4 mistakes every home loan borrower must avoid
Pay attention to these pitfalls; they have the potential of draining your bank balance.
Buying a home is a big decision financially and emotionally. At times, these emotions and the excitement of finally owning your home overtakes a sensible decision-making process and we make mistakes.
Knowing what to expect goes a long way in helping to avoid such costly errors.
Newly-weds Supriya and Anmol are looking out for a dream home. The young couple have a clear picture of what they are looking for and have saved a few lakh rupees for the down payment. For the rest, they plan to take a home loan.
They have been asking family and friends for advice and have researched online as well. They now think they have enough information to go ahead and apply for the home loan.
What they do not realise is that they are making some rookie mistakes that will prove to be quite expensive.
1. Not knowing your CIBIL credit score
Your CIBIL credit score is the basis on which any bank makes its lending decision. Checking on your CIBIL score can help you realise the credit mistakes you made in the past. You could take the time to correct them before applying for a home loan.
A CIBIL score of 750 and above is ideal from the viewpoint of a lender.
2. Overstretching your budget
Often your dream home might not be one you can actually afford, even with the aid of a home loan. While the bank might be willing to lend the required amount, the fact remains that you have to repay the loan via equated monthly installments month after month.
For a larger loan, you will either have a higher EMI or a longer tenure.
A higher EMI is a better option. You pay lower interest over the tenure of the loan. The flip side is it takes away a large portion of your disposable income month after month, leaving little space for luxuries or unexpected expenses.
Overstretching your budget under such circumstances could compel you to go for an expensive loan with a higher rate of interest. It increases the possibility of a default, which will leave you with a poorer credit score.
3. Forgetting to factor in the hidden costs
The cost of becoming a property owner goes beyond the cost of the house. There are several other things that will add up to the final amount that you actually spend while buying a house.
Stamp duty and registration form a substantial chunk of your total cost. In most states, it comes upto 6-10 per cent of the property cost. Besides stamp duty and registration, you will also have to factor in service tax, VAT, brokerage (if you are using a broker), etc.
Parking space in buildings costs Rs 2 lakh onwards, especially in the newer housing societies. Do account for this in your cost if you own a car.
Escalation costs of the project can also add to the final price you pay for your home. Builders often increase the cost of the house midway during construction to meet an increase in costs or to cash in on the rise in prices.
Renovation and furnishings can cost anywhere between Rs 50,000 for a simple paint job to Rs 10 lakh for all-out refurbishing and re-doing the interiors.
Do account for these expenses as well.
4. Not researching lenders
Not all lenders are the same. While PSU banks do offer better rates than private banks or foreign banks, they are more stringent with their lending norms.
Research your lenders objectively to find out one will suit you best.
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.