Applying for a home loan may seem scary if you go into the process unprepared, but if you have braced yourself well in advance and follow these steps you will find that getting your home loan application approved is a breeze.
There is nothing quite as pleasurable as having a roof over one’s head that one can call her/his own. It is a huge decision to buy your own house. So if you have decided to buy your first property the very first step you will take is shopping for a home loan.
While you may think that you will be spoilt for choice with so many lenders and products galore, shopping for a home loan is trickier than you think. However, it does not have to be a complicated process for you.
Here are six steps that will help you get through the process smoothly.
Ensure that your Cibil report is in ship shape
The first thing that any bank will look at is your Cibil score and Cibil report to assess your home loan eligibility. It will also determine the kind of interest rates you are eligible for.
It is therefore of utmost importance for you to check out your Cibil report well in advance (at least six months prior to making an application for a loan) to see that everything is in order and see if anything can be done to better your Cibil score.
You must also see whether or not there are any errors in the report.
For instance, there may be a loan that may be paid off from your end but does not reflect on your credit report because the lender may not have reported the closure of the same. In case of such errors your Cibil score could be negatively impacted.
Try and improve your debt to income ratio
This is an important consideration that a lender will take into account while assessing your loan eligibility. Simply put, your debt to income ratio is the amount of debt you handle in proportion to how much money you make.
Before you apply for a home loan you should therefore make an attempt either to reduce your debt or increase your income. Some ways to boost your ratio is to start making bigger payments on your credit card or pay off some long standing loans on which the interest outgo is large.
Plan for a big down payment
Before you shop for a home loan, you should have ideally saved for a large down payment of 20 per cent of the property value. The larger your down payment, the cheaper it will turn out to be for you in the long run because of a smaller EMI outgo. Besides, paying a higher down payment will qualify you for better rates of interest and will tilt the deal in your favour as you will be perceived as a less risky customer.
Research thoroughly before you decide on the lender
A home loan is a long term financial commitment that you will make. It is therefore necessary for you to choose the right bank who will give you the best home loan experience. Check the credentials of the prospective banks you want to approach, and research online about the kind of home loan experience others have had with them.
You may also consider taking the opinion of friends or relatives who have recently taken home loans and ask for their recommendations. Choosing the right bank will ensure that your home loan experience is smooth sailing.
Submit a thorough application
Make sure you submit a complete application with all the accurate information that the bank will require to process your loan. Along with the fully completed application form, ensure that all the papers such as salary slips, IT returns, bank statements etc., are in order.
Lock in your interest rate
The interest rate is an important factor that is primarily in the mind of any home loan borrower. After having discussed various implications of interest rate options with your lender, you must make a commitment and lock in your rate of interest. You can choose from a loan with a floating rate of interest, a fixed rate of interest or a hybrid loan. The floating rate will be linked to the base rate of the bank and will change as per the economic cycles. While the floating rate may seem cheaper, there will be an element of uncertainty attached to it always.
If you want certainty in your monthly outgo you may consider a loan with a fixed rate of interest. However, it will always be 1-2.5 percentage points higher than a floating rate. Depending upon your financial position and the volatility in the market, you may also decide to take a hybrid loan that is a combination of fixed and floating rate loans. In this loan, the bank will offer you a fixed rate of interest for the firs 3-5 years of the loan tenure and thereby shift it onto a floating rate regime.
Illustration: Uttam Ghosh/Rediff.com
The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.
