need to submit the property documents in original to get your home loan disbursement.

To see the complete list of documents needed for your home loan, visit www.hdfc.com

Your property papers are important. Since your original property documents such as title deed, agreement to sell, own contribution receipts, etc are mortgaged with the lender as security interest on the property being financed, it is important that the lender offers you safe storage. Another important aspect to consider is easy retrieval of the documents. Check whether the lender has decentralized the storage facilities so that retrieval of documents is quick and easy when the customer requires them.

10 Things you must know before you avail a home loan Did you know?
Eligibility criteria Home loan eligibility is primarily determined on the basis of your income and repayment capacity.
Types of home loans Floating rate loans are popular due to the flexibility which they offer to the customers.
Home first or loan first You can enhance your loan eligibility by adding in an earning family member as a co-applicant.
Loan amount The rate of interest applicable on your home loan is the rate prevalent on the date of disbursement.
Cost of your home loan You can apply for a home loan even before you shortlist a property.
EMI/Pre-EMI Longer the tenure, lower are the EMIs.
Tenure All co-owners to the property will have to be co-applicants of the home loan. However all co-applicants need not be co-owners.
Documentation You can be in one location, buy a property in another location and service your home loan from a third location.
Insurance cover You can convert your fixed rate loans into floating rate loans and vice versa, by paying a small fee.
Default You get tax benefits on both, principal repayment and interest payment on housing loans.

 

Which factors affect your home loan eligibility?

Availing a home loan requires an individual to meet eligibility criteria that ensure a borrower’s capacity to repay. The factors that affect eligibility are –

  • A person’s credit score
  • Monthly income
  • Current financial obligations as debt
  • Employment status
  • Age of the applicant
  • Property to be purchased

Which is the cheapest home loan available in India on the basis of Interest Rates?

While comparing home loans, it is necessary to check some key facts from different lenders. The major key points of comparison when it comes to loans are as follows:

✔ Interest rates
✔ Processing fees
✔ Turnaround time
✔ Loan to value Ratio

However, you need to view the loan in the entire package and not just focus on individual elements. If a loan has a very low interest rate, the chances are the fee structure is high.

Check and Compare Home Loan Interest Rates of Various Bank in India

Interest rate offered is the primary factor of comparison. It affects your monthly EMI and total amount payable. For a long duration loan it is advised to go for a home loan with low interest rate.

SBI 6.95 – 7.70%
HDFC Ltd 6.95 – 7.50%
ICICI Bank 6.95 – 8.05%
LIC Housing Finance 6.90 – 7.30%
DHFL Housing 8.70%
Axis Bank 7.75 – 8.40%
Bank of Baroda 6.85 – 7.85%
Canara Bank 6.90 – 7.90%
Aadhar Home loan N.A

Best Banks Which Offers Home Loans in India

S.No Bank Name Market Percentage
1 SBI Home Loan 34.00%
2 HDFC Ltd 24.13%
3 LIC Housing 05.83%
4 ICICI Bank 13.10%
5 PNB Housing Finance 6.23%
6 IDBI Home Loan 4.67%
7 Axis Bank 4.22%
8 Others 6.32%

What Is a Short Sale (Real Estate)?

  • A short sale in real estate is one in which a house is sold for a price that is less than the amount still owed on the mortgage.
  • It is up to the mortgage lender to approve a short sale.
  • Sometimes the difference between the sale price and the mortgage amount is forgiven by the lender, but not always.
  • For the seller, the financial consequences of a short sale are less severe than those of a foreclosure.
  • For the buyer, it’s important to calculate costs and be sure that there is room for profit when the house is resold.

What is a foreclosure?

Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan.

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