Securing and Managing a Home Loan – CA Sanjay Mittal

In the last two decades, the real estate industry has grown at a rapid pace in the country as more and more people opt to buy a house for themselves rather than living in a rented property. An increase in the purchasing power of people has also contributed to this growth.

However, buying a home in India can be a herculean task, if one is not aware of the procedures and legalities related to it, in addition to the financial commitments it requires. Thus, it is quite crucial for any home seeker to do to a lot of research work with regard to choosing the right house; understanding the various legal aspects and documentation required to buy the house and most importantly, how the payment for the house is to be made.

Managing the Finances

The residential property rates across India has sky-rocketed in the past decade or so, and it is not feasible for a sizeable population of the country to purchase a house without a home loan from a financial institution. However, as per the Reserve Bank of India (RBI) mandate lenders (financial institutions) can only provide 80% of the house value as a home loan, meaning homebuyers need to pay 20% of the property value as down payment on their own. Then there are additional costs such as stamp duty, registration fees, processing fees and moving expenses, for which no loan amount is sanctioned by financial institutions. Hence, it is quite necessary for people who aspire to purchase their dream homes to start saving as early as possible to manage the 20% down payment amount and the additional costs.

When it comes to getting a home loan to cover the rest 80% of the property value, one has to follow a multistep process to get an approval for the applied loan but before that the person has to assess his or her financial health.

Assess Financial Health

To assess financial health, one has to look at his or her:

• Income and Expenses: Evaluating the income sources and monthly expenses is a must to understand loan repayment capacity. Lenders generally prefer those borrowers, whose total monthly debt payments do not surpass 40-50% of their gross monthly income.
• Credit Score: One needs to ensure that they have a decent credit score to be eligible to get a home loan. This score is based on their credit card or loan repayment history. A point to note is that with a higher credit score, one can secure a home loan at a lower interest rate.
• Research Loan Options: Once one is satisfied with their financial health and have confidence to avail a home loan and repay it, then the next step is to understand the different types of loans on offer and choose the one that fits their requirement – financial situation and long-term plans. The choice can be made based on the loan term, interest rates – fixed rate or floating rate, repayment options, loan processing fees, loan disbursal time, etc.
• Check Eligibility Criteria: The next step, after zeroing down on the type of loan, one needs to map their eligibility with the criteria set by the lender. These generally include age, income, employment and credit score.
• Apply for Loan: Once the eligibility criteria is fulfilled, application for the desired home loan needs to be submitted to the financial institution for approval. During the application process, one is required to submit important documents such as identity proof, address proof, income proof and property documents along with the application and processing fee.

After due verification of the application, property evaluation and credit appraisal, the financial institution, upon satisfaction, is likely to approval the loan amount and issue a sanction letter mentioning the approved loan amount, interest rate, tenure and other terms and conditions. Upon agreement of the borrower, the loan amount disbursal takes place. This could either be in instalments or full, depending of the property construction stage.

Managing Loan Repayment

Once the loan amount is disbursed, one needs to get prepared to make the Equated Monthly Instalment (EMI) payments for the home loan, which includes both the principal amount and the interest on it. In order to stay away from any hassles like payment delays, the best option is to go for automated payment, which can be set up through one’s bank account.

The goal should be to pay the loan amount and the interests on time; however, if financial situation permits, one should prepay the loan amount in advance to save on interest payment but before doing so, one has to understand the lender’s policies for loan foreclosure and prepayment since certain financial institutions levy penalties for doing so.

Final Thoughts

Securing a home loan can feel a bit tedious and requires careful planning and due diligence. Understanding of documents, processes and legalities in this case is quite important, and one can always seek professional advice, if need arises. A final thought on securing and managing a home loan is that one should aim and achieve his or her dream of owning a house but while maintaining financial stability.

About Author
CA Sanjay Mittal – FCA, DISA & CS – is a well-known Chartered Accountant of Odisha. With over 15 years’ experience, he is an expert financial advisor and GST consultant.