Step-by-step approach to preparing for a home loan


Lenders assess the borrower’s credit risk before approving home loans by assessing their income, credit rating, repayment capacity, etc. Since the home loan involves a large financial commitment and a longer tenure, it is imperative that borrowers are financially prepared well in advance.

Here’s the step-by-step approach to getting ready for a home loan:

Assess your credit report

Most lenders consider a 750+ credit rating to be good, and those with such ratings are more likely to get loan approval. Many lenders have also started to extend preferential interest rates to mortgage applicants with good credit scores. Thus, potential applicants for a home loan should assess their credit report before applying for a home loan.

This would allow applicants with a lower credit score to take the appropriate steps to improve their credit score first and then submit their home loan application with a higher score.

Loan applicants can get a free credit report from each of the 4 credit bureaus per year. Alternatively, they can also consider visiting online financial markets to benefit from free credit reports with monthly updates.

Create a corpus for your own contribution to the acquisition or construction of the house

RBI guidelines allow real estate lenders to finance up to 75-90% of the value of the property through home loans. The final proportion is set according to the credit risk assessment of the lender of the loan applicant. The rest of the component must be provided by the borrower from its own resources. Thus, home loan applicants should aim to accumulate 10-25% of the cost of the property before submitting their application.

Try to contribute a larger amount from your own resources, as this will lower your interest charges. Making a higher contribution also increases the chances of a mortgage loan approval as it reduces the credit risk for the lender. However, do not compromise your emergency fund and crucial financial goals in your attempt to make higher contributions as this may require you to opt for loans at much higher interest rates to meet demands. financial goals or meeting critical financial goals.

Compare the different lenders

The interest rate, loan term, processing fee, LTV ratio and loan amount offered by lenders can vary widely depending on their risk assessment of the borrower. However, with many lenders and loan options to choose from, it may not be possible to approach every lender for comparison. Instead, you can visit the online financial markets to compare the loan options offered by different lenders.

Review your EMI accessibility

Lenders take the repayment capacity of applicants into account when assessing their loan applications. They prefer that loan applicants’ monthly repayment obligations (including EMI for new loans and existing EMIs for other loans) are less than 60% of their gross monthly income or net monthly income. Those who exceed this limit are generally less likely to get approval for their mortgage application.

So, be sure to keep your monthly loan repayment obligations within 60% of your RMG or NMI before submitting your home loan application. If not, you should first consider reducing your existing IMEs by prepaying or foreclosing on a few of your existing debts. Also, opt for a longer tenure or a higher down payment to lower your total EMI expenses and improve your chances of mortgage approval.

Create an adequate emergency fund

Financial demands such as job loss, illness, etc. arise out of the blue and can seriously disrupt your income, cash flow, investments and ability to repay loans. Failure to repay the EMI loan on time would not only result in hefty penalties, but also lower your credit score. While investments can be liquidated to pay off EMIs, this can have a negative impact on your long-term financial health.

One of the best ways to deal with such uncertainties is to create an adequate safeguard in the form of an emergency fund. This fund should be at least 6 times your unavoidable monthly expenses, including your existing IMEs as well as the new IME for your home loan. Therefore, as soon as you start planning for a home loan, try to simultaneously increase the size of your emergency fund by at least 6 times the EMI of the expected new loan. Additionally, since financial emergencies can arise at any time, be sure to place your emergency fund in highly liquid instruments such as high yield savings bank accounts and term deposits.

Another profitable alternative is to go for mortgage variations like the mortgage interest saver or overdraft options. This option allows you to open an overdraft account in the form of a current or savings account linked to the home loan account. Borrowers can deposit their excess into the overdraft account and withdraw as needed.

Since the interest component of the loan account is calculated after deducting the average monthly balance of the overdraft account from the unpaid loan amount, the parking of your surpluses in the overdraft account has the same purpose as prepayments. On the other hand, the liquidity facility offered by the overdraft account allows it to be an effective tool for parking your emergency fund.

The author, Ratan Chaudhary, is responsible for home loans at Opinions expressed are personal

(Edited by : Anshul)

First publication: STI

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