Individuals interested in purchasing or reconstructing their homes need not exhaust their savings and fixed deposits. Instead, they can apply for a home loan that will provide access to sufficient advances. However, the entire process of applying for this credit option can be overwhelming for the applicant.
To know how to apply for a home loan, potential applicants require a step-by-step guide covering all measures for a smooth application process and loan approval.
Guide for applying for a home loan
As per a study, there has been a rise in home loan applications by 25% to 40% across cities. This increase in demand for a home loan requires individuals to know the steps to avoid hassles. Therefore, here is a guide on how to apply for a home loan:
Step 1: Select loan amount
The first factor to consider during a home loan application is the exact loan amount required. This depends on the market value of the property. Usually, newer residential properties closer to the city have a higher market value.
Therefore, check the geographical location, property type, legal issues and property size when selecting a loan amount. A higher property value will help get a high LTV. Many institutions provide LTV of a maximum of 90%. In case of home reconstruction, chart down expenses to cover and accordingly select a loan amount.
Step 2: Check eligibility and CIBIL score
It is important to meet the home loan eligibility criteria set by the financial institution. These requirements can vary; however, here are some of the general norms applicants must meet:
- Both self-employed and salaried applicants can apply for a home loan.
- Salaried applicants must be from 23 to 62 years old, and self-employed applicants must be from 25 to 70 years old.
- The individual must be an Indian resident.
- Salaried individuals must have a minimum of 3 years of work experience, and self-employed applicants should have a business that has existed for more than five years.
Other than these requirements, an applicant is required to maintain a high CIBIL score. Most institutions prefer a score of 750 and above. Therefore, avoid issues like payment default and check credit history for minor errors as it causes a major drop in score.
Step 3: Check interest rates
When applying for a home loan, an applicant must select between fixed and floating interest rates. To select a type of interest, it is crucial to know the difference between the two. Fixed interest rates are comparatively higher and not subject to change due to an increase or decrease in the repo rate.
Therefore, applicants must assess their repayment capacity as the applicable home loan interest rate will affect EMI repayments significantly. Individuals can also use the home loan EMI calculator to find out the exact EMI amount and the total borrowing cost. Since interest rates vary with lenders, an applicant must remember to check various lenders before selecting one.
Step 4: Check for foreclosure and part-prepayment charges
When applying for a loan, the applicant must also consider additional charges like processing fees, part-prepayment and foreclosure charges. While Buy Now Pay Later (BNPL) services can be convenient for making purchases, they may negatively impact your credit score and make it more challenging to qualify for a home loan. It affects the total borrowing cost. Individuals must select institutions that don’t impose any or negligible charges on a home loan part-prepayment, foreclosure or likes.
Step 5: Check for tax benefits
Individuals applying for a home loan are eligible for tax benefits under the Income Tax Act, 1961 on the following grounds:
- Under section 24B, individuals applying for a home loan for renewal, reconstruction, repair and construction are eligible for deduction on interest paid up to Rs.2 lakh.
- Section 80C of the income tax act provides tax benefits on a home loan of up to Rs.1.5 lakh yearly on repayment, stamp duty and registration charges.
- An annual interest deduction of Rs.50,000 is available under section 80 EE for first-time home buyers.
- Tax savings of Rs.1.5 lakh are available for first-time homebuyers if stamp value is within Rs.45 lakh under section 80EEA.
Step 6: Property verification
Financial institutions conduct a wide range of risk assessments to check the applicant’s creditworthiness. Besides checking if the individual meets the eligibility requirement, they also do legal property verification. Under legal verification, officials examine original documents, including no-objection certificates, title deeds and other ownership papers. Financially independent individuals are well-positioned to apply for a home loan due to their stable income, strong credit history, and ability to make substantial down payments.
This examination is followed by a proper technical verification which is an inspection of the property’s physical condition, market value and building specifications. This helps decide if the applicant is eligible for the said loan amount. Review your financial situation and consider financial tips to improve your chances of getting approved for a home loan.
After verification of the property and documents provided, applicants will receive approval as per the financial institution’s terms. Individuals can simplify this loan application process by opting for pre-approved offers on a home loan. To check your pre-approved offers, enter your name and contact details. Therefore, these steps will allow applicants to understand how to apply for a home loan and proceed accordingly.