Home Loan

What is Home Loan?

Home loan is a secured loan facility, which banks and Housing Finance Companies (HFCs) offer for purchasing, constructing, renovating, repairing and extending an existing/ new residential property. The loan is backed by the underlying property till the loan repayment. In case of default by the borrower, the lender has the legal right to take the concerned property into possession and then auction the property to recover the unpaid loan amount.

How a Home Loan Works?

• A home loan is sanctioned based on the applicant’s income, credit score and repayment capacity.
• The property’s value and legal status is also considered while approving the home loan.
• The lender, usually, approves up to 75 to 90% of the property value as loan.
• The interest is charged as fixed or floating type as chosen at the time of application.
• Once the loan is sanctioned, it is disbursed in full or in parts, depending on whether the property is ready or under construction.
• The loan has to be repaid through EMIs comprising of the principal and the interest component.
• The property documents remain with the lender till the loan is repaid in full.
• Once the loan is repaid, the lender closes the loan account and hands over the property document and loan closure documents.
• A successful closure of home loan helps improve the credit score significantly.

Home Loan Interest Rates

• Home loan interest rates offered to the applicants depend on their credit scores, monthly income, loan amount, LTV ratio, job profile, employer's profile, etc.
• Home loans usually involve large loan amounts and this along with their loan repayment tenures lead to high interest cost, which often exceeds their principal component.
• As the interest rates offered on a home loan influences its cost of borrowing, applicants should always look for the lowest home loan rates available on their credit profile.

Home Loan Processing Fees and Other Charges

Home loan processing fees may vary widely based on lenders and credit profiles of loan applicants. To get a fair idea of the home loan fees and charges, read the table below:

Home Loan Eligibility - Criteria to Qualify

Home loan eligibility may vary across lending institutions and home loan schemes. However, a common set of housing loan eligibility criteria is given below:

Age Requirement

• Minimum Age: 18 years whereas some lenders set the minimum age of 21 years
• Maximum Age: Usually 70 years at the time of loan maturity with some lenders extending the tenure till 75 years of age

Minimum Income

• Minimum Salary: At least Rs. 25,000 per month (varies across lenders & locations)
• Monthly Income: Many lenders prefer self-employed applicants to have an income above Rs. 30,000.

Credit Score

• Lenders prefer applicants to have credit score of 730 or above
• Higher the score, better are the offers and lower can be the interest rate offered

Employment Type

• Both salaried and self-employed individuals are eligible for home loans
• As the risk in case of salaried individuals is less, such applicants tend to get better loan offers

Existing Liabilities/EMIs

• A low Debt to Income (DTI) ratio, generally below 50 – 55%, is preferred by lenders
• A high DTI ratio increases the credit risk leading to stricter loan terms and higher rates

Property Documentation

• Properties with proper documentation helps in faster approval and higher loan eligibility.
• Approved building plans, local authority clearances and completion certificates helps get better loan offers

Apart from the factors mentioned above, lenders may require applicants to fulfil additional eligibility such as,

• Nationality: Indian Residents, Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs)
• Work Experience: At least 2 years (for salaried)
• Business Continuity: At least 3 years (for self-employed)
• Loan Amount: Up to 90% of property value

Types of Home Loans

Banks and HFCs offer different types of home loan schemes to serve unique requirements of various customer segments. Below is a brief overview of some of the common types of home loans.

1. Home Purchase Loan

Consumers avail this loan for buying ready-to-move-in, under-construction and resale properties, as well as residential plots to build a house within a set time frame.

2. Home Construction Loan

Also known as self-construction home loan, this home loan type allows borrowers to construct their own house on plots already owned by them.

3. Plot Purchase Loan

This loan facility allows individuals to finance their plot purchases and then turn their dream home into reality within a pre-specified period.

4. Home Renovation

With this loan facility, borrowers can finance the expansion, renovation, improvement, structural changes or essential repairs of their existing homes.

5. Home Extension Loan

Existing homeowners can avail this type of home loan to extend their property or add more space to it to meet the needs of their growing family.

6. Overdraft Facility

This home loan variant allows borrowers to reduce their interest cost by depositing surpluses in the Overdraft account and make withdrawals as per their needs.

7. Step Up/ Flexi Home Loan

This type of home loan allows borrowers to service just interest components during the predetermined pre-EMI period and repay regular EMIs thereafter.

Key Features and Benefits of a Home Loan

Availing a home loan can help in the following ways:

1. Enabling home ownership sooner

• Home prices in India are usually very high making it challenging for most people to buy a housing property on their savings alone.
• A home loan, in those cases, can help you buy your dream home sooner without having to wait till you accumulate money for your dream home.
• Utilising all your available savings/investments upfront for home purchase may adversely impact your other financial goals.
• With a home loan, you can manage your finances better by committing only a portion of your annual income towards home purchase.

2. Longer repayment period

• When compared to its alternatives like a personal loan, home loan offers longer repayment period usually extending up to 30 years.
• Such a longer repayment period helps in spreading out the total loan amount, resulting in more affordable EMIs.

3. Lower interest rates

• Home loan interest rates are significantly lower than personal loan interest rates.
• Home loan interest rates start from 7.10% p.a. whereas personal loan interest rates usually start from 9.98% p.a.
• Lower interest rates lead to reduction in the overall interest cost on the loan, making it more affordable for the borrowers.
• Some banks/HFCs also offer interest concessions of 0.05% to women home loan applicants.

4. Tax benefits

• As per Section 80C of the Income Tax Act, home loan borrowers can claim tax deduction of up to Rs. 1.5 lakh on principal repayments made in a financial year.
• As per Section 24(b), a deduction of up to Rs. 2 lakh can be claimed on home loan interest payments made in a financial year.
• However, it’s important to note that home loan borrowers choosing the new tax regime are not eligible to claim tax deductions under these Sections.

5. No prepayment charges

• Most banks/HFCs offer home loans at floating interest rates.
• Due to this, they do not levy any prepayment/foreclosure charges when borrowers prepay or foreclose their home loans.
• Even in case of most fixed rate home loans, lenders may waive off prepayment/foreclosure charges, provided the prepayment is made from borrowers’ own fund sources.

Top Reasons Why Home Loan Applications Get Rejected

our home loan application can be rejected due to several reasons, some of them are listed as below:

1. Low credit score

• Your credit score is a numerical representation of how well you have handled credit in the past.
• Having a low credit score usually indicates poor financial discipline, causing lenders to deem you as a risky borrower and reject your home loan application.
• Applicants with a credit score of 730 and above usually have higher chances of getting loan approval.

2. Low loan repayment capacity

• Lenders usually prefer offering home loans to those having their total loan EMI obligations, including the EMI of the proposed loan, within 50-55% of their monthly income.
• Those exceeding this limit have lower chances of availing home loan.

3. Issues related to property

• If the property doesn’t meet the lender’s requirements (e.g., value, condition) or does not adhere to the regulations of the local authorities, it can lead to loan rejection.
• For instance, lenders will not approve your loan application if your property is in some legal dispute, does not have a clear title, is too old or is not authorised by the local authorities.

4. Multiple loan or credit applications within a short span

• Lender-initiated requests of credit reports are known as hard enquiries.
• With every initiated hard enquiry, credit bureaus generally reduce the applicant's credit score.
• Making multiple hard inquiries within a short period may lead to a sharp decline in the applicant’s credit score, thus, reducing the chances of getting a home loan.

Ineligible occupation profile

Individuals whose occupation or employer profile is not among the lenders’ list of preferred occupation/employer profiles may not get their loans approved.

What Are the Tax Benefits Available on Home Loans in India?

House loan borrowers can avail tax benefits under various sections of the Income Tax Act. These home loan tax benefits help borrowers save a substantial amount of money every year. Below are the tax benefits that you can get on your home loan EMI payments:

It is noteworthy that these benefits can be claimed only if the borrower files the ITR under the old regime. These benefits are not applicable under the new tax regime. Joint home loan borrowers can benefit more if the principal and interest amount is considerably high.

Dos and Don’ts to Get Your Home Loan Approved Faster

Can I get a home loan for the entire property value?

No, you cannot take a home loan for the entire property value as the Reserve Bank of India (RBI) has limited the loan-to-value (LTV) ratio of housing loans. As per RBI guidelines, for loan amounts up to Rs 30 lakh, the LTV ratio can go up to 90% of the property value; for loan amounts above Rs 30 lakh and up to Rs 75 lakh, the LTV ratio limit is up to 80% of the property value and for loan amounts above Rs 75 lakh, the LTV ratio can go up to 75% of the property value.

This means that at least 10% of the remaining value has to be paid by the borrower as down payment. Subject to the caps set by the RBI on LTV ratios, banks/HFCs further fix the LTV ratio on the basis of the risk assessment and credit profile of the loan applicant. Those with lower creditworthiness are usually offered lower LTV ratio.

Government Schemes for Home Loans

The Government of India offers subsidies on home loans through the Pradhan Mantri Awas Yojana – Urban 2.0. Under this scheme, financial assistance of up to Rs 2.5 lakh per unit has to be provided to 1 crore urban poor and middle-class families for purchasing, building or renting affordable homes in urban areas.

Home Loan Balance Transfer

A home loan balance transfer can be a smart financial move if you want:

1. Lower Interest Rates

• If your credit profile has improved over time, you may now be eligible for lower interest rates than what you were initially offered.
• Transferring your loan to a lender offering better rates can reduce your EMIs and overall interest burden.

2. Longer Loan Tenure

• Some lenders offer the option to extend your loan tenure beyond the residual term of your current loan.
• This helps in lowering your monthly EMIs, although it might increase the total interest paid over the loan period.

3. Top-Up Loan Facility

• Balance transfer applicants often become eligible for a top-up loan, which can be used for personal or professional purposes without end-use restrictions.
• This is beneficial if your current lender isn’t offering a top-up loan or is charging a higher interest rate on it.

4. Additional Benefits

• Switching to a new lender might also offer perks like zero processing fees, EMI waivers, or better customer service, enhancing your overall loan experience.
• A balance transfer, however, may not be ideal if you’re in the later stages of your home loan tenure or if the net savings after deducting the applicable fees and charges such as processing fees (charged by the new lender) and foreclosure charges (applicable only in case of fixed rates) are minimal.
• Always calculate the total cost-benefit before deciding to transfer your home loan.

Common Mistakes while Taking a Home Loan

• Already having a high DTI ratio, generally above 60%, may reduce your chances of home loan approval.
• Applying for 100% LTV ratio i.e., the loan amount equal to the property value, may lead to a loan rejection.
• Applying for a number of loans in a short span can also lead to the loan rejection.
• The home loan may get rejected if the property is in some legal dispute, does not have a clear title, is too old or is not authorised by the local authorities.
• The lender may reject the loan request if income documents such as salary slips, ITR, P&L statement, etc. are not provided.