How much loan am I eligible for ?

Before you start the home loan process, determine your total eligibility, which will mainly depend on your repaying capacity. Your repayment capacity is based on your monthly disposable/surplus income, which, in turn, is based on factors such as total monthly income/surplus less monthly expenses, and other factors like spouse's income, assets, liabilities, stability of income, etc.

The bank has to make sure that you're able to repay the loan on time. The higher the monthly disposable income, the higher will be the loan amount you will be eligible for. Typically, a bank assumes that about 50% of your monthly disposable/surplus income is available for repayment. The tenure and interest rate will also determine the loan amount.

Further, the banks generally fix an upper age limit for home loan applicants, which could impact one's eligibility.

What is the maximum amount I can borrow ?

Most lenders require 10-20% of the home's purchase price as a down payment from you. It is also called 'one's own contribution' by some lenders. The rest, which is 80-90% of the property value, is financed by the lender. The total financed amount also includes registration, transfer and stamp duty charges. Even though the lender calculates a higher eligible amount, it is not necessary to borrow that amount. Even a lesser amount can be borrowed. One should try to arrange the maximum of down payment amount and less of home loan so that the interest cost is kept at minimal.

Is a co-applicant necessary for a home loan ?

Yes, it is (mostly) mandatory to have a co-applicant. If someone is the co-owner of the property in question, it is necessary that he/she also be the co-applicant for the home loan. If you are the sole owner of the property, any member of your immediate family can be your co-applicant.

What documents are generally sought for loan approval ?

The loan application form gives a checklist of documents to be attached with it, along with a photograph. In addition to all the legal documents related to the purchase of the house, the bank will also ask you to submit your identity and residence proofs, latest salary slip (authenticated by the employer and self-attested by you) and Form 16 or income-tax return (for businessmen/self-employed) and the last 6 months bank statements/balance sheet, as applicable. Some lenders may also require collateral security like the assignment of life insurance policies, pledge of shares, national savings certificates, mutual fund units, bank deposits or other investments.

What is sanctioning and disbursement of loan ?

Based on the documentary proof, the bank decides whether or not the loan can be sanctioned or provided to you. The quantum of the loan that can be sanctioned depends on this. The bank will give you a sanction letter stating the loan amount, tenure and the interest rate, among other terms of the home loan. The stated terms will be valid till the date mentioned in that letter.

When the loan is actually handed over to you, it amounts to disbursement of the loan. This happens once the bank is through conducting technical, legal and valuation exercises. One may opt for a lower loan amount during disbursement against what is mentioned in the sanction letter. At the disbursal stage, you need to submit the allotment letter, photocopies of title deed, encumbrance certificate and the agreement to sell papers. The interest rate on the date of disbursement will apply, and not the one as per the sanction letter. In such a case, a new sanction letter gets prepared.

How will the disbursement take place ?

The loan can be disbursed in full or in installments, which usually does not exceed three in number. In case of an under construction property, the disbursement is in installments based on the progress of construction, as assessed by the lender and not necessarily according to the developer's agreement. Make sure to enter into an agreement with the developer wherein the payments are linked to the construction work and not pre-defined on a time-based schedule. In case of a fully constructed property, the disbursement is made in full.

What are the interest rate options?

Home loan rates can be either fixed or flexible. In the former, the interest rate is fixed for the loan's entire tenor, while in the latter, the rate does not remain fixed.

What are the costs involved in taking a home loan?

When you take a home loan, you don't just pay the EMI on the loan. There are several other charges, though not all apply to every case.

There could be a processing fee of about 0.5-1% of the loan amount. At times, the lenders waive it. For some high-value properties, two valuations are done, and the lower of the two is considered for loan sanctioning. The lenders call it technical evaluation fee. Most lenders engage firms to scrutinise borrowers' legal documents. Generally, banks include this cost in the processing fee, but some public sector (PSU) lenders charge it separately.

Can you pre-close your loan ahead of schedule?

One can pre-close the loan ahead of its original tenure. If you are on a floating interest rate, no charge will be applicable. If you are on a fixed rate, there may a charge applicable.

What is part prepayment of home loan? Does it help to prepay?

Partial prepayment refers to any payment made by the borrower in addition to the regular EMIs. It directly reduces the outstanding principal amount and the interest gets calculated on the reduced principal. Prepayment helps in reducing the total interest outgo as the loan tenure gets reduced. The higher the prepayment amount and the longer the period, the more will be your savings.

What documents should I receive from the bank each year against the EMIs I pay ?

Every home loan lender is supposed to furnish you with a statement at the beginning of the year showing how much of total interest and principal is expected to be repaid during the year. This statement helps you to declare the figures to your accounts department as a declaration of investment proof for tax deduction. At the end of the year, the lender is supposed to send a statement again showing the actual amount of interest and principal repaid that would help you to take tax benefits.

Should one take insurance to cover home loan liability?

It is always better to cover your home loan liability and not let it fall on your family in your absence. You may either buy a pure term insurance plan or a mortgage insurance plan for an amount equal to the loan amount for a specific tenure. One is allowed to pay a single premium or regular premiums to buy any such plans. It is, however, not compulsory to buy such an insurance plan while taking home loan from the lender.

What are the tax benefits on home loans ?

Of the total annual EMIs, the principal component gets tax benefit under Section 80C of the Income Tax Act. Even the partial prepayment amount qualifies for the same, but within the overall limit of Rs 1.5 lakh under Section 80C. Further, if it is a self-occupied property, the interest paid is deductible up to Rs 2 lakh in a year.

Benefits of a home loan

1. Tax benefits: - To encourage more and more people buy their own house, government of India provides tax deduction on the principal as well as interest paid on home loan. An individual is eligible to claim a deduction of up to Rs 1.5 lakh under Section 80C of Income Tax of India 1971 Act in a financial year. While a deduction of up to Rs 2 lakh is allowed on the interest portion under Section 24B of Income Tax of India Act. The deductions under income tax are only available after the construction of the house is complete. You can't claim the income tax deductions while the property is under construction. Read: to know more about home loan deductions.

2. No prepayment charges: - Unlike other loans where lenders charge prepayment penalties on payment made towards home loan , there are no prepayment penalties on floating rate home loans . So, whenever you have surplus money, you can utilize it for making part payment towards your home loan and lower your burden. However, there will be prepayment charges in case of floating rate home loan.

3. Balance Transfer Facility: - In case of home loan you have the facility to transfer your home loan to different lender if he is giving you loan at a lower interest rate.