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6 home loan planning strategies for first-time borrowers

Here are some of the factors that first-time home loan borrowers should keep in mind for increasing their home loan eligibility.

Smart tips to increase your home loan eligibility
A higher down payment reduces the credit risk and improves the chances of loan approval.  Some lenders also offer lower interest rates to borrowers opting for lower LTV ratios.

Lenders primarily approve home loans based on the applicants’ income, credit score, repayment capacity and other factors. Failing to match the criteria set by the lenders can lead to the rejection of a home loan application.

Here are some of the factors that first-time home loan borrowers should keep in mind for increasing their home loan eligibility.
 
Review your credit score at regular intervals
 
Your credit score would be amongst the first factors considered by banks and HFCs for evaluating home loan applications. Applicants having credit scores of 750 or above have higher chances of loan approval. Such credit scores can also help them in availing home loans at lower interest rates. Hence, those planning to avail home loans in future should start reviewing their credit scores at regular intervals. Doing so would allow individuals having low credit scores to take the necessary measures to improve their credit score. An improved credit score would increase their chances of availing home loans at lower interest rates.
 
Try to contribute a higher down payment
 
The LTV ratio is the proportion of the property value that a bank or NBFC can lend to the home loan borrower. The remainder of the property’s cost has to be covered by the buyer from his own funds, either as a down payment or a margin contribution. The final LTV ratio for a home loan application will be determined mostly by the lender’s credit risk assessment of the borrower. As a result, applicants should first try to save at least 10% to 25% of their property value to ensure that they are financially prepared to make a margin contribution or down payment on the loan.

A higher down payment reduces the credit risk and improves the chances of loan approval.  Some lenders also offer lower interest rates to borrowers opting for lower LTV ratios. Hence, home loan applicants looking to reduce their interest cost should aim at creating bigger corpuses for their home loan down payment. However, avoid compromising your emergency fund and investment portfolios earmarked for crucial financial goals for making higher down payment or margin contribution. Doing so may force them to avail loans at higher interest rates to deal with financial exigencies.
 
Examine your EMI affordability
 
Home loan lenders also consider the repayment capacity of applicants while evaluating their home loan applications. Banks and HFCs usually prefer lending to those applicants whose total EMI obligation, including the one for the new home loan, remains within 50-60% of their monthly income. Those exceeding this limit have lower chances of getting a home loan approved. Such applicants should try to decrease their loan repayment obligations by foreclosing or prepaying some of their previous loans, choosing a longer repayment term, or making a higher down payment or margin contribution for their new home loan.
 
Applicants can take the help of online home loan EMI calculators to know their optimum EMI based on their repayment capacity. This reduces the chances of defaulting on EMIs in the future.  
 
Factor in your home loan EMIs in your emergency fund
 
Unexpected financial exigencies or income loss due to job loss, illness, disability or other circumstances can occur at any time, which can adversely affect your loan repayment capacity. Also, defaults on home loan EMIs can attract penalties and a drop in credit score. While you can liquidate your current investments to pay off your home loan EMIs, this can have a negative impact on your long-term financial health. Hence, it’s better to include the estimated home loan EMIs for at least six months in your emergency fund. This will allow you to continue EMI repayments even if you run into financial difficulties.
 
Compare home loan offers from multiple lenders 
 
The interest rates, loan amount, LTV ratio, loan tenures, processing fees and other associated costs of home loans can differ widely across lenders based on their credit risk evaluation of loan applicants. As home loans are usually of more substantial value and have longer tenure, even a small difference in the interest rate can have long term effect. Hence, home loan applicants should extensively research and compare the home loans features offered by as many banks and Housing Finance Companies (HFCs) as possible before settling on a particular one. 
 
Home loan applicants should first approach lenders with whom they have existing deposit or lending relationships as many home loan lenders offer preferential interest rates and other terms and conditions to their existing customers. Then, they should visit online financial marketplaces to evaluate interest rates and other home loan characteristics offered by other lenders. 
  
Loop in a co-applicant to boost loan eligibility
 
Many home loan applications are rejected due to low credit score, insufficient income, high EMI obligations, etc. of the home loan applicants. Such borrowers can improve their loan eligibility and approval chances by lopping in a co-applicant, preferably someone with a steady income and a good credit score. Note that looping in a female co-applicant can additionally fetch an interest rate concession of 0.05% from some lenders.

(By Ratan Chaudhary – Head of Home Loans, Paisabazaar)

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