Home Loan

People typically take out a home loan to either purchase a house/flat or a plot of land for the construction of a house, or to renovate, extend, and repair an existing house. Because of the high cost of real estate in India, becoming a homeowner usually necessitates the use of a loan.

Let us first learn the meaning of a home loan.

What is a Home Loan?

A house loan, also known as a home loan, can be defined as a sum of money borrowed from a financial institution or bank to purchase a home. Home loans have an adjustable or fixed interest rate as well as payment terms.

The property is mortgaged to the lender as security until the loan is repaid. The bank or financial institution will keep the title or deed to the property until the loan is repaid in full, including interest.

Certain tax benefits are also available on your home loan under Section 80EE of the Income Tax Act. However, only first-time homebuyers are eligible for the income tax deduction on home loan interest.

What are the Types of Home Loans?

  1. Home Purchase Loan
    This is the most popular sort of home loan used to buy a house. Many home financing firms, public banks, and private banks offer housing loans in which you borrow money to buy the house of your choice and repay the loan in monthly installments.
  2. Home Improvement Loan
    A home renovation loan provides funding for updating or repairing the property.
    For example, if there is a problem with the present system, such as painting the interior or outside of the house, plumbing, upgrading the electrical system, waterproofing the ceiling, and more.
  3. Home Construction Loan
    If you already own a plot of land and need finance to build a house on it, this is the ideal home loan for you.
  4. Home Extension Loan
    This type of loan is suitable for you if you already own a home and would like to add an additional room or floor to accommodate your increasing family.
  5. Land Purchase Loan/Composite Home Loan
    This kind of home loan combines financing for the purchase of the plot of land on which you want to build a house and financing for the construction into a single loan.
  6. Home Loan Balance Transfer
    You can use this feature if your current home loan interest rate is too high, or you are dissatisfied with your current lender's service, you can transfer the outstanding balance to a new lender who provides a cheaper interest rate and better service.
  7. Home Loan Top-up
    This type of loan allows you to borrow money above the outstanding loan amount. In the case of top-up loans, Bajaj Finserv offers competitive interest rates.

Eligibility Criteria to Apply for a Home Loan

Banks and other financial institutions have specific eligibility criteria.

The first thing a bank looks at to evaluate a person's repayment tendencies is their credit history. A credit score of 750 or higher is typically preferable.

Other significant parameters to consider are as follows:

  • Age
  • Nature of employment
  • Annual salary
  • Collateral protection
  • Stability and continuity in profession/occupation
  • Assets and liabilities
  • Minimum margin requirements
  • Status of residency (resident of India or NRI)

Documents Required for a House Loan

The list of documents for different types of individuals are mentioned below:

For salaried individuals

  • Identity proof
  • Address/residence proof
  • Latest salary slip
  • Bank account statement of last six months
  • Form 16
  • Filled application form (with a photograph)
  • Processing fee cheque

For non-salaried individuals/businessmen

  • Identity proof
  • Address/residence proof
  • Proof of business
  • Bank account statement of last six months
  • Certificates of educational qualifications
  • Business profile
  • Income tax returns (last 3 years) - both self and business
  • Profit/loss balance sheet (last 3 years)
  • Filled application form (with a photograph)
  • Processing fee cheque

What is the Interest Rate on Home Loans?

As of March 2021, the average house loan interest rate in India ranges from 6.5-12%. Rates typically vary according to lender, RBI-prescribed repo rate, inflation, economic activity, and a variety of other reasons.

Some banks also provide a 0.05% discount on the house loan interest rate to women, bank employees, and older persons.

Furthermore, the interest rate on a home loan can be fixed or floating. A fixed-rate home loan has a fixed interest rate for a set length of time. This type of mortgage is not affected by market fluctuations.

The relevant interest rate for floating-rate home loans varies depending on market swings. It may or may not be advantageous to the borrower.

What is a Good CIBIL Score for a Home Mortgage?

To receive a home loan quickly, you must have a CIBIL score of at least 750. The lender will look at your credit score and report first. If the score is low, the application may be refused completely.

Your CIBIL score determines your creditworthiness, and a high score may help you negotiate better terms and circumstances. CIBIL scores often vary from 300 to 900. Your payment history has an impact on your CIBIL score. Defaults on loan EMIs or late payments have a negative influence on the credit score.

The credit utilization limit is also significant in calculating the CIBIL score. Increases in your credit card balance may have a negative influence on your score.

Having a higher percentage of unsecured loans, such as credit cards or personal loans, as opposed to secured loans, such as home loans or auto loans, may also have a negative impact on the score.

Also, if you have lately been approved for many credit cards or loans, your credit score may suffer because your debt burden will have increased significantly and you will be viewed as desperate for credit.

What is a Home Equity Loan?

A home equity loan is a sort of consumer debt that is also known as an equity loan, home equity installment loan, or second mortgage. Home equity loans allow homeowners to borrow against their home's equity.

The loan amount is determined by the difference between the home's current market value and the homeowner's outstanding mortgage balance. Home equity loans are typically fixed-rate, whereas home equity lines of credit (HELOCs) are typically variable-rate.

A home equity loan is similar to a mortgage, hence the term second mortgage. The lender uses the equity in the residence as security.

The amount a homeowner can borrow will be determined in part by a combined loan-to-value (CLTV) ratio of 80% to 90% of the home's appraised value. Of course, the loan amount and interest rate are also determined by the borrower's credit score and payment history.

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