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How to avoid mistakes while taking a home loan

Act in haste, repent at leisure. This adage might as well apply to a home loan seeker just as much as to a bridegroom. Here are 7 golden rules which will ensure that you do not repent in future.

Harsh Roongta

14 Aug 2007

Act in haste, repent at leisure. This adage might as well apply to a home loan seeker just as much as to a bridegroom. Here are 7 golden rules which will ensure that you do not repent in future.

Rule 1: Never choose a lender till the property is identified.

Speak to your bank about home finance only after you have identified the property you want to buy. While most banks will provide finance for ready-to-move-in properties, some banks do not readily finance a property which is being self-constructed or a property under construction. Also, if the property is very old or is being developed by a relatively unknown builder, the bank might have an issue with providing a property loan. Take a sanction for the loan only after identifying the property. Banks are known to reserve the best deals for immediate disbursement cases.

Rule 2: Get clarity about the loan amount you are eligible for.

Banks have different ways to calculate loan eligibility. If loan eligibility based on your income is likely to be an issue, then talk to several banks to find out which bank can give you the maximum amount. It may so happen that based on your own income, as well as your spouse's, you are still not eligible to get the amount of loan that you require. Then you must seek a bank that allows you to club the incomes of your other close relatives (parents, siblings, children etc.) to increase your loan eligibility. Some banks may agree to club the incomes of two siblings for the purpose of calculating the loan eligibility.

Rule 3: Remember to have own funds to the tune of 10-15% of the house cost.

If the house costs Rs 5 lakh, the bank expects you to pay at least Rs .50,000 to Rs.75,000 from your own sources, while the remaining Rs 4,25,000 -- Rs 4,50,000 is provided as loan subject to your income based eligibility. If the value of the house goes down in future, your down payment ensures that the bank's interest is protected by ensuring that outstanding loan amount is less than the realizable value of the property. Once you decide on your dream property, the bank will get the cost of the property evaluated by its own personnel. Surprisingly, this evaluation can throw up a price different (in most cases lower) from the actual price you are paying for the property. In such cases, you will need to shell out the difference between the actual price and the bank's valuation as additional down payment. So again, it makes sense to ask the bank to value the property (on payment of a small fee), especially if it is an old resale property. The small fee will be worth the while to avoid future hassles.     

Rule 4: Go window-shopping, then bargain and then, bargain some more.

You should shortlist four or five banks and get the shortlisted banks to compete for your loan. The cost of your loan depends a lot on your ability to negotiate. Remember that all terms and conditions of a housing loan are negotiable. Interest rates offered by banks take your income and repayment profile into consideration, apart from, of course, your negotiation skills. Apart from interest rates, also check various charges like processing fees, pre-payment charges, legal fees, valuation fees and other hidden costs. Take all these factors into account before choosing your bank.

Rule 5: Be prepared to lose your processing fee.

Your lender will charge you a fee to get the loan proposal on roll. This fee is called the 'processing fee'. This fee varies from bank to bank, but is usually around 0.50% to 1.00% of the total housing loan amount. Paying the fee doesn't mean that you will get the loan, but this is the fee to get the lender to even 'take a look' at your application. No matter what the bank representative informs you; the processing fee is 'NON-REFUNDABLE'. Don't trust any verbal promises about not encashing the cheque if the sanction is not done or is not as per the promised terms. Get all such promises in writing. This means that if your loan application is rejected or is sanctioned for a lower amount or at a higher rate than promised, you cannot claim the processing fee back.

Rule 6: Fixed or floating, there is no substitute for vigilance.

Even when opting for 'fixed interest ', remember that in some cases, it may remain fixed only for a certain period of time, as the bank may have the right to arbitrarily change even the so called 'fixed rate'. So, probe further and read the fine print before you sign on anything. Like a majority of consumers, if you have signed a floating rate loan, check whether the rates of your chosen lender had floated down in the years when interest rates were dropping like a stone. To know whether your lender offers 'transparent floating rates', ask for and check the bank's floating rate records from 2002-2003, when interest rates were going down. This is a fair indicator of what you can expect as (not if) and when the interest rates start moving down and the time comes for the bank to pass on the benefit to you.

Rule 7: Let your family inherit the house, not the home loan

Man knows little of what fate has in store for him. When you take a home loan, it is on the basis and assumption of continuing income. We run into all kinds of risks in our daily life. Accidents and health issues like heart attacks, stroke, paralysis, kidney failure and other physically crippling ailments can cause loss of income or in some cases, even your life. Housing loans are a fairly long-term liability. This is why when you take a home loan, it is advisable to take a life insurance and critical illness policy. Life insurance policies provide monetary benefit in case of an unfortunate incident like death and ensure that your family members inherit your home not your home loan. Critical illness policy will take care of the home loan liability if your income gets interrupted due to unforeseen, unavoidable circumstances which such conditions may create. That will be one less thing for you to worry about while you are anyway under severe stress. Best of all, most banks will be happy to finance the one-time premium payable for both policies, enabling you to get this protection at a small addition to your regular premium.