If you are going to take a home loan for the first time, then we have given you some important advice here. Let us know what are the things you should keep in mind before applying.
Home loan: Lenders generally approve a home loan keeping in mind the borrower’s income, credit score, repayment capacity, among many other factors. Your home loan application may get rejected if you do not meet the criteria set by the lenders. Before buying a home loan, it is not enough just to know the interest rate and the EMI you will have to pay for it. The home loan repayment process takes a long time, so it is important to fully understand the features and options that come with a home loan so that you can get a better deal.
If you are going to take a home loan for the first time, then we have given you some important advice here. Let us know what things you should keep in mind before applying for a home loan.
Check credit score at regular intervals
Banks look at your credit score before giving a loan. If your credit score is 750 or above then your chances of getting the loan approved increases. With a better credit score, you may get a loan at a lower interest rate. So, if you are planning to take a home loan in future, start checking your credit score at regular intervals. In this way, people with low credit score will be able to take necessary measures to improve their credit score. A better credit score will increase your chances of getting a home loan at lower interest rates.
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Advantages of making a higher down payment
Higher down payment lowers the credit risk and thereby increases the chances of loan approval. Some lenders offer lower interest rates to borrowers who choose lower LTV ratios. Hence, home loan applicants wishing to reduce their interest cost should pay a substantial amount towards their home loan down payment. However, avoid using your other important financial goals like emergency funds to pay a high down payment. Doing so may force you to take a loan at higher interest rates to meet your other needs.
how much loan should be taken
Home loan lenders also consider the repayment capacity of the applicants while appraising their home loan applications. You should calculate how much EMI you can pay along with your other liabilities and needs. A simple rule is that your EMI should not exceed 40% of your take-home salary. If you are short of funds to buy a home, you can take a joint home loan to increase the amount. However, always assess how much you can pay as EMI without any financial burden.
Applicants can take the help of online home loan EMI calculator to know their EMI based on their repayment capacity. This reduces the chances of defaulting on EMI in future.
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Include 6 months EMI in emergency fund
Sometimes your income gets affected due to job loss or other circumstances. Due to this you may face difficulties in repaying the loan. Also, defaulting on home loan EMIs can lead to penalties and a drop in your credit score. When you neglect your other financial goals to pay home loan EMIs, it can put you in trouble in the long run. Hence, it is better to include the estimated home loan EMI for at least six months in your emergency fund. This will help you to continue with your EMI even in case of any emergency.
Compare Home Loan Offers of Lenders
The interest rates, loan amount, LTV ratio, loan tenure and processing charges vary from bank to bank. Home loan is a long-term loan, so due to the small difference in interest rate, you may have to pay more in the long run. Therefore, before applying for a home loan, borrowers should carefully compare the home loan features offered by different banks and housing finance companies (HFCs).
(By Ratan Chaudhary – Head of Home Loans, Paisabazaar)