Types of Home Loans in India and factors that Influence It


Date: 24-September,2019Last Updated: 27-February,2021
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A Home Loan or Housing Loan is an amount of money that an individual borrows from a bank or financial institution at a certain rate of interest which is to be paid back every month.The property is considered as security by the financial institution to consider your home loan eligibility. The property can be commercial or personal in nature.

Have you applied for a home loan or looking to avail for a loan? Most first time home buyers apply for a loan while buying a house.

There are various home loans offered by private or national banks or non-banking financial institutions in India.

Types of home loans available in India

1. Home purchase loans

A home loan which is utilized to buy a residential property which is 80-85% of the market value of the house. Home loan interest rates can be fixed, floating or either hybrid.

Important points to consider:

Banks lend 85 percent of the market value of the house.
Home loan is a secure loan where collateral is subjective.
The eligibility for a home loan can be improved by clubbing the applicant's spouse, parent or child's income.
A housing loan is eligible for the tax deduction for the principal amount and the interest levied on it.

2. Land purchase loan

Such loans are given by banks or non-banking financial companies (NBFCS) to purchase a plot or land on which the loan applicant is looking to build a house, which is 80-85% of the total cost of the land.

3. Home construction loan

Banks and financial institutions issue home loans to people who want to construct a house on a plot that is owned or co-owned by them.

Important points to consider

Sales deed, approved building plan, No Objection Certificate (NOC) from the respective authority needs to be attached with the application form.
Any changes in the approved plan such as infringement of the boundaries, expansion beyond approved area, etc. will cause the bank to freeze the loan.
Home construction loans offer tax benefits unlike other loans, for the interest paid till the time the construction has been completed.
Loan for home construction does not cover costs like painting, lighting, plumbing etc.

To know more about Legal Documents Required while buying a new home.

4. NRI home loans

NRI home loans assist non-resident Indians who are interested in buying a residential property in India. The structure of this home loan is similar to the regular home loans, the paper work is a bit more exhaustive and tedious.

5. Home conversion loans

Existing home loan borrowers who want to move into another property can apply for a home conversion loan to buy a new property.

6. Home extension loans

This loan is taken by individuals who own a house and need funds to expand or extend their existing house.

7. Home improvement loans

Home improvement loans are availed by individuals who own a house but do not have funds to renovate it. Renovation includes repairing of the old house, painting of the walls, digging a borewell, waterproofing, electrical wiring inside or outside the house.

Apart from major renovation work, these loans can be applied for essential work like bathroom fittings, fans, furniture, etc. Self-employed and salaried individuals can apply for these loans especially first time home buyers. The minimum requirement for this loan is at least 21 years while the maximum age is limited to the retirement age of the applicant.

There are certain terms and conditions that the banks extend before giving out a home loan. There are certain parameters according to which banks evaluate your application and important factors that influence your home loan eligibility.

Factors that Influence Home Loan

Age

The time period estimated to pay off a loan is called "tenure". Your tenure is based on age and your ability to pay it off in certain time period. The ability of a young person to pay off the home loan will be better than that of a person who is middle aged or old.

Income

Your income is the most important deciding factor that influences the banks and financial institutions willing to be lenders. The banks will lend more amount of money to you if your income is higher. The banks and financial institutions insist that you have a certain amount of income to be eligible for a home loan which varies as per profession.

Qualification and experience

If your work experience and academic credentials are spectacular then the odds of the bank granting you a loan would be higher. A salaried person who has two or three years of work experience will be eligible for a home loan. A self-employed person should have a company that should have been operational for a few years with cash profits and revenues.

Tax returns should also have been filed in the company's name.

Type of employment

The type of employment you have will influence the home loan eligibility. Banks want to know as to whether you are an Employed professional, Self-Employed Professional (SEP) or a Self-Employed Non-Professional (SENP). The eligibility criteria varies according to your form of employment. If you have changed your job frequently then your prospects of getting a home loan would reduce.

Down payment

It is not merely the principal and the interest components of your EMI that one needs to worry about. The funds for the margin money needs to be arranged.

The lender gives 80 per cent of the market value of the property while the borrower must organize the 20 per cent of the market value of the property.

Dependents

You home loan eligibility will be influenced by the number of dependents who are relying on your income. The chances of a housing loan being sanctioned reduce if you have more dependents. Lenders calculate the Fixed-Obligation-to-Income Ratio (FOIR), which takes away a part of your income that you use to support your family members.

Credit and Payment history

Your Credit score (CIBIL) and Payment history gives the lender an idea of whether you are capable of repaying back the home loan and how have you handled your liabilities in the past. A credit score is given to you as per your credit history which allows the banks to decide whether you are eligible for the loan.

Nonetheless, Credit Score is not the only criterion which banks consider before giving out a loan.

Other liabilities you have

If have too many loans to repay, then the probability of the bank lending out a loan will be lower. This indicates that the applicant is under the weight of too much debt. Lenders compute the Debt-Service-Coverage-Ratio (DSCR) to determine the ratio of your total current debt to your total current income.

Market lending rates

The Reserve Bank of India's (RBI) policies and market lending/interest rates can greatly influence your debt and advances. Interest rates influence the cost of borrowing money. Higher the home loan interest rate, the cost of home loan will be higher. Currently some of the nationalised banks offering the lowest home loan interest rates are as follows:

State Bank of India -8.05%

Syndicate Bank -8.15%

Punjab National Bank - 8.25%

Taking a home loan is a reliable and logical option to finance your home purchase as it offers funds at your disposal and comes with a long tenure that makes repayment an easy task. Opting for the right lender and familiarising yourself with the process of the types of home loans and eligibility criteria will help you ensure a smooth experience.

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