For most people, their home is their biggest and most valuable asset. Buying a home is considered one of life’s milestones. Owning a home is both a dream and a necessity, one which requires considerable financial outlay. Buying a home is an important decision in any case. The same goes for the home loan you take out to raise funds. This is a simple yet crucial piece of paper and any mistakes you make in understanding the terms and conditions can cost you a significant amount of wealth over the loan period. Read on to avoid any such missteps and to make the best of your home loan agreement.
What is a home loan?
A home loan is a special type of loan wherein an amount of money is borrowed from a bank or a private lender such as Tata Capital for the express purpose of purchasing a home for residential purposes. Before signing on the dotted line, the borrower must be absolutely clear on what the various legal and technical terms in the agreement mean.
Important terms in a home loan agreement
Principal amount – This refers to the lump sum amount for which the borrower has applied
Down payment – Most lenders require a certain percentage of the purchase price to be paid up front while availing the loan. It can range from 15 to 30% depending on the borrower’s income and credit history
Fixed interest rate – In this case, the home loan interest rate remains the same over the complete loan period
Floating interest rate – In this case, the home loan interest rate fluctuates periodically over the loan period and the lender revises it from time to time
EMI – Equated Monthly Instalment, or EMI implies the monthly payment the borrower will have to make every month for repaying the loan. It is comprised of the principal as well as interest component. This is one of the most crucial factors for a borrower to consider.
Credit score – The credit score determines the creditworthiness of the prospective borrower. It denotes past credit history, earning ability and denotes whether the person is a worthwhile prospect. Banks generally lend to borrowers who have a credit score higher than 750
Processing fee – This is the amount paid to the lender at the time of applying for the loan. It may be a percentage of the loan amount. Essentially, it is like an advance
Default definition – The definition of default may include not just non-payment of an EMI, but also non-fulfilment of a number of other terms initially agreed upon. For example, if the loan was a joint loan taken by a married couple who have now divorced, it may constitute a default. It is important for the borrower to be clear on what constitutes a default in the home loan agreement
Amendment clause – The amendment clause allows the lender to change the terms and conditions of the original loan agreement at any time without the borrower’s consent. You can imagine how this would disadvantage the borrower. In such cases, the original mutually signed document stands worthless. The borrower must specify that his written consent is needed before the lender can make any amendments
Repayment clause – The borrower should ensure that the home loan agreement allows prepayment of the loan amount without any pre-closure penalties. Prepayment can save the borrower a considerable amount over the long run
Factors which affect a borrower’s eligibility for a home loan
- Age – Up to mid-thirties, it is relatively easy to be granted a home loan. However, borrowers over forty may find it difficult to fit under the eligibility for a home loan.
- CIBIL report – A low score or negative report on your previous credit history can lower your chances significantly
- Income – Salaried professionals may find it easy to be approved while self-employed individuals may not
- Outstanding loans – Any pending loans will lower your chances
- Ask for the loan agreement in advance and go through the same with a fine tooth comb
- Clear even the smallest doubts you may have preferably from a senior official
- Don’t rely on a salesperson’s verbal assurances. Ask them to back it up with an agreement in writing
Make sure you keep these factors in mind while applying for a home loan.