Tag: home loan interest rate

Is Buying a House Good or Bad for Credit Score?

Having your own house is often a dream come true. However, do you know that it can affect your credit score too?

When you buy a house with a loan, then the way you manage the loan repayment and other types of credit during the tenure affects your credit report.

Home Loan Process and Credit Score

One of the biggest mistakes you can make when applying for a home loan is overlooking the importance of CIBIL score check.

There are two main reasons why you should always check your CIBIL score before applying for a loan:

  1. Credit Health

When you apply for a home loan, the banks send an inquiry for your credit report to assess your credit profile. However, this affects your score itself.

If you have applied for a loan at multiple banks at the same time, which many people do to increase their odds of loan approval, then it can have an adverse effect on your report. This is because this behavior is commonly dubbed as “credit hungry”. In other words, it suggests a sense of desperation and may lead to credit score damage.

By performing a CIBIL score check, however, you can see whether your report is in a good state or not. If it isn’t, you can work on it first and then apply for a loan. This way, you don’t have to apply for multiple loans. Since there will be fewer credit report enquires now, there won’t be any credit score damage.

  1. Better Interest Rate

Generally, a home loan has a long tenure which can be as much as 20 years. Thus, you would want to get the lowest home loan interest rate possible. Again, this is where checking your credit score can help.

If your score is low, then you can work on it so that when you do apply for a loan, you can negotiate with the lender for a better interest rate.

Credit Score During Home Loan Repayments

The way you repay your loan can also affect your CIBIL score. In that regard, the following are some of the things you should keep in mind:

Repayment Pattern

One of the most important things that you should be careful about during the loan tenure is the repayment schedule. It’s super important that you pay all your EMIs on time. This is because punctuality matters a lot when it comes to credit score calculation.

If you miss an EMI, then your bank informs their credit bureau about the same. They, in turn, mention this in your credit report under the tag DPD which stands for “Days Past Due”. So, if you pay an EMI 11 days past the due date, then in the accounts section of your credit report there shall be a remark like “DND: 11”.

Remarks like DND can have a big impact not just on your credit report but your score as well. Thus, make it a point to repay all the EMIs on time at all costs.

Credit Report Details

If you want to maintain your credit score, then be sure to conduct a CIBIL score check every once in a while. This is because as you will repay your loan, it’s possible that an error takes place in your report which affects the score.

For instance, your bank may accidentally inform the credit bureau that you missed a payment, or you may become a victim of identity fraud, etc. Thus, by checking your report every few months you can avoid these issues easily.

Improved Variety

While you have to be careful with a home loan, it can also improve your score easily and open more doors for a better home loan interest rate in the future. This is because when you take a home loan, it improves the credit variation in your credit report, assuming that it’s currently based on just a credit card repayment history or a personal loan repayment history, etc.  In fact, the more is the variety, the better is the score.

The bottom line is that home loan can be good or bad for you depending on how you manage it. If you are punctual with your EMIs and don’t accumulate a high debt, then it’s good for you. However, if you delay the payments frequently or simply default at one point, then it can have serious repercussions on your score.

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Buying A House? 6 Things To Keep In Mind While Arranging For A Down Payment

The biggest aspiration of an average Indian family is to buy a house. Though home loans have made it quite easy for people to make the payments over a span of 15 to 20 years, it does not offer a complete solution. Banks fund only 80% of the property value and the borrower has to arrange for the balance on his own. As the property prices are soaring high, arranging for this 20% down payment is also an uphill task. It would take a few years to set aside and accumulate funds for the down payment.

Here are 6 things that you should keep in mind while arranging for the down payment

 

Start planning early- As soon as you become financially independent, you must start putting aside a portion of your salary for this purpose. The price of the house you wish to buy, and the amount you can set aside each month will determine the time it will take to collect the required amount. Instead of keeping this fund in a savings account, you may also choose other options that fetch better returns. Investing in debt linked mutual funds through an SIP is a secure way of accumulating the funds. You can also invest in equity if the time frame you have in mind to buy the house is more than 3 years. By starting early and following a discipline financial approach you can easily achieve this goal.

 

You must handle your existing debt responsibly and take care of the factors that affect CIBIL score calculation to ensure that your credit profile is in good shape. Banks are flexible with the amount of down payment they ask the buyer to put forward if he has an excellent credit score.

 

Liquidate existing savings– If you are planning to buy a house very soon, then taking stock of your existing financial resources and then liquidating your investments (Stocks, Mutual Funds, Fixed deposits, gold, bonds) is the most effective option. When you do so, do not forget to keep a portion of your savings for emergency requirements and short term needs of cash.

 

Borrow from relatives- If your own savings are still falling short, you may seek help from your friends and family. Remember to take only the amount that you can easily repay after an agreed upon time. Though this borrowing is usually interest free, it is still your liability and you need to keep your word in order to avoid straining your relations.

 

Other borrowings

Some employers offer soft loans to its employees at little or no interest charges. You can try and explore whether this option is available to you. An amount will be deducted from your income every month as repayment towards this loan.

You may also raise funds by borrowing against fixed deposits, mutual funds, stocks or jewellery, when liquidating them isn’t a wise decision. The loan amount will be only 70% of the savings value but it can be availed at a very low rate of interest.

You can also withdraw money from your provident fund to arrange money for the down payment.

Loan can also be taken against a life insurance policy at low interest rates. This is not an ideal decision, since it adds up to your liability.

A last resort can be to take a personal loan. But this is a very expensive option as the rate of interest can be as high as 20%. These loans can put a severe strain on your budget and hence they should be avoided as far as possible.

 

Calculate down payment amount correctly

 

As mentioned earlier banks finance upto 80% of the property value. However for property worth less than Rs 30 lakhs banks may even finance 90% of the value. Some banks may reduce it required and offer a greater amount of loan if the borrower has an excellent credit score. So check the loan to value ratio offered by your bank to estimate the down payment amount that you need to arrange.

If your credit score is low you may even be asked to put in a greater percentage of down payment. Find out the factors that affect credit score calculation and work to improve your CIBIL score to avoid such a situation.

When banks offer home loans, they do not include the stamp duty and registration charges in this amount. These expenses have to borne by the buyer completely. So make sure you are clear about the amount that you need to arrange.

 

Be sure of your capacity to pay the EMIs

Even though you can take a home loan for 80% of the property value, you don’t necessarily have to. Make sure you can pay the EMIs comfortably before taking on the liability. If you think that EMI will put too much strain on your monthly income, then you may want to postpone your plans so that you can arrange for a bigger down payment and reduce the loan amount.

With proper planning, budgeting and a disciplined approach you can ensure that the down payment amount is readily available when you need it to buy the house.

What to do when you cant repay your home loan?

As the real estate prices are soaring high, it is becoming difficult to buy a residential property by making a full down payment. A home loan is a blessing for a middle class Indian family as it helps them buy a dream abode without arranging for the entire amount upfront.  The loan tenure usually extends for a period of 15 to 20 years making EMIs affordable. But many unforeseen circumstances can make it difficult for a person to honour this long term commitment. A loss of a job, medical reasons, accidents, underestimation of future expenses are just a few reasons that can make it difficult to make the EMI payments on time. What if you miss some home loan EMIs? What impact will it have on your credit profile? How should you handle this situation? Read on to find all solutions.

Repercussions of not paying the EMIs

The first missed EMI doesn’t involve any serious action by the bank apart from a penalty charge that is added to the next EMI. The bank waits till the second monthly cycle to see if it is repeated default. If the second EMI is also missed, then the bank sends a reminder to the borrower to pay the amount. If the third consecutive EMI is also missed and the borrower doesn’t respond, the bank will send a legal notice to the borrower. It will mark the loan as an NPA and enforce “The Securitization and reconstruction of financial assets and Enforcement of Security Interest act’2002” ( SARFAESI)” to take possession of the property. In another 2 months the bank can initiate the foreclosure procedure wherein it auctions the house to recover the outstanding loaned amount. However no bank likes to get involved in this cumbersome process. The bank will always be open for negotiations and try to offer you a solution to settle things without a foreclosure. For this you need to approach the bank in a timely manner. You have a sufficient time of six months before your house is put on auction.

Impact on credit score

Payment history accounts for 30% of your credit score. Every month the missed payment information gets recorded on the CIBIL report and dinges your score by a few points. When you miss three consecutive EMIs, and the bank writes off the loan as an NPA, your name gets recorded in the loan’s defaulter list. This severely hampers your CIBIL score, and reduces your chances of getting approved for any kind of loan in future until you work to improve your credit score. If you do get approved, you will have to pay a high home loan interest rate on your borrowings.

Plan of Action

  1. In case you are unable to pay the EMI due to a sudden medical problem or a job loss, then the first thing is to approach the bank and explain your inability to meet the current EMIs. Take relevant documents to prove that the problem is temporary and you will get over it soon and service your home loan EMIs in the usual way. Also take proofs to show that you’ve always been diligent in meeting your obligations and your intentions are good. If the bank finds your reason valid and gets convinced that your situation will improve after a few months it will grant you a moratorium period of 3-6 months.
  2. If you have taken insurance, check whether it covers for loss of job or major illnesses. If such is the case the insurance company may take care of the EMIs for three months.

 

  1. If an increase in the rate of interest has increased your EMI amount or there is a strain on your finances due to some other reason, you can request for a restructuring of the loan. The tenure of the loan will be extended so that your EMI amount reduces.

 

  1. If you are facing regular cash flow problems, but have sufficient amounts in investments like FDs, equity, mutual funds, then you may think of liquidating your investments to service the EMIs and avoid the risk of losing your home.

 

  1. If you think there is no viable option left, but to dispose the property, you may discuss it out with the bank officials. Ask them if you can arrange the sale of the house yourself and use the sales proceeds to repay the whole amount. This will ensure that you get the best deal possible. It may leave you with some amount even after paying the bank’s liability.

 

Bottomline

Home loan is a long term liability and the EMIs take up a large chunk of one’s income. If it is not managed properly it can become a huge financial burden. It is always a good practice to have a contingency fund of 4-6 months of the EMI to tide over emergency situations. An insurance that covers for loss of job and illness is also a good way to prepare for crisis situation. If you are still not able to make repayments on time, follow the strategies above to avoid the risk of losing your home. Remember a dialogue with the bank will always help you find a feasible solution.