Step by step home loan explained: RBI rules and guidelines.
Here you will get tips to reduce home loan processing time from weeks to days, documents required for instant approval of your housing loan application. Some handy tips and guidelines. Lets get started with all the details.
1. Type of home loans
Buying home is everyone’s dream but Usually, you think that you can only apply for home loan when you decide to buy a ready to move in house or a flat. But there are other type of home loan options also for which you can avail home loan like for constructing your own home on your own piece of land or for extension/repair/renovation of existing home, loan is also available.
Basic home loan
Most popular type of home loan which banks offer in India. This type of home loan is for purchase of a ready to move in house/flat or for under construction flat.
In this type of home loan lump sum payment of loan amount is given to you by the lender in one go and thereafter you have to repay the loan in equated monthly installments.
For construction of Home
This type of home loan is for construction of independent house on the site already owned by you, cost of land maybe financed up to 50% of total cost of land but this usually varies from banks to bank. No lump sum payment is allowed in this type of home loan but loan is generally disbursed in installments based on progress of the construction of home.
Home loan for Extension/repair/renovation
This type of home loan is for those who already owned a house and wants to add some more floors or rooms to the existing home. Also given for repair of home usually given to home which are not more than 50 years old.
2.Eligibility: Parameters considered for calculating your housing loan eligibility
There are various parameters which are considered for arriving at your home loan eligibility, these parameters are indicator of your loan amount entitlement. Eligibility parameters are static and dynamic types, you can make certain modification in parameters which are dynamic in nature and can enhance your loan amount entitlement. Let’s get full details of these parameters.
Age limit for housing loan
You can avail housing loan for maximum 30 years, and maximum age limit for full repayment is 75 years for all classes of borrowers. However, the maximum age at the time of availing housing Loan should not be more than 65 years and minimum age should not be less than 21 years.
|You should always opt for a longer tenures loan so try to take housing loan at early ages. A longer repayment period means a lower EMI and thereby lesser burden on your monthly expenses, but this depends on the age at which you are availing loan. So always try to apply for housing loan at a early age.|
EMI calculation for home loan
By knowing your EMI you can calculate your loan eligibility and can plan for the rest of the down payment accordingly.
For salaried person
For salaried person banks generally consider 60% — 75% of your salary which can be used for calculating your EMIs. You have to deduct all your expenses including other loan EMIs and other monthly expenses, amount left after all these deductions are eligible for your housing loan EMI and ultimately decide your loan entitlement.
For non-salaried professionals, Self-employed and businessmen, monthly income should be arrived at Based on 100% of the assessed income as shown in the last Income Tax Assessment Order/Return filed. Income tax Return for minimum three years for all prospective borrowers to be taken.
|Divide annual income with 12 and the number comes out will be eligible for calculating your monthly EMI after taking into account all other deductions.|
For Farmers/Agriculturists, assessment of their income should be made as per the rent and revenue generated by him in a year or income derived by sales of produced raised by him. Repayment of housing loan maybe set yearly in the case of farmers. This depends on your particular bank so always try to take loan from public sector banks as these banks follow all government and RBIs guidelines. The quantum of housing loan/limit will be 5 times of the net annual income of the farmer (Both Farm and Non-Firm Activities), subject to scale of finance under cultivation.
Loan to value ratio (LTV)
This is calculated Based on cost of the project
1) 90% (loan up to 30 lakhs) of the project cost of construction or purchase price of house/flat as per agreement for sale.
2) 80% (loan above 30-75 lakhs) of the project cost of construction or purchase price of house/flat as per agreement for sale.
3) 75% (loan above 75 lakhs) of the project cost of construction or purchase price of house/flat as per agreement for sale.
Stamp duty, registration and other documentation charges are not included in the cost of the project and are not financed by banks.
Banks generally check your credit score to reflect your credit worthiness. A high credit score increase your change of getting loan at lower interest rates as compared to the one with lower credit score.
There is a high probability of your loan rejection
|You might get approval for your housing loan but with slightly higher interest rates||This credit score frame is considered to be average range, most likely you will get approval without any concessional interest rates.||Good score, probability of getting concessional interest rates on your loan||Excellent score you might get the best possible concessional interest rate.|
Tips-If your credit score is not good than you must clear all your past dues on loans and do not check your credit score frequently this will affect your credit score.
3. Home loan interest rate calculation methods.
Home loan interest rate is usually calculated either on yearly reducing or monthly reducing or on daily reducing basis.
Daily Reducing method for Home loan interest rate
In daily reducing method for Home loan interest rate calculation, the principal for which you pay interest, starts reducing from the day you deposit your installment. So, interest paid in monthly installment system is less than the monthly and yearly reducing method of interest calculation.
Monthly reducing method for Home loan interest rate
In monthly reducing method for Home loan interest rate, the principal for which you pay interest, start reducing at the end or began of every month in which you deposit your monthly installment. This method charges more interest from you than daily reducing method.
Annual reducing method for Home loan interest rate
In annual reducing method for Home loan interest rate, the principal, for which you pay interest, reduces at the end of the year in which you have deposited your installment. Generally applicable on home loans given to farmer who does not have regular income except agriculture.
4.Types of Home loan interest rate
We have discussed method of calculating Home loan interest rate now we will discuss types of interest most important component of home loan is to determine total expenses that you might have on loan and this depend on type of Home loan interest rate which you have opted for your housing loan. Housing loan/mortgages loans can be acquired at both fixed interest or at a floating interest both have their specific advantages and disadvantages.
|fixed Home loan interest rates||floating Home loan interest rate|
|fixed Home loan interest rate remain same throughout the loan tenure of loan.||floating Home loan interest rate may fluctuate with time, all ups and downs in interest rate depends on market condition.|
|Generally fixed interest rates are kept higher and hence overall cost of borrowing is generally consider to be more.||Generally interest rates in this type are kept low, and usually considered that these are less expensive for home loan in a longer time frame.|
|Zero interest rate risk.|
You can plan your future expenses and can make your budgeting simpler.
|Interest may increase or decrease.|
Hence in longer run this may hamper you day to day expenses if interest rates don’t fall in you favors. Budgeting could be more difficult in this case
Tips– One should opt for fixed Home loan interest rate when rates on home loan are very low and should opt for floating Home loan interest rate when interest rates are high You can switch over to floating rates at any time during loan tenure but this requires your loan account to be regular and one time switch over charges have to be paid.
Loan Entitlement Loan entitlement is calculated by two types, you are eligible for least of the Loan amount computed under type A and type B below:
Type A: On the basis of purpose/Cost of project
1. 90%(loan up to 30 lacs),
2. 80%(loan above 30 lacs to 75 lacs) or
3. 75% (loan above 75 lacs) of the project cost of construction or purchase price of house/flat as per agreement for sale. (LTV ration keeps on changing as per RBI directives)
Type B: On the basis of monthly income and equated monthly income
1.Those having monthly gross salary up to 50,000/ than 60% of your gross monthly salary is used for calculating equated monthly instalment EMI. Present EMI and other instalment of another loans should not exceed this 60 % on your gross monthly salary.
2.For gross monthly salary of above 50,000/- and up to 1,00,000/- – 70% of GMI is eligible for EMI (subject to minimum monthly take home pay of 20,000/-)
3.For gross monthly salary of above 1,00,000/- -75% of GMI is eligible for EMI (subject to minimum monthly take home pay of 30,000/-)
Stamp duty and registration charges are not included in of housing property and no finance is available to you for these expenses. Insurance of mortgage asset and life insurance of the borrower is mandatory in home loan, these expenses can be included in the project cost of housing property and can be financed by the banks.
In case of Repair/Renovation/Extension of flat/house, the amount of your loan will not exceed as stipulated above of the estimated cost, subject to maximum loan amount for Repair/Renovation under the Scheme as offered by individual bank.
6.Home loan documents
There are some standard Home loan documents which all the applicant need to produce at the time of loan application submission and there are some different set of documents for salaried and non salaried. You will get details of Home loan documents required for housing loan in below table.
|Standard Home loan documents for all applicants||Home loan documents For salaried||Home loan documents For non salaried|
Proof of identity, proof of address and loan application form dully filled.
|Salary slip of last three months.||Income tax return of last two years.|
occupancy certificate, approved plan copy, permission for construction of building, registered agreement of sales, property tax receipt.
|Income tax return of last two years.||Business address proof.|
|Bank account statement of six months.||Balance sheet with profit and loss accounts, business license, bank account statement of last six months.|
A moratorium period is a financial term used for the repayment holiday, it is basically a length of time during which a borrower gets off time from his or her loan repayments. That is you as a borrower need to start repaying your housing loan amount after moratorium period.
For Purchase of ready built house 6 months and for construction of Individual House 24 months in total or 6 months after completion of construction.(whichever is earlier)
|During moratorium period actual monthly interest is calculated. Moratorium is just a help for managing cash flow, not a reduction in payable amount. So, it is always a wiser decision to repay if you can.|
8.Tips which you should also consider before applying for any type of home loan
Low Processing Fee– Borrower has to pay processing fee equal to certain percentage of total loan amount usually 0.50% of loan amount with some upper and lower ceiling cap. Processing fees are generally kept nil in festival sessions so, you should plan accordingly to get full waiver of theses charges.
No Pre Payment Penalty – Always go with the banks which offer nil pre-payment/foreclosure charges. All public sector banks offer nil pre-payment option so, go with public sector bank.
Interest charges on Daily Reducing Balance-There are different type of home loan interest rates but in This type of Home loan interest rate calculation is more beneficial for the borrower as it reduces total outstanding from loan from the day you pay your EMI. EMI in the daily reducing system is less than those in the monthly and yearly reducing system.
Repayment up to 30 years– Choose banks which offer loan repayment periods between 24 to 30 months. More the repayment period less will be your EMI.
Interest Concession for Women Borrowers– Some banks like SBI bank, ICICI banks offer low interest rates for women so, you can make your wife or daughter or mother co-applicant to avail concession on interest rates.
Credit score-if your credit score is low than you must clear all your past dues on all the loans, this will improve you credit score.
Good CIBIL score is more likely to get you discounted interest rates than average CIBIL score.
Moratorium– Avoid taking unnecessarily long moratorium period as moratorium is given just to manage your cash flow, it is not a relaxation on amount payable. You have to pay interest of the moratorium period in later stage.
Club income– To enhance you loan entitlement you can club income of your family members with yours by making them co applicant in loan application. By doing this your loan eligibility based on your income gets improved by the banks.
|Co-applicant can be|
g) Brother-Brother (own brothers
The income of wife/wives of brother/brothers can also be considered where Home Loan is sanctioned jointly to Brothers. In such cases, wife/wives should stand as a guarantor/co-applicant.
In case of delay in payment of EMI by one month or more, penal interest may be charged at around 2% per annum on the amount of default for the overdue period i.e. With effect from the due date So, avoid delay in your EMI payments as it will increase you loan amount.
Housing loan have tax exemption benefits, you can take exemption on principle as well as interest paid on your loan amount. You can also avail these benefits on your second home loan. Lets understand this in complete detail.
On principle paid– The repayments (EMIs) towards the principal loan amount availed are eligible for a tax deduction up to 1.5 lakh, under section 80C of the Income tax Act 1961.
On interest paid– While Section 24(b) of the Income Tax Act 1961, provides for a deduction on the Home loan interest portion of home loan EMIs up to 2lakh per annum.
1st home buyers– In addition to the exemption of 2 lakh rupees allowed under Section 24 and the exemption of 1.5 lakh rupees allowed under Section 80C another exemption of rupees fifty thousand is given to 1st time home buyers.
2nd home buyers– Second home buyers can also claim income tax exemption on interest paid on home loan
Tips– applying for home loan jointly not only enhances your loan entitlement but also the tax benefits. while you can club your income with a joint holder you can avail tax concession individually. This means that if two individuals have applied for joint home loan, each can claim tax benefit of up to 1.5 lakh rupees and 2 lakh rupees on their housing loan principal and interest, respectively. So the combined tax benefit that they enjoy is of total 7 lakh rupees.
As you are now familiar with the things which you should consider before applying for a home loan, you should keep in mind these point before you apply for a home loan. As home loan is a long term loan so a few days of inquiry will help you to save money, time and energy in a long run.
Generally public sector banks are more convenient and transparent in their policies, they do not have any hidden charges. the only disadvantage of public sector banks is their turnaround time for sanctioning loan which is more as compared to private banks.
Choose your bank wisely as small tweaks have larger impact on long term loans. You can also check out collateral free loan for business.
For any queries feel free to contact us.
HERE IS MY LIST OF BANKS FOR BEST HOME LOAN IN INDIA
You can compare these banks and any off the Public sector bank to find best suited bank according to your requirement, making comparison of all the banks out in the market is not recommended as most of them provide similar facilities
|SBI BANK||concession for women, home loan available as overdraft, No pre-payment charges|
|AXIS BANK||Private sector bank which offers no pre-payment charges for any home loan and takes very less turnaround time for loan appraisal|
Well diversified home loan product range for all kind of borrowers
|ICICI BANK||concession for women, no pre-payment charges for floating Home loan interest rate , Can make a non-working female partner as a co-borrower and avail reduced Home loan interest rate|
|All other public sector banks||No hidden charges, Low interest rates, long term loans uppto 30 years.|
FREQUENTLY ASKED QUESTION ABOUT HOME LOAN
Who can get home loan?
Can I get home loan for extension?
Home loans are for purchase of new house, for extension and for renovation of old house.
Is income tax return mandatory for home loan?
Home loan for farmers?
Can we get home loan to purchase land?
Home loan for pensioners?
Documents required for home loan ?
Which bank has lowest home loan interest rate?
You can also go with regional rural banks and cooperative banks they also offer you lowest interest rates.
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