The home loan process in India is one of the most complex bureaucratic processes. There are several aspects that banks look at before shelling out coins. Therefore, new homeowners should have a clear idea of the process behind the whole thing. Here we go!
Home Loan Process In India
Buying your first house? Well, it is the biggest and most significant decision you will ever make. If done right, it has the potential to transform your life into something else. But it also has the potential to derail you financially.
However, I believe that an informed individual is the safest individual when it comes to finances. As a result, do not think of buying a house or getting that loan approved without knowing the nitty gritty of the home process in India.
A housing loan is one of the biggest loans of your lifetime. It can take around 30 years to finish the repayment process. Here are some of the basic points that you should know about the home loan process in India:
- Financial institutions assume that a person’s 50% income is disposable and can be used to repay the loan. Therefore, your salary decides your loan eligibility.
- Most lenders will lend you the full amount of the loan. Therefore, you need to save up at least 20% to 30% of the total value. The financial organization would finance the rest of the amount.
- Home loan rates can be floating or fixed. Therefore, you need to be clear about the options that the bank offers and your preference.
- The home loan carries several ancillary charges. These charges include processing fees, interest, technical evaluation fees, legal document scrutiny fees, etc. Therefore, you need to read the documents clearly.
- At the time of loan disbursement, you need to have all your documents ready, such as the PAN Card, encumbrance certificate, agreement papers, etc.
- Every year, the lender will send the payee a mandate that records the total amount and principal paid by the company. You need to save this document for future reference.
- Prepayment of the loan will help you to save some hefty amounts of cash as it reduces the overall interest rate. In fact, a consistent prepayment can actually enable you to save money and improve your CIBIL score.
- Pre-closing of loans is a possible option. However, banks might charge some prepayment amount.
How To Avail Home Loan?
Availing home loans has become increasingly easier in the current financial landscape. As a result, more and more people are exploring this option. This works on a double front. Firstly, it allows people to avail themselves of the benefits of home loans with ease. Secondly, it improves the country’s overall economy by rolling money. Here is a step-by-step breakdown of availing of a home loan in India in 2024.
Application
The very first step of the home loan process is the application stage. This is a very important stage that needs to be addressed carefully. A single mistake can result in loan application rejection.
Hence, you need to be extra careful and keep all your documents handy while filling out the required sections of the application. Most banks allow their users to fill out this application online. Therefore, you do not have to take time out of your busy schedule to fill out the form.
Here are some of the most common documents asked by a bank or financial organization while lending out money:
- ID proof
- Address proof
- Age proof
- Professional and educational qualification
- Employment details
- Bank statements of last few months or years
- Proof of income
- Pan Card
- Property details if you have those. This is optional.
Payment Of Processing Fee
Once you are done with the process of application, you are ready to proceed to the next step. This step involves paying the overall processing fee asked by a bank. Most banks will charge around 0.5% to 2% of the principal loan amount as the processing fee.
Along with the processing fee, the banks also charge 18% GST. This is a government mandate, and banks have to follow it. Banks use this amount to initiate the process of verification.
As of late, several banks have waived this processing fee in an attempt to bring new customers to the foray. Otherwise, you can negotiate this percentage with the bank you are dealing with.
Scrutiny & Verification
The third step of the home loan process is the scrutiny and the verification process of the loan. The banks would initiate a rigorous scrutiny process after you pay the processing fee. This is a crucial home loan process that banks take very seriously.
In this stage, banks scrutinize and see if you are eligible to take loans or the total amount you are cleared for lending. Most banks would like to call you in for a detailed scrutiny after two or three working days. Therefore, you need to be patient.
The scrutiny and verification process are two processes rolled into one. The first stage is about scrutinizing all the details. The next step is the verification process. For this, you will be called down for a personal interview. In this interview, every small detail, such as the overall credit history, financial history, etc., will be checked.
Some banks can even send representatives to your residence and your workplace as an added layer of verification.
Evaluation Of Payment
Once the verification is done, the bank evaluates the borrower’s capacity to repay the loaned amount. This is another very important step in the home loan process. A bank can either sanction or deny the request for a home loan. In general, home loan requests are not declined. However, it can happen.
In some cases, banks might issue conditional approval. This means that you need to fulfill certain parameters and requirements in order to get the loan approved. The best solution to bypass this step is to apply it in more than one place. This automatically improves the chance of success.
Offer Letter
Once your loan is sanctioned, the bank will send you an intimation. This intimation is a documented record that your loan application has been accepted. However, you need to hold your horses. After acceptance of the application, the bank will send you certain documents. These documents include:
- The overall receipt of the total sanctioned amount.
- The applicable rate of interest that the bank will charge on the principal amount.
- Whether the interest format is floating or fixed.
- The overall tenure of the loan.
- The repayment methodology you have to follow.
- Special schemes that are applicable.
- Terms and conditions that are associated with the agreement.
Property Verification
Just before the loan is disbursed, the bank will send its envoy to verify your property. This is one of the final steps of the verification of the home loan process. The representative will come and record all the documents that you have declared in the application.
The representative would come and check every small detail that you have announced about your property. Also, the representative can even ask for original copies of documents like the title deed, the no-objection certificate, etc. This is to ascertain that you are truthful about your financial condition.
Some banks go the extra mile and can conduct a technical verification of the housing project to ensure that there is a consistent return.
Disbursal
The final step of the home loan process in India is the loan disbursal. Once all the aforementioned formalities are done, the financial institution will initiate the process of loan disbursement.
First things first, the banks would chalk up some legal agreements to structure the transaction. The bank’s personal lawyers approve the format and take everything into consideration. Read this document carefully to understand the terms and conditions of the agreement.
The process of disbursal will initiate once you are done signing the loan agreement. The bank can disburse the whole amount in one go or can do it in parts. Do not worry. You will have a say in this part of the home loan process.
Borrowing Capacity
An individual’s total loan amount is decided on several factors. However, the borrowing capacity is one of the biggest and most prominent aspects of the home loan process. Therefore, it would be beneficial for users to know the parameters that determine the overall borrowing capacity of a user. Here are some of the basic parameters that banks look at before giving out loans:
Age
Age becomes a huge issue whenever the question of borrowing arises. As per the government mandate, a payee cannot be more than 58 years old when he or she is paying their final EMI. This is a very important aspect of the home loan process.
Therefore, a financial institution automatically prefers somebody who is in their late 20s. That does not mean that people who have reached their 30s will not be eligible for a loan. The bank will look at your age and will decide accordingly.
The best time to apply for a loan is around 35 years of age. This age offers that flexibility. Subsequently, a person gains financial stability by 35. Therefore, 35 is the sweet spot.
Salary Structure
The next parameter that decides your borrowing capacity is your overall salary. Banks might ask you to provide a salary slip for a year or two. This would help the financial institution decide on the borrowing bracket in which you could be placed.
A general rule of thumb that banks follow is that a person’s salary should be double the overall EMI amount. In fact, this is one of the basic and most important proponents that banks follow while deciding the optimal borrowing rate for the person.
Liabilities
The final aspect that banks consider is the liabilities. As per the mandate, a person’s EMI should not exceed more than 55% to 60% of the total monthly income. These fall under liability and become a huge deciding factor.
A person with mounting bills will not be cleared for a home loan. Therefore, clear all the existing debts before you initiate the home loan process. Otherwise, you will end up wasting your time and resources.
Here are some of the factors that a bank can consider as a liability:
- Mounting medical bills
- Pre-existing loans
- Poor CIBIL score
- Records of financial discrepancy
Cash Flow & Other Expenses
Finally, the bank would also like to have a clear idea of your cash flow. Most banks proceed with the notion that a person spends 40% of their salary in order to pay the EMI. Therefore, a bank would determine if you follow this mandate. This is a very important point that you also need to consider before making any financial decision.
Like for example, if your income is around 1,00,000, then the bank will proceed with the notion that you can pay around Rs. 40,000 in EMI. Therefore, the bank would use this information to determine the EMI value.
Calculating The EMI
An EMI is calculated in a methodical and strategic manner. There are three key components that decide how much EMI a person needs to pay in order to pay off their loan.
The first component is the principal amount (P). This is the actual amount that an individual borrowed from a bank.
The next component is the interest (R). This is the added interest that the bank would charge over the repayment tenure. This can either be fixed or floating.
The final component is the tenure (N). This determines the total period that a person might take to pay off a loan.
These three components come together to formulate the EMI. Therefore, you need to take each of these into consideration before you start calculating your EMI.
Here is the formula that you need to follow while calculating your EMI: [P x R x (1+R)^N]/[(1+R)^N-1].
The Final Thought
That is all there is to know about the home loan process in India. Buying a home will not be an easy feat. There are a lot of cogs that fit into the machinery. Hence, one needs to understand that there are several things to consider before buying a house. Keep following our page for more such content.
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