Lenders consider multiple factors for evaluating home loan applications. Chief among these factors are credit score, income, property title, job profile, repayment capacity, etc. Failing to match any of the criteria set by the lenders can lead to loan rejection. Moreover, large loan amounts and long tenures of home loans also require some level of financial preparedness for the first time home loan borrowers before taking such a long repayment commitment.

Here I will share some factors that consumers should keep in mind while availing their first home loan.

Credit score

Most lenders consider credit scores of 750 and above as ‘good’. Thus, home loan applicants having such credit scores have higher chances of availing home loans. Many lenders also offer lower interest rates to home loan applicants having higher credit scores. Thus, those planning to avail home loans should review their credit report at regular intervals. This would allow them to take corrective steps to improve their credit scores and then, avail the benefits of making home loan applications with higher credit scores. One can directly avail credit reports from the credit bureaus or alternatively visit online financial marketplaces to fetch free credit reports along with their monthly updates.

Also Read: Self-employed? Here is how you can build a good credit score

Down payment or margin contribution

RBI guidelines allow home loan lenders to finance up to 75% to 90% of a property’s value through home loans, depending on the loan amount. The proportion of the property value financed through a home loan is termed as LTV ratio. The rest of the component has to be arranged by the borrower himself from his own sources in the form of down payment or margin contribution. In case of home loans of up to Rs 30 lakh, the LTV ratio has been capped at 90%. For home loans of above Rs 30 lakh to Rs 75 lakh and home loans above Rs 75 lakh, the ratio has been capped at 80% and 75% respectively.

Apart from the regulatory caps based on the property value, the final LTV ratio set for the applicant would also depend on his credit risk assessment undertaken by the lender. Thus, consumers planning to avail their first home loans should try to create a corpus amounting to at least 10-25%, preferably higher, of the home property value.

Making higher down payment would not only reduce the total interest cost for the home loan borrowers, it would also increase their chances of loan approval. However, applicants should not compromise their emergency funds or corpus meant for crucial financial objectives to make higher down payment. Doing so might force a borrower to avail more expensive loans in the future.

EMI affordability

Home loan lenders usually prefer loan applicants whose monthly EMIs obligations, including the EMI of the proposed home loan, are within 50-60% of their net monthly income. Applicants exceeding this limit have lower chances of home loan approval. Such applicants can increase their approval chances by opting for longer tenures. Availing longer tenures reduce the EMIs for the borrowers, which in turn increases the chances of bringing the total EMI obligations within the 50-60% limit.

Maintain an adequate emergency fund

An emergency fund should be big enough to cover your unavoidable expenses like insurance premiums, EMIs, rent, children’s tuition fee, etc for at least 6 months. Those planning to avail home loans should also include their prospective home loan EMIs for 6 months in their emergency fund. This would help them to continue with their home loan repayments during financial emergencies or periods of income loss caused by disability, illness or job loss.

As an alternative, first time home loan borrowers can opt for home loan overdraft schemes like Max Saver, Maxgain, Home Loan Advantage, etc. Under these schemes, an overdraft account is opened in the form of savings or current account and is linked to the home loan account. The borrower can park his surpluses and withdraw from it based as per his requirements. The interest component of the home loan account is calculated after deducting the balance maintained with the linked overdraft account from the outstanding home loan amount. Thus, home loan borrowers can use the overdraft account to park their emergency funds as well as other short-term surpluses, which would help in reducing interest cost of the home loan. Being opened in the form of savings or current account, borrowers can make instant withdrawal from the overdraft account to deal with financial emergencies or other requirements.

Home loan offers from multiple lenders

The interest rates, LTV ratios, tenures and even the loan amount offered to home loan applicants can vary widely depending on the lender and the credit risk evaluation of its loan applicants. Thus, borrowers should compare the home loan offers from as many home loan lenders as possible before making the final home loan application.

First time home loan borrowers should start their search by first contacting the lenders with whom they already maintain deposits, credit card and/or loan accounts. Some home loan lenders may offer lower interest rates to their existing customers having a good credit profile. Then, they should visit online financial marketplaces to compare home loans offered by other lenders based on their credit score, job profile, monthly income, employer’s profile, etc. After comparison, home loan applicants should opt for the lender offering the best deal in terms of interest rates, tenure, loan amount and processing fee.

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