Buying a home is not only one of the biggest financial decisions of your life but also the proudest one. Since it is a high-ticket item, you will need to take a loan to purchase a house. Here are some mistakes you must avoid when applying for a home loan.
Not reviewing credit scores before making a home loan application: Lenders consider the credit score of their home loan applicants while evaluating their creditworthiness. Applicants with a credit score of 750 and above have higher chances of obtaining home loan approval as they are considered more creditworthy.
Many lenders also offer credit score-based interest rates to home loan applicants, wherein those having higher credit scores are offered home loans at the lowest interest rates.
According to banking experts, individuals planning to avail of home loans in the near future should fetch their credit reports at regular intervals. This would allow them to take corrective measures to improve their credit scores. An improved credit score would increase their chances of home loan approval and possibly at lower interest rates.
Need an adequate down payment amount: You can get a home loan for only 75-90 per cent of your property value. The remaining amount needs to be paid as an upfront down payment. Therefore, before applying for a loan, you must ensure that you have the required corpus. Remember, using money from your emergency fund for your down payment is not a good idea. Also, according to IDFC Bank, you can make as high a down payment as possible to reduce the total loan amount and get a better deal on your loan.
Not comparing home loan offers from multiple lenders: Lenders consider the credit profiles of the home loan applicants while setting their interest rate, tenure, processing fee, loan amount, and loan-to-value (LTV) ratio. Lenders also factor in their cost of funds, credit policies, and other internal factors while setting their home loan interest rates. As these factors can vary widely among lenders, home loan features like interest rates, processing fees, LTV ratio, etc., offered by various lenders to the same applicant can also vary widely.
“Thus, home loan applicants should compare the home loan features offered by as many lenders as possible before making the home loan application,” says Ratan Chaudhary, head of home loans, Paisabazaar, a digital consumer credit marketplace.
They should start by approaching banks and NBFCs with whom they already have an existing consumer relationship. Then, they should visit online financial marketplaces to compare the home loan interest rates and other features offered by other lenders.
Finally, the applicants should opt for the lender charging the lowest interest rate for an optimal loan tenure and adequate loan amount.
Overestimating how much EMI you can pay: You may have to pay your home loan EMIs for 20 years or more. Hence, estimating the amount of equated monthly installments (EMIs) you can pay is very important. Factoring in future increases in income may not be a good way to decide on the EMI. Your EMI should never be more than 40 per cent of your total income. You can use a home loan EMI calculator to calculate the optimum EMI.
Trying to time the markets: Like investing in stocks, here, too, timing the markets is not a good idea. If you wait for the interest rates to fall, you may miss out on buying a property that is ideal for you. On the other hand, rushing to buy a property just because the interest rates are low without adequate preparation may also be foolish. Buying a home should be independent of the prevailing interest rates.
Keeping some of the above points in mind will ensure your journey to a new home is smooth and worry-free.