Lenders assess borrower’s credit risk before approving home loans by evaluating their income, credit score, repayment capacity, etc. Considering home loan entails large financial commitment and longer tenure, it is imperative for borrowers to be financially prepared well in advance.

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Here is the step-by-step approach to prepare yourself for availing of a home loan:

Assess your credit report

Most lenders consider a credit score of 750+ to be good and those with such scores have higher chances of loan approval. Many lenders have also started extending preferential interest rates to home loan applicants with good credit scores. Thus, prospective home loan applicants should assess their credit reports before applying for a home loan.

Doing so would allow applicants with lower credit scores to take appropriate measures to first improve their credit score and then, submit their home loan application with a higher score.

Loan applicants can fetch one free credit report from each of the 4 credit bureaus per year. Alternatively, they can also consider visiting online financial marketplaces to avail free credit reports with monthly updates.

Create a corpus for your own contribution towards the home acquisition or construction

RBI guidelines allow home loan lenders to finance up to 75 percent-90 percent of property’s value through home loans. The final proportion is set as per the lender’s credit risk assessment of the loan applicant. The rest of the component has to be contributed by the borrower from his own resources. Thus, home loan applicants should aim at accumulating 10-25 percent of the property’s cost before submitting their applications.

Try to contribute a higher amount from your own resources as it will reduce your interest cost. Making a higher contribution also enhances the chances of home loan approval as it reduces the credit risk for the lender. However, do not compromise your emergency fund and crucial financial goals in your attempt to make higher contributions as doing so may force you to opt for loans at much higher interest cost to deal with financial exigencies or meet crucial financial goals.

Compare amongst different lenders

The Interest rate, loan tenure, processing fee, LTV ratio and loan amount offered by the lenders can vary widely on the basis of their risk assessment of the borrower. However, with numerous lenders and loan options to choose from, it may not be feasible to approach each lender for comparison purposes. Instead, you can visit online financial marketplaces for comparing loan options extended by different lenders.

Review your EMI affordability

Lenders factor in the repayment capacity of the applicants when assessing their loan applications. They prefer loan applicants’ monthly repayment obligations (including the EMI for new loans and the existing EMIs of other loans) to be within 60 percent of their gross monthly income or net monthly income. Those surpassing this limit generally have lower chances of getting their home loan application approved.

Thus, make sure to contain your monthly loan repayment obligations within 60 percent of your GMI or NMI before you submit your home loan application. If it does not, then you should first consider bringing your existing EMIs down by either prepaying or foreclosing a few of your existing debts. Also, opt for longer tenure or higher down payment to reduce your total EMI outgo to enhance your home loan approval chances.

Create an adequate emergency fund

Financial exigencies like job loss, illness, etc come unannounced and can severely disrupt your income, cash flows, investments and loan repayment capacity. Failure to repay the loan EMIs on time would not only attract hefty penalties but also pull down your credit score. While one can liquidate investments to pay off the EMIs, doing so can adversely impact your long-term financial health.

One of the best ways to deal with such uncertainties is to create an adequate backup in the form of an emergency fund. This fund should be at least 6 times your monthly unavoidable expenses, including your existing EMIs along with the new EMI of your home loan. Hence, as soon as you begin planning for a home loan, try to simultaneously enhance the size of your emergency fund by at least 6 times the expected new loan’s EMI. Also, as financial emergencies can hit anytime, ensure to park your emergency fund in highly liquid instruments like high yield savings bank accounts and fixed deposits.

Another cost-effective alternative is to opt for home loan variants like home loan interest saver or overdraft options. This option provides an overdraft account in the form of a current or savings account linked with the home loan account. Borrowers can deposit their surpluses in the overdraft account and can withdraw from it as and when they require funds.

As the interest component of the loan account is calculated after deducting the monthly average balance of the overdraft account from the outstanding loan amount, parking your surpluses in the overdraft account serves the same purpose as prepayments. On the other hand, the easy liquidity offered by the overdraft account allows it to be an efficient tool for parking your emergency fund.

The author, Ratan Chaudhary, is Head of Home Loans at Paisabazaar.com. Views expressed are personal

(Edited by : Anshul)

First Published:Mar 12, 2021 1:06 PM IST