6 mortgage planning strategies for new borrowers

Lenders mainly approve home loans based on the applicant’s income, credit rating, repayment capacity, and other factors. Failure to meet the criteria set by lenders may result in the rejection of a home loan application.

Here are some of the factors new borrowers should keep in mind to increase their home loan eligibility.

Check your credit score at regular intervals

Your credit score would be among the first factors considered by banks and HFCs when evaluating home loan applications. Applicants with credit scores of 750 or higher are more likely to be approved for a loan. These credit scores can also help them qualify for home loans at lower interest rates. Therefore, those considering availing home loans in the future should start reviewing their credit scores at regular intervals. This would allow people with low credit scores to take the necessary steps to improve their credit rating. An improved credit score would increase their chances of getting home loans at lower interest rates.

Try putting in a bigger down payment

The LTV ratio is the proportion of the value of the property that a bank or NBFC can lend to the mortgage borrower. The rest of the cost of the property must be covered by the buyer from his own funds, either as a deposit or as a margin contribution. The final LTV ratio for a home loan application will primarily be determined by the lender’s assessment of the borrower’s credit risk. Therefore, applicants should first try to save at least 10% to 25% of the value of their property to ensure that they are financially ready to make a margin contribution or down payment on the loan.

A higher down payment reduces credit risk and improves the chances of loan approval. Some lenders also offer lower interest rates to borrowers opting for lower LTV ratios. Therefore, home loan seekers looking to lower their interest charges should aim to create larger corpuses for their home loan down payment. However, avoid compromising your emergency fund and investment portfolios for critical financial purposes to make a higher down payment or margin contribution. This might force them to avail loans at higher interest rates to meet financial demands.

Examine your EMI affordability

Home lenders also consider applicants’ ability to repay when evaluating their home loan applications. Banks and HFCs generally prefer to lend to applicants whose total EMI obligation, including that of the new home loan, remains within 50-60% of their monthly income. Those who exceed this limit have less chance of getting a home loan approved. These applicants should try to reduce their loan repayment obligations by foreclosing or paying off some of their previous loans, choosing a longer repayment term, or making a higher down payment or margin contribution for their new home loan.

Applicants can use online home loan EMI calculators to find out their optimal EMI based on their repayment capacity. This reduces the risk of default by EMIs in the future.

Factor EMIs from your home loan into your emergency fund

Unforeseen financial demands or loss of income due to job loss, illness, disability or other circumstances may arise at any time, which may affect the ability to repay your loan. Additionally, EMI defaults on home loans can result in penalties and a lower credit rating. Although you can liquidate your current investments to pay off your home loan EMIs, this can have a negative impact on your long-term financial health. Therefore, it is best to include estimated home loan EMIs for at least six months in your emergency fund. This will allow you to pursue EMI refunds even if you are in financial difficulty.

Compare mortgage offers from several lenders

Interest rates, loan amount, LTV ratio, loan term, processing fees and other costs associated with home loans can differ significantly from one lender to another depending on the assessment of the credit risk of loan applicants. As home loans generally have a higher value and longer term, even a small difference in the interest rate can have a long-lasting effect. Therefore, home loan seekers should thoroughly research and compare the features of home loans offered by as many banks and housing finance companies (HFCs) as possible before settling on an individual.

Home loan seekers should first contact lenders with whom they have existing deposit or lending relationships, as many home lenders offer preferential interest rates and other terms and conditions to their existing customers. Next, they should visit online financial markets to assess interest rates and other features of home loans offered by other lenders.

Loop in a co-applicant to increase loan eligibility

Many home loan applications are rejected due to low credit, insufficient income, high EMI requirements, etc. home loan applicants. These borrowers can improve their loan eligibility and chances of approval by bringing in a co-applicant, preferably someone with a stable income and good credit rating. Note that setting up a co-request may also earn a 0.05% interest rate concession to some lenders.

(By Ratan Chaudhary – Head of Home Loans, Paisabazaar)