Today millions of Indians are opting for home loans to purchase their dream properties. However, not everyone is acquainted with the process of procuring a home loan. Consequently, many a loan application gets rejected and many a buyer finds himself in a quandary after securing the loan because he is unable to pay off its EMI. It is therefore imperative for home buyers to be well versed with banks’ criteria for disbursing home loans, know their monetary obligations to the bank or financial institution funding their purchase to avoid a negative impact on the credit score in the future. Read on to know more about the home-loan procedure and your loan eligibility and repayment liabilities.
Your financial health is as important as your physical health. Certainly then, your credit score is a vital indicator of the former. Whether it’s the new apartment you are eyeing or a business that you are planning to set up or simply the medical expenses of your loved ones, a loan could be required anytime. As such, the first thing a bank looks for, before lending money, is whether you qualify with the required credit score for a personal loan or a car loan or a consumer loan. This is to ascertain your risk value to the bank. Following are just some of the key ways to ensure you keep your credit score, well above average.
1. Pay your dues on time: This is the single most important factor which influences your credit score. Clear your outstanding dues on time. When you spend from your credit card, make sure you don’t just pay the minimum amount required to continue the usage but pay in full or the maximum amount which you can afford for that particular month.
2. Cut your Credit Cards: Although there is no restriction on the number of cards one can use, it is better to have only as much as you can pay for. For instance, if you have multiple credit cards, then your total credit increases, but then you may also have to pay a minimum amount to maintain the cards. And It’s easy to lose track of the payment dues especially if they fall on different dates and have a variable amount. A series of defaults is good enough to pull your score down. A better way to increase your credit limit and decrease spend ratio is to have no more than 3 credit cards at a time. If you have only one, and you are paying the dues on time, then nothing like it. One more benefit of minimizing your credit cards is cutting down the probability of identity fraud, by restricting the loopholes leading to your account.
3. Use your Credit Card responsibly: Most of the time, rampant usage of Credit cards is accountable for a low Credit score. It is a good practice to use your Credit card with the thumb rule that you restrict your spending upto 30-35% of your credit limit. If you frequently need more money than that, then you may opt for another Credit card. Think of your Credit Card as a necessity, not as a luxury.
4. Old is gold: A good history of timely payment exhibits responsible behavior. Do not hasten to erase your records from the accounts once you have paid your dues in full, because a trail of paying EMIs on time is actually a score booster. Also, in case of credit cards, if you are planning to discontinue the excess ones, make sure that you retain the older ones and eliminate the newer ones. A credit card with a long history of timely payments indicates a good track record.
5. Limit your loan applications:It could happen that you apply for a loan at a bank, but it gets rejected owing to a low credit score. In such case, do not hasten to re-apply with another bank as they would be able to see your rejection by the previous bank. This could further hurt your credit score & make things worse. In case of Credit cards, applying for multiple cards at a time indicates a credit hungry behavior.
6. Be cautious with inquiries: Whenever you want to buy a new car or a new house, you would want to opt for a loan. And it’s a common practice to enquire with various banks to compare and contrast the interest rates before you crack the perfect deal. However, banks check your credit score everytime you enquire. Such an enquiry is termed as hard enquiry. A number of consecutive hard inquiries is enough to hurt your credit score. In fact, as an immediate consequence, it may even affect the amount of loan that you are entitled to.
7. Keep a track of your Score: Checking your credit score regularly is a good and harmless practice. It helps you keep a check on your financial health and accordingly devise adequate measures to rectify it. You can check your Credit score for FREE and obtain a detailed report by availing CRIF services. You’ll be required to input some basic information and answer a few questions to get to the report. There’s no limit to the number of times you can check as this is a soft enquiry and does not affect your Credit score.
A home sweet home is a personal asset that you have dreamt of owning for a long time now. If you are planning to buy a home, there are two things that you think of: a pretty home and a not-so-pretty usually-unavoidable home loan. However, what matters the most is qualifying for the home loan. It is very important for lenders to assess your repayment ability, which is essentially evaluated on the basis of your earnings, expenses, savings, work profile, financial capability and repayment history of loans and other dues. A bad credit score and the ghosts from the past, i.e. your credit debts or poor payment history can pose a problem while qualifying for a home loan. Here are 4 important tips to check before you go for a home loan:
1. Check Your Credit Score: A credit score lays the foundation for your easy home loan application process. This score depends on how consistent you are or how good your record is for paying your EMIs and credit card dues. The credit information report (CIR), which contains your Credit Score, is basically the credit history of your borrowings from different institutions such as banks or NBFCs (Non-Banking Financial Company) or Housing Finance Companies (HFCs). A trusted credit bureau prepares and maintains your credit records and shares it with the banks/lenders whenever an enquiry is made by the loan provider. The higher the credit score, the higher the chances of the loan getting approved. And also once can expect the best rate of interest on the home loan as a bonus. Ensure you check your credit score at least six months, preferably 12 months, before you plan to buy a home.
2. Consider your budget, down payment and EMI: Define your budget for buying a home, how much money you can consider for down payment and how much of home loan would you require. Typically, you can get 80% of the value of the property as a home loan if your income seems sufficient. Identify the EMI range that you are comfortable with, as that will help you decide the tenure of the loan. You can use online EMI calculators to play with various options in helping you here. In case your income is not sufficient, you can think of adding your parents or spouse as a co-borrower.
3. Documents Required for Home Loan: Before you go and apply for a home loan, it is necessary to understand the necessary documents required and ensure they are available before you approach a bank or housing finance company. Here is a list of documents that you should be ready with:
- Income Tax Returns or Form 16 for past 2-3 years make sure all taxes are filed
- PAN Card – the lender would carry out a PAN Verification to know its authenticity
- Aadhar Card – the bank would also do an Aadhaar verification to verify your identity
- Bank Statements for past 6-12 months for a bank account where your income and expenses reflect. Make sure you maintain a reasonable balance in this account over past 6 months.
– Last 3 Months Salary Slips if you are salaried
– Application Form with Photograph Duly Signed
4. Identify the right banks and lenders: Avoid applying to many lenders at the same time, as many credit inquiries can negatively impact your Credit Score. It doesn’t mean that you should not compare your options. Identify the banks or housing finance companies which have pre-approved the property where you plan to buy a house as that can reduce your loan approval time. Understand the eligibility criteria of such lenders in terms of the cutoff for credit score and the loan scheme (processing fees, the rate of interest etc.). Select one or two lenders which best match your requirements and get your loan sanctioned from them before booking the property.
Taking into consideration all the above points will prepare you well for your home loan and thus, improve your chances for a quick home loan approval. If co-borrowers are being considered for, do ensure you prepare them to check their credit score and keep their documents handy.
Chennai Super Kings (CSK) won the Indian Premier League last month in a great fashion and this win was indeed special as it came after 7 long years. Aditya and Rakesh had been having a great time watching the weekend IPL matches together. However, this Sunday, it was a bit different. Rakesh seemed in a bit of mood while they were having tea together.
Rakesh was always a happy and smiling chap and Aditya too sensed something wrong when he saw Rakesh like that.
“What happened, Rakesh? You seem a bit upset.” Aditya was concerned.
“Nothing really. Just that my landlord has asked me to vacate the house in a month as he is planning to sell. He is selling off the property as he is going to Australia to stay with his son. He has even offered me to buy that flat for Rs. 50 lakhs, but I don’t have enough savings. I am just worried about finding a new rented house.” Rakesh and Aditya were friends for a long time and Rakesh was also comfortable sharing his life with him.
“Just Rs. 50 lakhs? It’s a great steal at this rate, Rakesh. The market value of this flat is at least Rs. 70 lakhs. Just go for it. And as regards funding the purchase is concerned, go for a housing loan.” Aditya immediately jumped off the seat.
“And you know what, this housing loan will help you save taxes as well.” Aditya further added.
“Oh really? How housing loan lowers my tax burden?” Seeing some tax advantage, Rakesh was now seriously considering the option to buy the flat after taking a housing loan.
“With a view to encouraging people to have their own house properties, Govt. provides tax deductions on the interest on housing loan as well as the principal repayment of the loan.” The financial advisor within Aditya was now active.
“That’s nice. How much tax savings can be expected?” It seemed like the idea had really pleased Rakesh and he was in no mood now to leave the offer to buy the flat.
“As per the present tax laws, you can save tax against the interest amount that you pay on such a property. Importantly, even if the property is self-occupied, you can avail of this benefit. Since you will stay in the house, interest amount of up to Rs. 2 lakhs can be deducted from your taxable income and hence you can save up to Rs. 62,400 of tax. In fact, if you have a co-borrower on the home loan, he or she can also additionally claim the deduction of up to Rs 2 lakhs from his or her taxable income.” Aditya was using his financial acumen to get him more interested.
“And the tax benefit not only stops with this. The principal amount of loan repaid during the year also gets deducted from your income as per Section 80C of the Income Tax Act, 1961 once you take the possession of the house. However, this benefit is part of the overall tax saving options such as ULIPs, PPF, EPF etc, under that section and the ceiling thereon is Rs. 1.50 lakhs for all the tax savers in aggregate. In fact, in the first year of the loan, you can also claim your expenses towards stamp duty and registration of the house under Sec. 80c.” Aditya added to his earlier statement.
“Any saving is indeed a good saving. While I was worried about finding a new flat on rent, you have given me a nice reason to think for something better.” Rakesh was much excited now.
“So, when are you inviting me for a tea in your own flat?” Aditya quickly stole the moment and it ended up with smiles on both the faces.