Tag: home loan interest rate

Can The Credit Score Prevent You From Taking A Home Loan?

Buying your dream home is like achieving a major milestone in your life. After you have done your research and decided on a location to buy your house, the next hurdle that you need to cross is to get the approval of finances. There are various factors that are considered by the lenders to determine your eligibility for the loan. Your credit score is the most important among them. Your credit score is a three digit number that summarises the information in your credit report. Your past repayment history, outstanding debts, credit utilization ratio, credit mix, length of the credit history are some major factors that determine your credit score. All lenders look at this number to understand your financial standing and determine the risk associated with you as a borrower. It gives them a quick impression of your probability of default based on the past behaviour. Most financial institutions have a minimum criteria that one needs to satisfy in order to get approved for the loan. Different banks have different guidelines relating to the minimum credit score that they are willing to accept depending on their risk tolerance. But in most cases, a home loan gets approved if your score is more than 700.

A high CIBIL score is an indication that you have serviced your past obligations diligently. It is a reliable measure of your future repayment behaviour and hence it improves your chances of getting a loan. A low score that does not satisfy the minimum limit set by the bank may lead to a denial. So if you wish to avoid any chances of rejection, you must pay attention to your CIBIL score and ensure that it stays above the 700 mark.

Your credit score not only affects the bank’s approval decisions, but it also determines the home loan interest rate that they will charge. Yes, banks in India are now planning to switch to risk based pricing, where they will charge a lower rate of interest from people with an exceptionally high CIBIL score. They believe that lending to an individual with a fairly high score will be a good investment as he won’t have problems in repaying the debt. Loans for low CIBIL score are available at a higher rate as lending to such individuals is considered as a riskier investment. Bank of Baroda has already announced that it has linked home loan interest rates with the CIBIL rating. So if you maintain discipline in paying your existing loans, your credit score will improve, and you will have to pay a lower EMI on your new loan.

If you are planning to buy your house anytime soon, checking your credit score should be your top priority. Do it at least 6 months prior to filing a home loan application, as it will not only help you gauge your financial standing but also give you enough time to work on your score if it isn’t in a good shape. If may be extremely devastating if you find out that your credit rating is too low to qualify for a home loan. Do not worry, all is not lost. Many peer to peer lending options are available online where you can get loans for low CIBIL score. But these loans will be available at a higher cost. A difference of even half a percentage of home loan interest rate can cost you thousands of more rupees over the life of the loan. It is in your best interest to work on your CIBIL score and improve it so that you can get approved for home loans at attractive rate of interest.

Make sure you make timely repayment of your instalment debts from now on as late payments pull down your score. Get a secured credit card and use it for small purchases every month. Timely payments of the credit card bill will help in establishing a good track record of the payments made that would be reflected in your report. Do not utilize more than 30% of the available credit limit. Check your free credit report every year to ensure that you are moving in the right direction. Also scrutinize your report to make sure it does not have any errors. Sometimes errors on the part of the credit bureau are also responsible for a low CIBIL score. So if you find any discrepancies you can raise a dispute with CIBIL.

Raising your CIBIL score will not happen overnight. But if you focus on taking positive actions you can slowly move up the ladder and make your CIBIL score ready for an easy approval of home loan at attractive interest rates.


6 Important Things You Should Know Before Taking a Home Loan

Home loans have become inseparable parts of home deals today. For an individual the decision to buy a dream home depends on their eligibility to get a loan. Probably this is why people begin to plan for home loans much in advance.

To understand how home loans work, you should first understand that these are basic loans which all the popular banks offer for long run. Home loan is nothing but a monetary assistance offered by a bank or financial institutions to make a purchase of residential property. The purchased home usually stands as security until you pay back the entire loan amount with interest. Thus loans are secured loans and banks are always keen to offer home loans.

The basic requirement to get a home loan may differ from lender to lender. Usually to get a loan, you should have a fixed, dependable source of income. You may be employed and self-employed, it doesn’t hurt your stakes. You need to have a good financial history and banking transactions for at least 6 months. The age should be between 21 and 60 years of age for employed or between 21 and 65 years, for self-employed.

Let’s outline 6 important things you should know before taking a home loan.

How much you want to borrow?
First things first you must clearly know how much you want to draw from the bank. These days you can avail home loan up to 90% value of the property, however decision to borrow the amount should not be dependent on bank’s will only. The banks assess the loan amount by calculating your net income, i.e after deducting your current credit outstanding and day to day expenses from your income. Based on the net income they would calculate how much you could spare as loan EMI. As a rule of thumb, banks generally limit the loan installments at around 40 to 50% of the borrower’s salary.

Type of loan
There are two types of these loans based on the interest rate. One is fixed rate of interest and the other is floating rate of interest. When A person is taking fixed rate loan,it  usually charges a fixed rate across the whole tenure. Interest is constant for the full period of the loan. On the other hand, the interest on the floating rate changes with the market rates. For example, when the market rates rise, the interest rate on the these loan goes up and when the market rates fall the interest rate on the home loan goes down. The fixed rate home loans are generally higher than current floating rates.

Tenure of loan
Major lenders offers maximum 30 year tenure for home loans. EMI is lower when the tenure is longer. Being fat loans, people with limited resources opt for 25 to 30 year loan. However, it is advisable to take a loan for the shortest tenure if you can afford. Suppose, in a 10-year loan tenure, the interest paid is 57% of the borrowed amount. This can go up to 128% if the tenure is 20 years. So, always keep the tenure as short as possible.

Tax benefits
You can avail tax benefits with this loans and you should clearly know about the benefits in advance. You and the co applier both can get income tax deduction up to 2 lakhs for home interest. The property however need to be self-occupied to avail the benefits.

Loan defaulter
All those who have not repaid their loans will find their names enlisted in Loan Defaulter List. The default can happen when you do not pay EMI. So, the borrower must be careful about the add-on charges and penalties. It is not just the interest that you pay, there can be additional charges such as administrative and service charges or processing fees. Once blacklisted as a loan defaulter, it would take many years to restore the credit score.

Prepayment penalty
Before you sign the deal ask the lender if there is any prepayment charges. By prepaying the loan you close the account earlier than anticipated and reduce the cost of loan. Many banks charge a penalty on prepayment of home loan, so if you intent to prepay, look for the loan that allows you to prepay without a charge.
Following these six points you could be rest assured of finding a good home loan deal.

4 Things to Avoid When Picking a Home Loan

A house loan is unlike any other loan you would take in your life. Not only it’s exceptionally big amount-wise, it also has a term duration as long as 20-30 years, which is a lot. In other words, it’s a big responsibility and you must be careful with the decisions you make for it.

You may have read a lot about all the do’s of the home loans like finding a low home loan interest rate, finding the right financer, etc. but the don’ts are equally important to be aware of.

On that note, the following are the top 4 things to avoid when picking a home loan:

  1. Spending Your Life’s Savings

There are certain events in your life where you have to take bold decisions. However, there is a thin line between being “bold” and being “foolish”.

For instance, after searching for a perfect house for weeks you finally found one that makes the cut. However, it’s way above your original budget. So, to fill in the cash-gap you decide to break open your biggest piggy-bank- your life’s entire savings.

Big. Mistake.

Your life’s savings are meant for emergencies, and they might be the only thing to save you from a rainy day. So, it can be a terrible idea to splurge all your savings on a house. Ironically, you may also end up on a loan defaulter list because if you became cash-strapped down the road, you won’t be able to pay the EMIs and you won’t have any savings to use either.

  1. Not Factoring in the Additional Costs

A lot of people forget about the costs that are added to the cost of the property itself. For instance, the cost of the furniture, lighting fixtures, etc. along can easily hit a six-figure. Then there are maintenance costs which include payments to the security guards, sweepers, gardeners, etc. and membership costs (if you bought a house in a society/locality) for gym, clubs, etc.

Your bank will also impose a few charges of its own such as processing fee, transfer fee, etc.

  1. Settling for the Interest Rate Offered

It would be unwise to accept the first offer made to you by your bank for a loan. You have all the right to negotiate the terms and the home loan interest rate itself.

If you have a top-notch credit history and a decent credit score, then you are a good candidate for a home loan. If you are an old customer of the bank and have always paid your credit card bills on time, maintained good relations with the staff, etc. then it’s even easier to get a better interest rate. All you have to do is let them know upfront that you have a spotless credit profile and you have been a loyal customer to the bank, which is why you should be given a better interest rate.

  1. Applying Without Good Credit

Applying for a home loan when your credit report isn’t quite ready yet, can do harm on multiple levels. For starters, a poor credit score will instantly increase your chances of loan rejection. However, if you have applied at several banks, then it will damage your score even further, thus reducing your odds even more.

It’s important that your work on your credit report first before sending out the loan applications. If there are some serious remarks on your credit report such as a mention on a loan defaulter list, settled accounts, etc. then you must get them removed by talking to your bank or the credit rating bureau. Similarly, if there are any discrepancies in loan repayments, current debt, personal details, etc. then you should get them corrected as well.

Only with a good credit report, you can easily obtain a loan at an affordable interest rate.

So, these were some of the most common yet the most important things that you must avoid when applying for a home loan. In doing so, you are sure to save yourself from a lot of trouble and stress.