Home loan is a loan, advanced to a person to help them purchasing a flat or a house. Buying a house or a flat is a huge investment. Home loans are the invisible hand of aid to make the dream of a person to have his own house or flat, shape into reality without making a huge payment at one go.
There are numerous advantages and reasons why a person should take a home loan:
- A minimum of only 20% of property value a person have to pay in the beginning instead of a lump sum amount when they take a home loan .
- Home loans have significant tax benefits under Section 80C, Section 24 and Section 80EE. People should always apply for tax deductions when taking a home loan.
- As per Section 24(b) of the Income Tax Act, 1961 a deduction to a maximum Rs. 1.5 lakh towards the total interest payable on the home loan towards purchase or construction of property can be claimed while calculating the income from house property.
- Property prices have boom over a decade now, the prospect of capital appreciation is the biggest debate for buying a home. Construction of property have risen at 15 per cent annually in the past decade. Rents too have risen with inflation; making a home, one of the few investments that can shield you from inflation for the long term.
Eligibility criteria to avail a home loan
The eligibility criteria of a home loan varies from institution to institution, the basic criteria for home loans same for all institution are as follow :
- Employment stability : The candidate needed to be salaried for no less than 2 years in the present company or if the candidate is independently employed, then atleast 5 years of income is required for a home loan to proccessed.
- Age Criteria : The younger the candidate is the easier it is to get the loan for salaried candidate the age group should be 20 – 60 and for self employed the age group is 24 – 65.
- Credit Rating : Individual credit rating is higly important for a home loan, good credit rating helps in increasing flexibility of loan amount, EMI tenure and interest rates. Fradulency, defaulter in previous payment can result in cancellation of loan or might end up charging high rates of interest.
- Employer: For a salaried person reputative employer with high turnover increases the credibilty of an applicant.
- Financial situation: Past record of financial stabilty holds a huge value in deciding eligibility, interest rate loan amount and tenure.
- Cibil Score: To avail home loan cibil score should always be above 750.
These are the basic criteria when applying for a home loan, however at times the criteria varies based on institute owing to the documentation that they require to approve a home loan for the applicant.
Documentation required for loan approval
The documents required for loan approval on a general scenario are
- Application form with photograph duly signed
- Bank Account Statement
- Latest Telephone Bill
- Latest Credit Card Bill if any
- Latest Electricity Bill
- Employers letter certifying current mailing address
- Passport(Valid)- provided the passport address is present address mentioned in application form Government I-card with photo
- Existing Registered House Lease.
However some documentation that further adds on depending on the institution of loan approval are:
- Application form with photograph duly signed
- Last 3 month or more salary-slips for salaried person
- Proof of business existence and business profile for self employed.
- Processing fee cheque
- Form 16 / Income Tax Returns
- Education qualification certificate
- Last 3 years Income Tax Returns with computation of Income optional based on institution
- Last 3 years CA Certified / Audited Balance Sheet and Profit & Loss Account optional based on institution.
- Guarantor form optional based on institution.
Secured or Unsecured
Home loans are secured in nature as a result of which the asset is collateral for the loan. In case of failing to pay the loan the lender can take possession of the property. However when the lender take the possession of the asset due to default you could still end up owing money on the loan if you are a defaulter, if the asset does not sell for enough money to cover the loan amount. The loan applicant will be responsible for paying the difference.
Interest rates for home loans
In general the interest rates of home loans varies from institution to institution, however the margin varies from 8.5% to 8.9% p.a in case of floating rate, and 8.7% to 10.10% p.a in case of fixed rate, however the interest margins are completely based on loan amount and tenure of the loan.
Well to understand whether the rates charged are compounded monthly or annually we need to understand the what is EMI. EMI is a combination of both the interest and principal portion of the loan, to be paid every month.
Hence we can say interest rates are compounded on a monthly basis, since the fixed rate of interest creates a fixed EMI.However the EMI keeps on changing every month in case the interest rates are floating in nature.
Is prepayment option available?
Yes prepayment of loan amount is possible for home loans.
What are the prepayment charges?
There are no prepayment charges as per RBI guidelines on their monetary policy on 2012 – 2013.
However where prepayment amount exceeds 25% of principal outstanding, inclusive of all prepayments made within past 12 months, then the amount prepaid in excess of 25% of principal outstanding will attract pre-payment fees of 2%; unless specifically mentioned in the borrowers’ loan agreement.
What are the modes of repayment?
Repayment of home loans can be done by using both cheques as well as NEFT. However charges are applicable in case of swapping from one mode of payment to the other, charges varies from institution to institution.
What are the charges of Late EMIs ?
Late charges on EMI is generally 2% per month in case of home loans.
What are loan processing charges ?
Loan processing charges are non refundable charges, taken for processing a loan application, the rate are as follow: 0.50% – 1.00% of the loan amount or Rs. 1500/- (Rs. 2000/- for Mumbai, Delhi & Bangalore), whichever is higher + applicable Service Tax & Surcharge.
Special feature of home loans for woman employees?
Woman employees get rebated interest rates when applying for home loans. Stamp duties are 1% lower than that of women. Women are also eligible for tax deduction of 2 lakhs on interest rate paid on home loans. Women are further allowed to deduct interest paid against asset loans against net rental value if they put their home on rent.