Understanding home loans in India: A complete guide

Owning a house is a dream come true for most of us. What makes it even more memorable is knowing the loan process, eligibility for a home loan in India, tax rules, etc. 

With so many options available, navigating through even simpler questions like how to apply for the right home loan can be challenging. Therefore, we have compiled everything to know about a home loan in India to help you make an informed decision. Read on!

Types of home loans available
 

Taking a home loan in India is an excellent way for individuals to purchase or construct their dream homes. Here are the most common types of home loans available in India -

· Home purchase loan - This loan is for individuals who want to buy a new or resale home. The loan amount can be up to 80-90% of the property's value, depending on the lender's policies.
 

· Home construction loan - This loan is for individuals who want to construct a new home. The loan amount can cover the construction cost, and the lender disburses the loan amount in instalments based on the construction's progress.
 

· Home improvement loan - This loan is for individuals wanting to renovate or improve their homes. The loan amount can cover the cost of repairs, painting, or any other home improvement expenses.
 

· Plot purchase loan - For buying a plot and building a new home, this loan disburses the amount in instalments according to the construction's progress. It covers the plot's cost and is suitable for individuals.
 

· Home extension loan - For home extensions, this loan disburses the amount in instalments based on construction progress. It covers extension costs and is available for individuals.
 

Also read - Simple ways to repay home loan faster

​​Eligibility criteria for home loans
 

The eligibility criteria for applying for a home loan in India vary from lender to lender. Here are some common eligibility criteria that borrowers need to meet to apply for a home loan -

· Age - The borrower should be at least 21 and less than 65 years when applying for a home loan.
 

· Income - The borrower's income determines the home loan amount and eligibility. The lender may consider the borrower's salary, business income, or other sources of income to determine eligibility.
 

· Credit score - A good credit score is essential to get a home loan in India. A credit score is a three-digit number that reflects the borrower's creditworthiness and repayment history. A score above 750 is considered good by most lenders.
 

· Employment status - The borrower should have a stable job or a steady source of income.
 

· Property ownership - The borrower should have a clear title to the property they plan to purchase or build.
 

Applying for a home loan
 

Once the borrower meets the eligibility criteria, they can apply for a home loan by following these steps -

· Research - Research and compare the interest rates, processing fees, and other charges of different lenders. Choose a lender that offers reasonable terms and suits your requirements.
 

· Eligibility - Check your eligibility for a home loan based on your income, credit score, age, and employment history.
 

· Documentation - Collect all the necessary documents required for a home loan, including identity proof, address proof, income proof, and property-related documents.
 

· Application - Fill out the application form and provide all the necessary details. You can apply for a home loan online or visit the lender's branch.
 

· Property evaluation - The lender will evaluate the property you plan to buy or construct. They will assess the property's value and confirm its legal status.
 

· Loan approval - Once the lender approves your loan application, they will send you a loan offer letter with the loan amount, interest rate, and tenure. Then your loan will be disbursed.
 

Documentation required for a home loan
 

To apply for a home loan, borrowers need to submit the following documents -

· Proof of identity - Passport, voter ID card, Aadhaar card, PAN card, or driving license.
 

· Proof of address - Aadhaar Card, voter ID card, passport, utility bills, or ration card.
 

·  Income proof - Salary slips, Form 16, Income Tax Returns, bank statements, or other income-related documents.
 

· Property-related documents - Property papers, NOC from society or builder, land agreement, or sale deed.
 

· Employment proof - Employment certificate, appointment letter, or any other document for a home loan the lender requires.
 

How to increase your chances of getting a home loan approval?
 

Here are some tips to improve your chances of getting approved for a home loan -

· Maintain a good credit score - A good credit score is critical in approving a home loan. Lenders consider a credit score of 750 or above as good.
 

· Choose the right lender - Different lenders have different home loan eligibility criteria, interest rates, and loan terms. Research and compare different lenders to find the best home loan deal that suits your requirements.
 

· Provide all required documents - Providing all the required documents for a home loan accurately and on time can improve your chances of getting approved.
 

· Apply with a co-borrower - Applying for a home loan with a co-borrower with a good credit score and stable income can improve your chances of getting a home loan approved.
 

· Make a higher down payment - It can improve your chances of getting a home loan approved by reducing the loan amount and risk for the lender.
 

· Choose the right loan amount and tenure - Choosing a loan amount or tenure you cannot afford can reduce your chances of getting a home loan approved.
 

Interest rates and fees
 

Interest rate is the percentage of the borrowed sum paid by the borrower to the lender. Home loans may include processing, prepayment, and foreclosure fees, which differ by lender and affect total expenses.

IDFC FIRST Bank home loan offers minimal processing fees for both salaried and self-employed individuals.

 IDFC First Bank home loan offers minimum fees for both salaried and self-employed professionals

Here are some types of interest rates available for a home loan -

· Fixed interest rate - A fixed interest rate stays steady over the loan term, enabling borrowers to plan their finances with certainty about their EMI (Equated monthly instalment) amount.
 

· Floating interest rate - A floating interest rate changes with the market and is more volatile than a fixed rate, but it can be advantageous when rates are predicted to fall.
 

· Semi-fixed interest rate - A semi-fixed interest rate combines fixed and floating interest rates. The interest rate is fixed for a specific period and then becomes floating.
 

· Marginal cost of funds-based lending rate (MCLR) - MCLR is based on the bank's cost of funds and is used to determine the lending rate of a bank. MCLR-linked home loans are beneficial when interest rates are expected to decrease.
 

· Base rate - The base rate is the minimum lending rate set by the Reserve Bank of India. Home loans linked to the base rate are beneficial when interest rates are expected to increase.
 

Calculating home loan EMI
 

EMI is the amount the borrower must pay every month to repay the loan. It comprises the principal amount and the interest charged on the loan. The home loan EMI can be calculated using the following formula -

EMI = [P x R x (1+R)^N]/[(1+R)^N-1]

P is the principal amount, R is the monthly interest rate, and N is the loan tenure in months.

Fees associated with home loans
 

Here are some common fees associated with a home loan in India -

· Processing fee - The lender charges a processing fee for the home loan application. The fee is typically a percentage of the loan amount, ranging from 0.1% + GST to 1% + GST
 

· Prepayment penalty - The lender charges a prepayment penalty if the borrower decides to repay the loan before the loan tenure ends. This fee is usually charged as a percentage of the outstanding loan amount.

· Late payment fee - The lender charges a late fee if the borrower fails to pay the EMI on time. The fee can be a fixed amount or a percentage of the EMI.

· Legal and technical fee - The lender charges a legal and technical fee for conducting a legal and technical check on the property. The fee is usually a fixed amount.
 

Repayment options available for a home loan in India
 

· EMI (Equated Monthly Installment) repayment - This is the most common home loan repayment mode. The borrower pays a fixed amount every month, including principal and interest.
 

· Step-up repayment - This mode of repayment is beneficial for borrowers with a low income when applying for a loan. The EMI is low in the initial years of the loan and gradually increases over time as the borrower's income increases.

· Step-down repayment - High-income borrowers benefit from this repayment mode. It begins with high EMIs in the loan's early years, gradually decreasing.
 

Consequences of defaulting on a home loan
 

Defaulting on a home loan can have serious consequences for the borrower. Here's what you need to know -

· Impact on credit score - Defaulting your home loan can harm the borrower's credit score, making it tough to secure future credit. Lenders may deem them high-risk, resulting in loan rejections.
 

· Legal action - Lenders can sue borrowers, leading to court cases and collateral seizure, causing complete property loss and disrupting financial stability.
 

· Penalties and Fees - Besides legal action, the lender may charge penalties and fees for late payments and non-payment of the loan. These charges can add up quickly and increase the overall cost of the loan.
 

· Blacklisting - The borrower may also be blacklisted by the lender, making it difficult to obtain credit in the future.
 

Also read - Various types of Home Loans you can apply for

​​Conclusion

Obtaining a home loan in India can be long drawn, but it can be manageable. Understanding the basics of home loan eligibility, calculating home loan EMI, and others can help borrowers make informed decisions when applying for and repaying a home loan in India.

IDFC FIRST Bank offers tailor-made loans that require minimal documentation. Customers can also get a top-up of up to 100% at the same rate as a balance transfer. The bank has a digitised process for loans up to 5 crores and a tenure of up to 30 years. 

Remember to use the home loan eligibility and EMI calculators to evaluate your financial status. Apply now and take the first step towards owning your dream home! 

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.