What is the concept of a home loan ?
- The concept of a home loan is to provide homebuyers with a large sum of money toward buying a property. Importantly, the sum loaned can be paid back over long-drawn-out period that does not put any pressure on homebuyers. For example, with a home loan you can own a property by paying as little as 20% of the cost. The rest can be paid back over a period varying between 5 – 30 years, depending on the terms of the bank or housing finance company that lends the money. Needless to say, the repayment comprises both principal and interest.
Am I eligible to apply for a home loan ?
- Yes. As long as you are either a resident Indian, non-resident Indian, or a Person of Indian Origin, you can apply for a home loan without any restrictions. Loans are given to salaried, professional, and self-employed persons for buying properties located in India. However, you should be at least 21 years of age at the start of the loan, and not more than 65 years when the loan matures.
When can I apply for a home loan ?
- You can apply for a home loan even before selecting a property. This is because your loan is sanctioned based on your repayment capacity. The advantage of having a loan sanctioned beforehand is that with a clear idea of the resources at your command, you have the freedom to plan your budget.
What criteria do banks to apply determine home loan eligibility ?
- Banks apply several criteria to assess the applicant’s loan eligibility. With your repayment capacity as the focus, banks look at your income, age, qualifications, number of dependents, spouse's income, assets, liabilities, stability and continuity of occupation, and savings history. Including the income of other members of your family could make you eligible for a higher loan amount. In any case, banks and housing finance companies do not provide home loans in excess of 80/85% of the cost of a property.
Are there minimum and maximum tenures for home loans ?
- Home loan tenures vary between 5 and 25 years, and depend on factors such as number of working years left, cash flow necessities, and repayment ability. Longer tenure loans help to keep the EMI commitment down but increases the ultimate interest payout. While deciding on the tenure of a loan, it helps to keep in mind the number of working years left and cash flow needs once earnings stop. Adopting such an approach will help to safeguard fund outflow post retirement.
What should be my primary selection criteria for a home loan ?
- Cost of funds is the primary criterion for selecting a home loan. Thus, your selection criteria should include a comparison of interest rates on offer, processing fee, and loan tenure. Equally important would be a home loan provider’s reputation to deal ethically with its customers. In this respect, banks and reputed housing finance companies will always score over non-banking finance companies and private operators.
How should I apply for a home loan ?
- In this respect, your earning status—salaried, professional, or self-employed—will be the deciding factor in as far as filling out the application form and providing necessary supporting documents for the loan is concerned. Always insist that a representative of the bank or housing finance company is available to guide you through the process as, depending on your earning status, you will be required to produce various supporting documents. Missing out on any of the details will result in the application being returned for resubmission, with all the details included, which is an avoidable waste of time and effort.
In addition to filling out the form without missing any points, following is a quick check list of supporting documents that have to be attached to the loan application form:
Photo ID proof
: Copy of any one document: Aadhar card/Voter ID/PAN Card/Driving License/Passport
: Copy of any one document: Recent Telephone Bills/Electricity Bills/Property Tax receipt/Employment Letter/Voter ID /Ration Card/ Driving License/Passport
: Original Salary Certificate from Employer/ Pay slips for past months, TDS Certificate on Form 16 or multiple past years’ IT returns
: Bank Account Statement or Pass Book for the past 6 months
: Signature identification from present bankers
Employment Continuity proof
: Letter from employer with date of joining
Previous employment proof
: Copy of appointment or relieving letter
Details of other loans
: Welcome letter/s or EMI table/s
: Passport photos
- * The above is an indicative list and requirements may vary from one loan provider to the other; always confirm with the loan provider’s representative
- * For income received in cash, a different set of documents are required which must be obtained from the particular loan provider
- Banks and housing finance companies take approximately one working week to process an application and inform the applicant whether the loan has been sanctioned and on what conditions.
What is the usual method of loan repayment ?
- Like any other loan, home loans too are repaid through equated monthly installments (EMI) comprising principal and interest. However, in the case of new homes, EMIs fall due only when it is ready to be delivered. Till then only pre-EMIs, that is the interest component of the loan amount disbursed according to the construction schedule, have to be paid.
Can I get a higher loan through an existing loan account ?
- In order to enhance your existing loan, it would be practical to consider a Home Conversion with your lender. In this option, depending on your eligibility, your existing loan could be transferred to the new property with an increase in loan amount. This would save you the trouble of prepaying your first loan as well as save you from prepayment and processing charges to the extent of the loan converted.
What is pre-EMI interest ?
- This is the interest you pay on the loan amount disbursed by the lender based on the progress of the construction. Pre-EMI interest is paid till the final disbursement is made and falls due every month from the date of each disbursement.
What is a fixed rate home loan? Under what circumstances should I opt for it ?
- The rate of interest of a fixed rate home loan remains constant throughout the tenure of the loan. Opting for a fixed rate home loan is advisable if it is felt that home loan interests have bottomed out. In such cases, the fixed rate home loan option is an obvious choice to protect your interest obligation.
What is a floating rate home loan? Under what circumstances should I opt for it ?
- In a floating rate home loan the interest charged by the lender fluctuates across the tenure of the loan. The fluctuation happens against a market driven benchmark rate. In a floating rate home loan, the loan tenure or the EMI will move up or down with the movement in interest rates charged by the lender. If is predicted that interest rates are expected to fall, the floating rate home loan can prove to be very useful.
Can a fixed rate home loan be converted to a floating rate home loan and vice versa ?
- Both are possible. While converting a fixed rate to a floating rate home loan will involve a small fee, the reverse (floating to fixed) can be done without having to incur any extra charges. It is possible to switch between the two, any time and any number of times!
Can I repay a home loan in advance ?
- Yes. By making lump sum payments, it is possible to repay your loan ahead of schedule.
Am I entitled to tax benefits on my home loan?
- Resident Indians who file their I–T returns in India are entitled to tax benefits on both interest and principal repayments of home loans. Pertinent sections of the Income Tax Act, 1961, allow a deduction of Rs. 200,000 p.a. toward interest paid on home loans. For principal repayment, the allowable deduction limit is Rs. 150,000 p.a. The combined tax savings can be quite substantial.
How does "Monthly reducing balance" differ from "Yearly reducing balance" ?
- The difference lies in the method in which interest is calculated. Whereas in “Monthly reducing balance” interest is calculated on the principal outstanding at the beginning of each month, in the case of “Yearly reducing balance” interest, as you might have guessed, is calculated on the principal outstanding at the beginning of each year. Between the two options, “Monthly reducing balance” is more beneficial as immediate repayment credit brings down the principal and along with it the interest component.
Who will qualify as co-applicants for a home loan ?
- The spouse can always be a co-applicant for a home loan. In the case of a working spouse, the loan amount can be much larger than with a single applicant. Some lenders also accept other family members as co-applicants, provided their profile meets the lender’s norms.
What would qualify as security for a home loan ?
- With respect to security, a clear and marketable title of the property being financed constitutes a first mortgage to the lender. The custody of the title deed of the property being financed has to be handed over to the lender. In addition to the first mortgage or primary security, some lenders may prefer to have collateral security. The borrower’s life insurance policies, shares and securities such as NSCs, units, mutual funds, bank deposits, or any other investments are considered collateral security.
What is the scope of a Home Extension Loan ?
- As your family grows, there is need for extra space. A Home Extension Loan covers expenses involved in making alterations such as extension or modification of a property. To avail a Home Extension Loan getting an approval from the municipal corporation is the first step. Many lenders these days offer this loan at home loan rates.
What is the scope of a Home Improvement Loan ?
- If you plan to spruce up you home and need to carry out external work like repairs to the structure or waterproofing, or for that matter any work inside the house such as tiling of floors, painting, any electrical or plumbing work, you should apply for a Home Improvement Loan. Many lenders these days offer this loan at home loan rates.
Can I sell my property even though my home loan is not fully paid ?
- Even if a loan has not been fully paid, there is no restriction in disposing of a property bought with it. With the lender’s consent in writing, containing details of the amount to be paid for the loan to be considered as fully paid off, you can negotiate a sale of the property even though the loan is outstanding. The written consent usually indicates the amount payable to the lender inclusive of prepayment charges, calculated for a future date. This gives the borrower adequate time to find and finalize a consideration with the prospective buyer. In case the new buyer is not making an outright purchase but intends taking a home loan, it is advisable for him to borrow from the same lender and take advantage of administrative and other benefits. The lender would be happy to continue with an already approved security and may even offer an incentivized interest rate. Alternatively, if the buyer wishes to make an outright purchase, he can make the remittance directly to the lender on the basis of the consent letter and receive the property papers against the remittance. As the seller, you can retain the balance negotiated sale amount, if any.
As a home loan beneficiary, when am I expected to pay my share of the cost of property ?
- As a home loan beneficiary, you will have to remit your share of the cost of property before the lending institution starts releasing their funds toward scheduled loan installments.
Are home loans disbursed over a specified number of installments ?
- Disbursement of home loans is not done according to a fixed number of installments. If the loan is for outright purchase of a ready-to-occupy property, it will be a onetime disbursement. For under-construction properties, the disbursement is done taking into the progress of construction and the agreed payment schedule for the project.
Does a fall in the price of a property affect the EMI amount or tenure of the home loan ?
- A fall in the price of the property bought with a home loan has no connection with either the EMI or tenure of the loan. Repaying the loan as per the agreed amortization schedule continues to be binding on the borrower until the loan account is closed. Failure to adhere to the repayment schedule makes the borrower liable to the penal terms of the loan agreement and spoils his/her credit history vis-à-vis procuring further loans. For properties that no longer appear attractive to remain invested in, owners are best advised to dispose them and close their home loan accounts.
What are the loan reassessment criteria in case of a change in status from NRI to resident Indian ?
- From a lender’s viewpoint, change in status from NRI to resident Indian will necessitate a reassessment of the borrower’s repayment capacity. The borrower’s repayment schedule will be revised along with the interest rate applicable to resident Indians for the same loan product. The lender will confirm all the changes to the borrower, including borrower’s status, in writing.
Do special eligibility norms apply to professionals with regard to home loans ?
- This is a discretionary matter, although lenders (banks and financial institutions) are known to view professionals who are self-employed in a favorable light. They give credence to the fact that a professional’s actual earning capacity may be higher than the disclosed income, which in turn can reflect in the credit appraisal. There are no fixed norms and lenders are free to decide on the category of professionals they wish to cater to. It is up to professionals to present their cases to lending institutions as best as they can.
Am I eligible for separate home loans for buying two or more properties ?
- As long as a borrower, in the lending institution’s opinion, can repay all the EMIs due every month in time, there are no restrictions to availing multiple home loans by an individual.
Can I avail tax benefits against my home loan as well as claim house rent allowance (HRA) ?
- Yes, tax benefits can certainly be availed but subject to certain conditions, but taking the help of a tax consultant is always advisable.
- HRA exemption can be claimed for a specific financial year in addition to exemption on interest paid [u/s 24(b)] and principal repaid [Section 80C read with section 80CCE] provided you are living in a rented house and the property you have bought with a home loan is not ready for occupation. Once the property bought with a home loan is ready for occupation HRA exemption will no longer be allowed.
- However, after taking possession if you rent it out your new house yet continue to live in a rented accommodation, you will still be eligible to claim all the three tax exemptions; in this case, though, the rent income from your property will be added to your taxable income.
When a co-applicant in a home loan pays the entire EMI amount, what is the total amount of income tax exemption that can be availed ?
- To claim tax exemption on the EMI he/she has paid the co-applicant in a home loan would need to be one of the owners of the property bought with the loan. However, tax exemption can be claimed only to the extent of EMI paid; if the co-applicant pays the entire EMI, the same will qualify for tax exemption. To be able to pay the entire EMI or a part thereof, the co-applicant would need to enter into an agreement to that effect with the other borrowers.
Once a home loan has been sanctioned, is it possible to make upward or downward revisions in the sanctioned amount?
- As long as the loan amount has not been disbursed, a lending institution will accommodate requests from borrowers for upward or downward revision of the loan amount. Needless to say, an upward revision would depend entirely on the borrower’s eligibility. It may also necessitate the borrower to pay additional processing fees. In the case of a request for downward revision, however, the lending institution has no obligation to refund excess processing fee to the borrower.