Factors Affecting Your Choice of a Lender
With so many housing finance companies and bank competing with each other for the home loan pie, the home loan borrower is a pampered lot and is confused as to whom to approach to borrow money for buying the house. There are many factors which one needs to consider before one ticks on specific lender. Let us discuss the important factors to be considered.
Your Credit History and profile
In case your credit history is spoiled, due to any default in payment of your credit cards or any other dues in the past, well established lenders are not willing to give you home loans generally. Even in cases where the borrower does not have any credit history and is neither professionally qualified or does not have adequate working track record, the reputed lenders do not entertain such borrowers.
However in such cases some housing finance companies can still give you home loan to buy your house albeit at higher rate of interest and with requirement for higher contribution for purchase of the property.
So before you approach any lender please obtain your credit report/history and if the report is not clean, it is not advisable to waste your time in chasing established home loan lenders but to approach housing finance companies which willing to take the bait.
Probability of Repayment of Home Loan before its Initial Term
In substantial number of cases people who take home loan, repay it at faster pace and complete it before the term for which the loan was taken. In case you prepay the home loan the lender might charge you a penalty for such repayment which is called prepayment penalty in banking parlance.
The basis for charging such penalty differs between a bank and a housing finance company as both are regulated by different authorities. The housing finance Companies are not allowed to levy any prepayment penalty on home loans unless your home loan is under fixed rate and you are transferring the home loan to another housing loan lender be it a bank or a housing finance company.
The banks do not charge any prepayment penalty on floating rate home loans but are free to levy it on fixed rate home loan even if you are repaying the entire home loan by arranging funds yourself. Some of the lenders do not levy any prepayment charges in cases where the amount of prepayment during a year does not exceed a certain percentage (generally 25%) of the home loan outstanding at the beginning of the year.
So in case you eventually intend to close the home loan before its original term, take this prepayment cost into account which is generally around 1% of the loan amount prepaid.
Location of the Property
All the home loan lenders are not active in the whole country. Some lenders are active in some parts of the country and not other parts. So your choice of the home loan lender would depend on the physical location of the property and will be restricted to such active player/s in the area.
Likewise in case the property to be purchased by you is at different place than where you are working, it is advisable to select a lender who has operations in both the places. This is because lenders, generally are not keen to lend for a property unless they have physical presence in such area.
Enhanced Home Loan Eligibility
Your home loan eligibility is positively correlated with the home loan tenure chosen by you. Longer tenure will get you higher home loan eligibility. Home loans are generally given for a tenure of 20 years but some of the banks like Oriental Bank of Commerce grant you home loan for a tenure as long as 40 years.
However to the best of my knowledge the housing finance companies grant home loan upto 20 years only. So in case your home loan eligibility, in terms of amount is a concern, you better approach such banks giving home loans for longer tenure.
Nature of the Property to be Acquired
Home loans are given for three different type of property to be acquired/constructed. Majority of the lenders are into giving home loans for a ready to move in house property. Then there are lenders who finance an under construction property booked by you from a developer. And a few lenders give a home loan to finance purchase of a plot as well as construction cost on such plot.
So in case you wish to take home loan for a ready to move in house, you have ample choices. With increasing incidences of default by the builders and the home loans turning into Non Performing Asset (NPA) more and more lenders are becoming reluctant to finance under construction properties.
Likewise since the monitoring of a composite home loan (Loan for a plot and construction thereon) is more difficult, only a few lenders are active in this specific segment. So your choice will get restricted depending on the type of property you wish to acquire.
Basis of Interest Rate charges and frequency of its revision
Since banks are required to price their home loans benchmarked against their Marginal cost of Fund Based Lending Rate (MCLR) which they are required to review more frequently, so the home loan borrowers get the benefit of reduced rates during the declining interest rate cycle.
Moreover the banks are not allowed to lend below the MCLR except to its employees, these rates are transparent as the home loan borrower knows exactly how much premium, in terms of higher interest rate, he is paying over the best borrower who may get home loan exactly at MCLR.
The housing finance companies give home loans benchmarked against a retail prime lending rate (RPLR). The actual home loan generally is given at a rate as a discount to the RPLR. So the borrower never knows what premium he is paying over the best borrower.
Moreover the housing finance Companies are quick in raising their home loan rates during rising rate cycle but relatively shower in passing on the benefit of declining home loan rate.
From the above discussion it becomes clear that there is no one size fits all lenders for home loan and you have to chose your lender based on your specific requirements and situation.