Buying a home is very personal yet a financial decision, and both salaried and self-employed mostly opt for a home loan from a bank or a financial institution like SBI, LIC, HDFC or ICICI etc. Let us know how the loan application process works.
A home loan also brings with it the huge liability or responsibility of paying back (repaying) the loan with interest over a reasonably long period of one’s lifetime. This home loan pay-back period could range between a 5 to 30 years of tenure.
Most people in India usually pay back the home loan in about 8 to 10 years’ timeframe, and this indicates the will and zeal to wriggle out of being under debt, and finally taking back the mortgaged property papers from the bank, and have our own encumbrance-free property.
In this article we shall discuss about some of the first steps one needs to take before you embark upon the journey of owning a home.
The enablers to this journey involve critical considerations like: i) our income inflow, ii) our current standing/credibility in the eyes of the lender, iii) the expected income-outflow for living as well as repaying the loan in the years to come, iv) the current and future economic conditions, v) possibilities on our job or income inflow in the years to come, vi) our ability to afford a property within reasonable means over the tenure, and vii) our ability to service the loan without defaulting on the monthly instalments.
One area that gains supreme importance in getting our home loan approved is having a good credit history so far as our financial transactions are concerned. The government in India has institutionalized a fool-proof mechanism to judge whether or not we are worthy of being granted a loan.
Let us get a deeper understanding of this aspect, and a little more in this article.
Qualifying for a home loan matters!
The first step towards this journey is to ‘qualify’ for a home loan. The financial institution or a bank usually assesses our ability to pay back the loan taken. This in turn is evaluated based on our monthly income/earnings minus the expenses/liabilities we are expected to shoulder on a monthly basis. Our current savings, the profile or nature of your profession, our previous loans (existing and pending), and our overall performance as a payer is very critical for this assessment. We have to prove our credibility as a trustworthy individual who is extremely dependable and high on financial integrity. Our credit history is captured and maintained by a credit bureau in India called the TransUnion Credit Information Bureau [India] Limited (CIBIL).
A good credit history is indicative of the trustworthiness and financial sobriety of an individual.
A poor credit score in TransUnion CIBIL (Credit Information Bureau [India] Limited) means that a person has been poor in keeping up to the commitments of paying back to the financial institutions or individuals one has been dealing. Delays and failure to make regular payments dent the CIBIL scores irreparably.
Scenarios like delayed payments, cheque or ECS bouncing impacts credit score
Some people even have genuine unresolved service issues with financial institutions where they are not at fault. When faced with a situation like this, they sort out their issues by stopping the payments, be it a credit card payment or a personal loan repayment instalment. This in turn harms the CIBIL scores, since, the CIBIL records only the concrete data, and does not indulge in softer aspects like ‘whose fault it was’.
RBI has made a category of defaulters into wilful (deliberate/intentional) and non-wilful (those genuinely in debt or under some financial duress). An individual is considered a ‘wilful defaulter’ when the person (defaulter) is construed to have deliberately chosen to NOT pay, siphoned funds, misused finances for reasons other than those stated, falsified information, removed securities without the bank’s knowledge, or conducted fraudulent transactions.
All such wilful instances are noted, and are recorded by the credit bureaus as reported by the financial institutions. For some cases, a suit is filed by the financial institution, which are called the ‘suit filed’ account, and those that are not filed are called ‘non-suit-filed’ account. Either ways, the financial institutions informs the banks of how their dealings are progressing with their individual customers, especially on payments they have to receive.
At times, people wrongly assume that a cheque bounce or an ECS is a matter between themselves and the institution they have issued a cheque to. Even cheque bounces, or returned ECS mandates etc. are construed as a default by the credit bureau, when reported.
All these payment related issues accumulate over a period of time, and turn into ghosts only to resurface and haunt us when we are applying for loans like a home loan.
Cheque bounce is a criminal offence as per section 138 of the Negotiable instruments Act. However, not all cheque bounce scenarios adversely impact your CIBIL score. In fact, even if you have bounced a cheque, your CIBIL scores remains protected should you immediately make the payment to a financial institution, i.e. within a stipulated time frame. Even after the cheque bounced your cheque bounce may not be reported since your ability to repay has not been impacted. Hence, paying well within the stipulated timeframe after a cheque bounce is important to prevent your credit scores from plunging down.
What some of us do not realise realize while stopping or refusing to make scheduled payments is that the credit bureau is watching us, and all such wilful and non-wilful instances end up depleting our credit worthiness.
Simply put, a poor credit score is a result of a bad payment history, and becomes a big hurdle to get past while trying to get obtain a home loan application process.
Given below are four important things one needs to check, and be ready with prior to applying for a home loan.
1. Check where you stand on your ‘credit score’
A good credit score facilitates easy approval of a home loan by the financial institution. This solely depends on the consistency with which you pay your EMI, especially the scheduled ECS debits, cheques issued and the due card payments. You should not allow your credit card, or loan repayments get to a default status. Going and defaulting on payments beyond three months is a sure recipe to get reported into CIBIL by the financial services companies.
Even if you have a dispute regarding a financial transaction, it is better to pay first, and argue later! It is the credit information report (CIR) that actually is an account of your Credit Scores, and indicates your credit history vis-à-vis your borrowings from all the banks or non-banking financial institutions or home loan institutions.
Credit bureaus like TransUnion CIBIL keep a complete track of your financial transactions, especially those that go wrong, and based on these calculates and your credit score. These credit records are shared with the financial institutions when an enquiry is made by the financial institution while assessing your loan application.
CIBIL, for instance has two sections, namely ‘Accounts’ and ‘Enquiries’ under your CIR, and keeps your credit score, which ranges from 300 to 900. A credit score above 700 out of 900 is considered respectable from a home loan perspective. In fact, higher the score, the more risk-free you become for the bank. Higher the score, better are the chances of approval.
You may even end up getting a higher loan amount besides a better (lower) rate of interest considering your credibility and good standing.
With this background, you must ensure that you continually and consciously build on your credit scores over the years, since last ditch attempts are futile, and simply won’t work.
2. Need to be prudent in your budget, initial down payment, tenure and the EMI commitment
You need to be very clear and sensible about things like the down payment, the amount of loan you will take, and also bake in as possibility of future uncertainties while choosing the property.
Stretching beyond reasonable means at times becomes very difficult in the long run. While you get about 80% of the property value, it is important to consider the amount you will currently need to meet your monthly, yearly needs, and how much you expect your income to grow over the coming years considering your skillset, the industry demand and the overall economic scenario.
Besides, factors like ‘double income’ (i.e. added income with spouse also earning) also play a vital role to give you the safety net in unforeseen difficult times. You need to park yourself with a comfortable ‘Equated Monthly instalment’ (EMI) range, and the tenure which does not disturb your peace of mind, and financial stability from living a decent life.
Also, remember to carefully look at the amortization table while deciding on the ‘EMI range’ and the ‘tenure’. Amortization table shows how the monthly EMI, and also indicates the exact amount of monthly repayment that goes into ‘interest’ and ‘principal’ repayment. All the banks, during the initial few years take back a major chuck of interest repayment from you. The principal repayment comes during later years. Hence, in a scenario when you are foreclosing the loan between 5 to 10 years, you will realise that the principal amount has hardly gone down despite making such heavy EMIs, since most of your money got adjusted towards interest component. This can be better understood only by looking hard at the amortization table.
There are many online home loan calculators that give an indication of the EMI, tenure, and amortization schedules offered by different banks.
3. Keep the documents needed by financial institutions/banks in order to proceed with the loan application process
Keep the documents in place before approaching the bank to ensure a hassle free and quick approval, disbursal and decision process.
- Form 16 issued by the employers, and/or your Income Tax Returns for a minimum of past 2 years or so. Make sure you are filing your tax returns regularly
- PAN Card is always needed by the financial institutions to run a PAN card verification to verify your authenticity as a tax payer
- Aadhar Card verification is done to ascertain your identity and credentials as part of the ‘Know Your Customer’ process
- Your Bank Statements may be required for a period of 6 to 12 months to assess how your income and expenses stack-up
- An important factor this reveals is any regular pay-out that you are paying (monthly commitments that you did not disclose while applying for the loan.
- The total ‘actual’ dispensable (disposable) income you effectively have to service the loan you are seeking.
- Plus, should you have a healthy savings balance goes, it goes in your favour too; it adds to your credibility, and your ability to shoulder the initial down payment for the property you are looking to purchase. Plus, it indicates your ‘propensity to save’, and shows you in good light to the underwriting (loan approval) team of the bank.
- Your Salary Slips if you are salaried; Evidence of income if you are self-employed.
- Your Photographs on a duly filled and signed application.
4. Get knowledgeable about the facets related to home loans application, and choose the right financial institution/bank
- Do not apply randomly to too many banks, as this shows you in poor light to the credit bureau, and your scores are adversely impacted.
- Every enquiry into CIBIL is taken seriously. Incessant enquiries mean that you are a high-risk person, and are desperately scouting for a loan. This causes a negative hit on your Credit Score. This is why one should consider the options well prior to applying for a loan to one or two banks, one after the other, and not simultaneously
- At times you could also scout for banks that have already pre-approved the property you are looking to buy. This further reduces your time to buy, and also reduces your overall risk with the property per se, since the credentials and property related legal documents have been checked thoroughly by the bank/financial-institution
- Once your credit scores are within acceptable range of a bank, and you are fine with the overall proposition of the bank in terms of the interest rates, fees, tenures, options and benefits etc., you are good to go
- Choose a lender whose home loan proposition works for you best, both in the short & long term. Be sure to evaluate factors such as customer service, reduction in rates, helping you with foreclosure, or top-ups at a later stage etc. You need to plan way ahead of time in terms of what you can expect along the journey as you start making repayments. Once this is clear, and your requirements are met, you could go ahead with you getting the loan amount sanctioned, and book your dream home
The perspective above gives a holistic view of the factors that impact a home loan approval process.
The important thing to realise is that you not only need to have a good standing with the Indian credit bureau, but also needs to evaluate other factors which help you opt for the right (sensible) loan amount, the right EMI, along with the right tenure with the right bank.
Clearly, financial sobriety and prudence helps not only while applying for a home loan, but also when you effectively servicing the loan over a long drawn tenure. After all, a home loan is usually a life-impacting and important commitment that you embrace. So, it needs to be a conscious, well-planned and a well-informed decision.
An overall preparedness, knowing ‘what, why and how it works’, understanding what could be a blunder, pre-empting what might be a roadblock, and enabling the ‘right perspective’ helps!