Home loan is a long-term financial commitment as it involves larger loan amount and longer tenure. Approval of the home loan application ultimately depends on the borrower’s credit rating and ability to make a margin contribution or down payment, as well as ability to make timely repayment to the future.
Ask yourself the following questions to assess your readiness for a home loan:
Do you have sufficient funds to make a deposit or margin contribution?
Home loan seekers are allowed to finance up to 75% to 90% of the cost of a property through a home loan. The rest of the amount must be arranged by the applicants from their own funding sources. Therefore, if you are considering taking out a home loan, aim to accumulate 10% to 25% of the value of the property to make the down payment or margin contribution. Paying a higher down payment or margin contribution has its benefits as it increases the chances of qualifying for home loans, at lower and lower interest rates. Since a higher down payment reduces credit risk for the lender, many lenders have started offering lower interest rates to loan seekers who pay a higher down payment or margin contribution.
Do you have a “good” credit rating?
Consumers with credit scores of 750 and above are considered financially disciplined and therefore pose lower credit risk to lenders. Reduced credit risk for lenders also causes many lenders to offer preferential interest rates to applicants with higher credit scores. Therefore, start working towards having a credit score of 750 and above if you plan to qualify for a home loan in the future. Begin the process by retrieving your credit report at regular intervals from credit bureaus or online financial markets. This will allow you to detect write errors, if any. You should also be financially disciplined and follow good credit habits, such as paying your credit card bills and existing EMIs by the due date, keeping the credit utilization rate below 30%, and avoiding several loan or credit card applications in a short period of time. By following these steps, you will steadily increase or improve your credit score.
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“Opt for a credit card to establish your credit score if you have never used a loan or credit card in the past. Credit card transactions are considered available loans and are therefore reported to the bureaus This information is then used to assess the credit score of cardholders. Opt for a secured credit card if you cannot use a regular credit card due to insufficient income, low income profile, employment, unusable location, etc. Secured credit cards are similar to regular credit cards except that they are issued against fixed bank deposits as collateral. Secured credit cards are also reported to the credit bureaus and are used to calculate your credit score,” says Ratan Chaudhary, Head of Home Loans, Paisabazaar.com.
Have you included your planned EMI home loan in your emergency fund?
Loss of income due to illness, job loss, disability, among others, can have a negative impact on the ability to repay your loan in the future. Failure to repay home loan EMIs by their due date would result in steep penalties and lower your credit score and future loan eligibility. Liquidating your existing investments to pay off home loan EMIs can negatively impact your long-term financial health. An ideal way to ensure continued repayments during financial demands is to add at least 6 months of projected EMI from your new home loan to your emergency fund.
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Do you have sufficient mortgage repayment capacity?
Housing lenders generally prefer to lend to applicants with monthly loan repayment obligations, including the EMI of the new housing loan, within the limit of 50-60% of their monthly income. Those who exceed this limit are less likely to be approved for a loan. Therefore, if you go over this limit, try foreclosing or prepaying some of your existing loans to reduce your monthly repayment obligations. If this is not possible, go for a longer home loan term to reduce the EMI of your home loan.
“You can use online home loan EMI calculators to find the optimal EMI for your new home loan. Consider the monthly contributions required to meet crucial financial goals when calculating the EMI, because neglecting them may cause you to resort to more expensive loans in the future to achieve your financial goals,” says Chaudhary.