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Saturday, November 27, 2021

Five home loan problems you should be aware of

A look at some challenges you may face in your home loan journey.

Written by Adhil Shetty |
Updated: November 25, 2021 3:36:59 pm
home loanTo avoid a loan rejection due to lack of margin money, you should select a property you can afford. (Representative image, source: Pexels)

Home buying is a big aspiration for most Indians, and few can fulfill this aspiration without a home loan, whether they are first-time homebuyers or otherwise. A home loan allows them to purchase a property that they may not be able to afford basis their current financial capacity. I’ve talked about the various facets of the home loan journey from application to repayment. This time, let’s look at some challenges you may face in that journey.

Rejection of loan application

Imagine how you may feel if after finalizing a great property deal, you’re unable to get it financed because your loan application got rejected. It happens to those buyers who proceed hastily without checking if they are eligible for a home loan or not. Even if the applicant is eligible for a home loan, they should know how much they can borrow, what documents they need to furnish, and what their interest rate would be. Confirmation of loan eligibility can significantly lower the chance of loan rejection. Do check beforehand if your own bank has a pre-approved offer for you.

Charges levied

When taking a loan, many borrowers have the misconception that they just need to pay interest on the loan. This is a mistake. You need to be aware of all the charges that your home loan could attract. For example, the lender will charge a processing fees, legal charges, documentation fees, MODT charges, property valuation fees and any other charges as applicable during the application. When repaying the loan, there will be charges such as refinance costs, late payment penalties, documentation costs, and simple interest. Ensure you are aware of these various costs, however small they may be, to avoid confusion later.

Insurance bundles with loan

Borrowers often have the misconception that they need to purchase a bundled home loan insurance along with the loan. It is not compulsory to buy any insurance coverage, for the loan or the property, when taking a home loan. Some lenders incentivize this coverage by offering you a lower interest rate. Some may say they can’t give you the loan without the insurance cover. But you are well within your right to refuse the bundled coverage. You can always buy it later from your preferred insurance provider or at a cost that suits you.

Difference in property valuation

The property which you plan to purchase at a certain price may not be worth the same as per your lender’s valuation. It could be a financially challenging situation if you have already paid the booking amount because you may not get the desired loan amount from the bank. If you keep a cushion of 5-10 per cent while estimating the down payment requirement, it can help you deal with the problem of a lower valuation by the bank. You may check with the other banks and HFCs to explore if they can allow a better valuation for your property.

Down payment requirements

A property has a base price. Let’s say it is Rs 100. If it is under construction, it may attract GST of Rs 1 or Rs 5, depending on the kind of property it is. You may need to pay another Rs 5 for amenities, various funds, and utility connections. You may need another Rs 5 to 10 for furnishing. You’ll need to pay another Rs 6 for registration and stamp duty. All put together, you’ll need to pay up to Rs 130 for the house whose base price is just Rs 100. Of this, you may get a home loan at 75 per cent to 90 per cent loan-to-value including base price, amenities and utilities, and GST. For a loan value case, the lender may go up to 90 per cent loan-to-value. For a high value case, the maximum you can borrow is 75 per cent. The rest will come out of your own pocket. So let’s assume that you’ll be able to borrow Rs 82.5 at a 75 per cent loan-to-value, the other Rs 49.5 needs to be out-of-pocket. You may have to pay this up front or in a staggered manner. Therefore, ensure that you have this margin money ready, without which you cannot complete your property purchase.

To avoid a loan rejection due to lack of margin money, you should select a property you can afford. Banks may also consider investments like NSC, LIC policy etc. as collateral for increasing your loan eligibility.

If are aware of these problems, you can easily avoid them by being prepared.

The author is the CEO at BankBazaar.com. Views expressed are that of the author.

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