Due to the increasing property and housing prices, owning a house by paying the whole amount is nearly impossible for many. As a result, individuals avail of home loans to not only meet their dream of owning a home but also to make the most of the available loan benefits. Big-ticket loan proceeds clubbed with the long loan tenures available on the home loan result in a higher repayment commitment for you. Also, lenders require the borrowers to finance from their pocket a sizable amount for home purchasing or construction costs. Also, lenders check your repayment capacity when checking your home loan application. All these factors require prospective home loan applicants to know their financial preparedness before placing a home loan application. You can contact ICICI home loan customer care, SBI Home Loan Customer Care or customer care numbers of other lenders to know about the home loan offers and terms and conditions. Doing so will help you decide on a suitable home loan deal.
Discussed here are the top 4 tips that you must factor in to know your financial preparedness for a home loan:
Form a sizable corpus for paying the home loan down payment
As RBI has permitted the lenders to finance up to 75 – 90 percent of the property or home cost via a home loan, you are required to contribute the rest of the property or home cost from your own pocket as a down payment or margin contribution. The ratio of the loan amount and your contribution from your own pocket is called the LTV (Loan to Value) ratio. While many applicants prefer selecting a higher LTV (Loan to Value) ratio, choosing a higher margin payment or down payment is highly beneficial. Selecting a lower LTV ratio leads to a lower requirement for the home loan amount, which assists you to reduce your entire interest outgo, which is incurred for property construction or purchase. As availing a lower LTV ratio reduces the lender’s credit risk, it also increases your chances of availing the home loan approval at a lower interest rate. However, you must avoid making a higher margin contribution or down payment by sacrificing your emergency fund or crucial investments especially meant for attaining your crucial financial goals. Doing so might impel you to avail a high-cost loan option to meet your instant monetary requirements in case of emergencies or financial goals.
Aim at building a higher credit score of 750 and above before applying for a home loan
A credit score is a crucial factor considered by lenders when approving your home loan application. Applicants having a higher credit score of 750 and above usually have higher chances of getting the home loan approval. Many of the home loan lenders also offer preferential Home Loan Interest Rates to those with a higher credit score. Thus, if you are planning to avail of a home loan, you must consider evaluating your credit reports periodically. Doing this will endow sufficient time to those with a lower credit score to undertake the required actions to ameliorate their credit score before making the application for a home loan.
If you have a lower credit score of less than 750, then you can slowly and steadily build it by following responsible credit behaviour. Responsible credit behaviour includes timely repayment of credit card and loan EMIs, avoiding submission of multiple credit enquiries in a short time span, maintaining a balanced mix between unsecured and secured credit options, timely reviewing of the credit report to detect any mistake or error etc. Those with no credit score and credit history can consider building their credit score by availing of a credit card. Note that credit cards are the same as availing loans, as all transactions through the card are reported to the credit bureau. With the reported data, the credit bureau computes your credit score. If you are not able to avail of a regular credit card due to a risky job profile, unserviceable location, or low credit score, then you can avail of secured credit for forming your credit score. The functions of a secured credit card are the same as a regular credit card, with the only difference being that secured cards are provided to you against your fixed deposit.
Your monthly loan repayment obligation must be under 60 percent of your monthly income.
Like most credit options, home loan lenders consider your repayment capacity when evaluating your home loan application. Lenders usually lend only to those with a monthly repayment loan obligation of within sixty percent, which even includes the EMI of the new home loan. Thus, if you exceed this specific limit, you must prepay or foreclose your prevailing loans for reducing your EMI obligations. Also, applicants can select a lower LTV (loan to value) ratio or choose a higher repayment tenure for reducing the overall EMI obligation.
As a home loan seeker, you can use the online home loan EMI calculator to calculate the optimal EMI depending upon your capacity to repay. Alongside this, consider factoring your fund contribution towards crucial financial goals for estimating your disposal income. Placing a home loan application after knowing your repayment capacity will not just reduce your EMI default chances but will also help you to be always prepared with your monthly investment towards your crucial financial goals.
Add in your assumed home loan EMI to your contingency fund.
Uncertainties like illness, accident, job loss or disability can extremely impact your capacity to repay your loan. Failure to meet your home loan EMI within the due date can make you incur massive penalties, which causes an adverse impact on your credit score. On the other hand, liquidating your important investments for a home loan, EMI repayments can save you temporarily. It can extremely hamper your long-term financial health and stability. One of the best ways for ensuring timely home loan repayments in case of emergencies is to include the assumed or expected home loan EMI of nearly six months to your contingency fund.
The main goal of forming a contingency fund is to keep you prepared to meet unavoidable expenses like living expenses, rent, loan EMIs, child’s education expenses, insurance premiums and others in the case of unforeseen exigencies or loss of income.
