Home Loan Guide for First-Time Home Buyers – Understand The Basics!

July 27th, 2023

For those looking to buy a home, it is crucial to understand the home loan process since it makes it much easier to go through it. Understanding the complexities of this process allows one to make educated choices about loans, interest rates, and ultimately the best loan option that best meets their financial objectives.

One of the biggest dreams is to buy one’s own house. This dream signifies financial stability and independence and reflects personal success and achievement. Owning a home represents a sense of belonging and security, allowing individuals to create a space that mirrors their personality and aspirations.

As a first-time home buyer, one might wonder where to invest in and it has been proven that real estate in India is one of the most lucrative options due to its ever-growing market value. With increased urbanisation and infrastructure development in many Indian cities, buying a property can offer potential long-term returns on investment. Purchasing one’s own house for the first time is a personal aspiration and an important milestone for those seeking professional growth and financial prosperity in India.

Availing home loans allows individuals to fulfil their long-standing desire to own a property without burdening their savings. Professional institutions, such as banks and lending companies, offer home loans with competitive interest rates and flexible repayment terms, making them highly accessible for individuals from different financial backgrounds.

Moreover, obtaining a home loan provides homeowners several advantages, including tax benefits and the potential for capital appreciation in the long run. However, availing of a home loan requires careful planning and consideration of factors such as creditworthiness, income stability, and the ability to meet monthly mortgage payments.

Although there are many guidelines accessible on the internet to assist you with the house loan procedure, some are just insufficiently thorough to be helpful. Here, in this blog, you will discover all there is to know about home loans.

Table of Contents

What is a Home Loan?

A mortgage, commonly called a home loan, is a financial arrangement between a borrower and a lender, often a financiar institution or a bank, whereby the lender lends the borrower money to buy or refinance a property. With the help of this loan, people may realise their ambition of buying a property without having to pay the entire amount upfront. The borrower then must repay the loan in regular payments over an agreed-upon time, often between 15 and 30 years and offers the property as security for the loan.

Home loans have various interest rates, periods, and repayment alternatives to suit different financial situations and budgets. Additionally, there are many home loan options, including fixed-rate mortgages and adjustable-rate mortgages, each with benefits and factors to consider.

To guarantee long-term affordability and responsible homeownership, obtaining a house loan necessitates a comprehensive assessment of one’s financial condition, extensive research of the available possibilities, and wise decision-making.

Types of Home Loans

1. Regular Home Loan:

The most typical sort of house loan in India is one a person takes to purchase a freshly built or pre-built property. This loan is provided by practically all Indian banks and home finance businesses; however, the interest rates and loan terms may differ from one lender to another.

2. Fixed-rate Home Loans

A fixed-rate home loan is where the interest rate remains constant in the entire duration of the loan. This means that borrowers will have predictable monthly repayments for the life of their mortgage. Typically, these loans are offered for 15 or 30-year terms, allowing homeowners to plan their finances accordingly.

Fixed-rate home loans are prevalent during low-interest rates as borrowers can lock in a favourable rate for an extended period. However, it’s important to note that while the interest rate stays the same, other factors, such as property taxes and insurance, may still cause fluctuations in monthly payments.

3. Floating-rate Home Loans

A floating-rate home loan is where the interest rate charged on the loan fluctuates over time.

Floating-rate home loans often start with an initial fixed period, usually one to ten years, during which the interest rate remains stable. After this period expires, borrowers may experience adjustments in their monthly payments based on market conditions. These loans provide flexibility and can be advantageous if interest rates are expected to decline or if borrowers plan to sell their homes before significant rate increases occur. But, they also carry risks as higher interest rates can lead to increased monthly payments and potential financial strain for homeowners.

4. Combination (hybrid) Home Loans

A combination or hybrid home loan is a type of loan that combines the features of both fixed-rate and adjustable-rate mortgages. This allows borrowers to benefit from the stability of a fixed interest rate for an initial period, , after which the interest rate adjusts periodically based on market conditions.

The initial fixed period gives homeowners certainty in their monthly payments, offering protection against rising interest rates. Once the specified period expires, the adjustable rate comes into effect and can fluctuate over time. Hybrid loans are advantageous for homebuyers who anticipate living in their homes only for a certain number of years or plan to sell before the adjustment occurs.

5. Loan Against Property

This is a secured loan wherein borrowers can use their property as collateral to secure funds from financial institutions. This type of loan allows individuals to unlock the value in their properties and utilise it for various purposes such as business expansion, education expenses, debt consolidation, or any other personal requirements.

Typically, banks and lenders provide a loan amount, a certain percentage of the property’s market value. Eligibility criteria for loan securing include property valuation, income stability, credit history, and repayment capacity. As it involves collateral, interest rates for these loans are usually lower than unsecured loans.

Borrowers must remember that failure to repay the loan can result in the loss of their property through foreclosure by the lender. Therefore, considering the pros and cons is essential before choosing this financing option.

Eligibility Criteria for Home Loans

Home loan eligibility criteria are mainly determined by income, age, credit history, and the property’s value. Lenders typically assess an individual’s repayment capacity by considering their monthly payment and stability of employment. A higher income ensures a larger loan amount, whereas a stable job indicates consistency in repayments.

The applicant’s age is another influential factor, along with a good credit history with a high credit score improves one’s chances of loan approval and often results in lower interest rates. Moreover, lenders usually limit the loan amount based on the property value or estimated price approved valuers provide.

Factors like location, construction stage, and legal compliance of the property influence its valuation. Understanding and meeting these eligibility criteria can significantly affect an individual’s ability to secure a home loan in India.

Home Loan Application Process

Your eligibility for a home loan is determined as the first stage in the procedure. This is the maximum loanable amount for a residence. Your present income, age, the income of any potential co-applicants, credit score, and debts will all impact your eligibility.

The choice of a house loan provider is the next stage. You can choose banks, home finance organisations, or other NBFCs. Different lenders will issue loans at various rates, terms, and circumstances. It’s critical to compare the available choices before finalising the one that best suits your financial requirements.

You must complete the home loan application once you decide on a lender. This comprehensive application includes information on you, your co-applicant (if applicable), the property you want to buy, and other specifics.

Then, provide the necessary documents after completing the application form. These consist of proof of identification, address, income, etc. You could be required to provide more documentation by your lender.

Factors Affecting Home Loan Eligibility

Several factors come into play when determining an individual’s eligibility for a home loan. Firstly, their credit score holds significant weight in the eyes of lenders. A good credit score demonstrates financial responsibility and assures lenders of timely repayments.

Lenders also consider the borrower’s income stability and overall debt-to-income ratio, which gives them an idea of repayment capacity. Other aspects, such as employment history, job stability, and age, also influence home loan eligibility. Also, the loan-to-value ratio (LTV) is another critical factor; a higher percentage signifies more risk for the lender, making approval less likely.

Lastly, a sizable down payment helps bolster one’s chances of obtaining a loan since it reduces the amount borrowed and proves one’s commitment to homeownership. By considering these factors, lenders can assess an individual’s ability to manage finances responsibly and mitigate potential risks associated with granting them a home loan.

Understanding Home Loan Interest Rates

FIXED INTEREST RATES	FLOATING INTEREST RATES
Home loan interest rates remain fixed all through the loan tenure.	The interest rate on your home loan changes based on the lender’s benchmark rate proportionate to market fluctuations.
Fixed rates interest rates come at a higher price than floating interest rates.	Floating rates are slightly lower than fixed rates when the loan is for a shorter tenure.
The fixed home loan interest rate is for those still determining the market standing in long-term loans and prefer to repay loans at a fixed amount. They are sure that the market rates will rise, increasing the interest on floating loan interest rates.	Those still determining where the interest rates will head should go for floating loan interest rates.
Suitable for those hoping to repay loans within 3-10 years	Ideal for younger borrowers expecting to repay loans in the long term within 20-30 years
It must be remembered that fixed home loans come with a prepayment penalty. Lenders do not risk loss in interest rate, which fixed interest rates bring.	Floating home loans come with no prepayment penalty. When the interest rate drops, borrowers can prepay a few EMIs together
You can plan your financial budget and other investments	Financial budget planning gets tricky and difficult
It gives you a sense of security	You can generate savings
Risks are lower	Risks are higher

Major Factors that Influence Your Home Loan Interest Rate and EMI

MCLR Rates

The Marginal Cost of Funds based Lending Rate (MCLR) is the lowest interest rate a bank will lend money. There are other variables that may come into play and they include the tenor premium, the marginal cost of funds, cash reserve ratio (CRR), operational cost, and any negative carries on those variables.

Type of Interest

A fixed rate, variable rate, or hybrid interest rate are all options. Floating interest rates are subject to Reserve Bank of India (RBI) adjustments. Your EMIs will be reduced and vice versa if the most recent RBI regulations lead to lower interest rates.

Loan-to-Value (LTV) Ratio

LTV represents the portion of the property’s worth that the loan can fund. A bigger loan amount has a higher rate of interest because the credit risk is higher. A greater down payment can assist in reducing the amount of the loan, which will lower the interest rates.

Credit Score

This significantly impacts your interest rates. Your credit score reflects your trustworthiness, financial discipline, and payback history.

Location of the Property

The interest rates you pay will depend on where the home is located. Homes in communities with excellent facilities and connections will sell for higher prices. Lenders see homes with a high resale value as attractive investments. As a result, they offer lower borrowing rates for them.

Job Profile

People with a reliable income source are viewed as low-risk, whilst those who don’t are viewed as high-risk. Thus, people with steady incomes are given lower loan rates.

Tenure of the Loan

Even if the EMIs are greater, loans with shorter terms have lower interest rates than loans with more extended periods, with higher interest rates but lower EMIs.

Read More – Home Loan Tenure – Maximum and Minimum

Loan Repayment and EMI Calculation

A fixed payment made by a borrower to a lender at a specific time each month, is known as an equated monthly instalment (EMI). The loan is repaid over a certain period of years by making equal monthly payments to the interest and principal each month.

Read More – How To Reduce Your Home Loan Interest Rate?

How is Home Loan EMI Calculated?

EMI is calculated using the formula mentioned below:

EMI = P × r × (1 + r)n/((1 + r)n – 1)

P = Loan amount

R = Rate of interest

N = Tenure of years for which loan is taken

For example, suppose someone took out a loan for Rs. 1 lakh with a 12-month term and a 10% interest rate. The EMI will then be reduced to Rs 8,792, according to the calculation.

Components of an EMI

Principal and interest are the only two components of EMI in general. According to the guidelines, the early years’ interest payment is relatively expensive. However, to properly pay off the principal amount towards the conclusion of the loan term, one must make bulk payments.

Factors Affecting Home Loan EMI

Principal: The amount you borrow from the lender is the principal. The principal is a crucial consideration when calculating the cost of your loan, as Your principal is used to calculate interest.
Interest Rate:This is the price the lender will provide you for the loan. Conducting a simple search on the market’s interest rates is crucial. Obtaining a competitive rate enables you to calculate the loan cost to your advantage.
Loan Tenure:This refers to the length of time you have borrowed. It significantly affects the EMI amount. Longer-term loans have lower monthly payments, and vice versa.

Home Loan Additional Costs and Charges

The lender must do a number of procedures to process your request between the time the loan application is submitted and the bank approves it. Bank representatives will carefully examine the validity of your application and the supporting papers. The buyer must pay the bank a ‘processing fee’ to do this activity. Some banks deduct a certain percentage of the house loan’s total amount as a processing fee, while others impose a flat price.

Fees for Registration and Stamp Duty

The original documents are delivered to the lender to hold onto as security until the borrower has fully repaid the mortgage after the sale deed has been recorded with the sub-registrar. The buyer signs a memorandum of deposit of title deed (MODT) outlining the details of the agreement to ormalize it. The state regulations impose stamp duty and registration fees on this document, which must also be registered. The buyer will pay 0.10%-0.20% of the loan amount in stamp duty and registration fees. However, rates vary by state.

Home Loan Common Terminology

– Loan-to-Value (LTV) ratio

Loan-to-Value Ratio (LTV): The loan-to-value ratio, sometimes abbreviated as LTV, signifies the division of the loan amount by the entire worth of the property. The loan-to-value ratio will be 70% if you take out a loan of Rs 70 lakh for a piece of property worth Rs 1 crore.

– Margin Money

The phrases margin and down payment are interchangeable when referring to mortgages. Simply put, the margin is the discrepancy between the loan amount offered by the lender and the property’s actual worth. Most lenders typically provide 80% of the real property value, leaving 20% for the borrower to pay as a margin or down payment.

– Balance Transfer

With a home loan balance transfer, you can move the remaining balance to a different lender with better terms and a cheaper interest rate.

– Pre-EMI Interest

EMI payments start once a loan is fully disbursed. Until then, the borrower must pay interest to the lender on the sum that has only been partially disbursed. Pre-EMI is the name for this.

Final Thoughts

In conclusion, a detailed review of several factors is required to understand home loans fully. Understanding the many home loan alternatives available, such as fixed-rate loans, adjustable-rate loans, etc., is crucial first and foremost.

It’s important to carefully evaluate the lender’s loan eligibility conditions, including their credit score and income verification requirements. Additionally, one must be familiar with the financial terminology related to house loans, such as down payment, pre-EMI, balance transfer, etc.

Overall, developing a thorough awareness of these elements will give people the skills to efficiently traverse the loan application and management processes.

Frequently Asked Questions –

1. What is the maximum loan amount I can get ?

The maximum loan amount you can get is 6 times your annual gross salary. For example, for a monthly gross salary of Rs 50,000, annual salary would be around 6 lakh, and loan eligibility would be 36 lakh. Since lenders want to ensure that borrowers have a consistent and sufficient income to repay the loan over the agreed-upon time, salaried persons are preferred as they are considered more stable.

2. Can I get a home loan without a down payment?

Yes, you can get a home loan without down payment, by applying for an unsecured loan.

3. How can I improve my chances of loan approval?

There are five ways to improve your chances of loan approval: 1. Make sure your deposit is sufficient 2. Be more cautious with your expenditures 3. Boost your credit rating 4. Verify that you have the appropriate documentation 5. Maintain a long-term, stable job

4. What happens if I default on my home loan?

If you default on your home loan, your credit rating suffers, legal notice gets published, possession of the collateral may be affected, collateral may be sold or auctioned.

5. What should we know before taking a home loan?

Before taking a home loan, you should know that lenders will determine your eligibility based on your income and ability to repay it. Age, qualification, financial situation, number of dependents, spouse's salary, and job security are other crucial factors you should know before taking a home loan.

6. At what salary should I take a home loan ?

You can take a home loan when your salary can easily cover your monthly expenses (including any other loans or liabilities) and 50% of the salary is available exclusively for the EMI commitment of the proposed house loans. Your ability to repay the house loan EMI would decrease if you have many other open loans for which you are making EMI payments.

7. What is the best age to take a home loan ?

The best age to take a home loan is in your mid-to-late 20s or early 30s, when you are young, active, and working. This will ensure that you will be able to use your monthly salary to pay the EMIs, and can choose long tenures to repay the loan as you’ll be getting regular salary even towards the end of the loan tenure.

8. Can I get a 90% home loan?

Yes, you can get a 90% home loan, if the value is less than Rs. 30 lakhs – as per Reserve Bank of India (RBI) norms.

9. How much EMI is safe for a home loan ?

Safe EMI for home loan is usually 35-40% of your income or salary. The primary justification for this is that you should have some breathing space since you need to cover many other monthly costs & payments.

10. What is the salary for a Rs 50 lakh loan ?

Salary for Rs 50 lakh loan is around Rs 70,000, assuming you are between 21 to 65 years old currently and will not be older than 70 years by the time the home loan matures. Also, your CIBIL score should be 750 or higher.

11. How much home loan can I get for a Rs 1 lakh monthly salary?

You can get a home loan of about Rs 70 lakh, for a Rs 1 lakh monthly salary – assuming you are between 21 to 65 years old currently and will not be older than 70 years by the time the home loan matures. Also, your CIBIL score should be 750 or higher.

12. Is a 100% home loan possible?

No, 100% home loan is not possible, as per the policies of most banks and lending organisations. They ask you to deposit at least a small sum of cash. Most banks only lend you 75–90% of the cost of a home. Therefore, you have to pay the remaining amount.

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