Home loans are a kind of loan that you take from a financial institution to fund your dream home. Buying a home is a long-term commitment, and the same is the case with being granted a home loan. When you make your decision of applying for a loan, you have to make sure you are well researched and have all the necessary documents with you. Your research starts with gathering information about the real estate market and goes all the way to figuring out the best banks to take a home loan from. Deciding on the right bank is not an easy decision either. You need to consider all factors before you are sure that you are making a wise choice. Apart from all this, there is the constant pressure of paying back the loan within the decided time frame.
Now that taking home loans has become slightly easier and more accessible, homebuyers have become a little careless too. If you think diving right into the process will get you a home loan and help you secure the property you want to buy, then you probably need to think again. What buyers do not understand is that while the process might have become easier, banks have become stricter too. They expect error-free paperwork and do not hesitate to entirely reject your loan in case any document is missing.
When you think of it, the process is extremely time-consuming and you have so much on your mind that you are bound to make mistakes at one point or another.
Neither do we want you to be careless nor do we want you to make any mistakes along the way. Let us discuss some common mistakes that home loan applicants quite often commit and lead themselves to a debt trap that they regret later.
Common Mistakes To Be Avoided By Home Loan Applicants
1. Lack of Proper Research
If you have been active in the real estate industry for even a few months now, you already know the importance of research every step of the way. Researching on home loans and their processes is no exception. If you are not well researched, you may end up choosing the wrong financial institution or paying higher EMI for the rest of your life. Make sure you take out time for planning your finances, looking at flexible repayment options, identifying hidden charges if any, and also checking the terms and conditions of each financial institution.
Get on the internet and start comparing the home loan schemes different banks offer before for the sake of making an informed and wise decision!
2. Failing to Collect Enough Funds for Down Payment
Many of the home loan applicants get so busy with the whole verification process and paperwork that they forget to plan about the funds needed for the down payment. You need to have more than enough saved to pay as the down payment for your finalized property. Putting this off for later and completely prioritizing the home loan process is not a trait of a good home buyer.
The Reserve Bank of India permits banks to approve a home loan of up to 80% of the total property value. However, the remaining 20% that is the down payment needs to be handled by the applicant.
3. Enable to Secure a Stable Job
If you have decided to apply for a home loan, you already know that repaying all EMIs is your most important responsibility. You need to have a stable job and at least a source of income to repay the debt. This needs to be given some thought, especially in the post-pandemic era. Even if your interest rate on the home loan is low, ask yourself - do you have a safe and secure job that will help you pay your EMIs on time? Financial institutions are extremely rigid about the repayment timelines that have been put in place.
Apart from a stable job, make sure you also have an emergency fund in place.
4. Overestimating Repayment Capacity
It is alright to be confident, but never to be overconfident! Are you one of those homebuyers who plans everything but forgets to include their monthly expenses when calculating their repayment ability? Well, consider this a sign to change this habit immediately. Instead of assuming that you might earn extra income in the future, ensure that you plan according to your present financial situation. After all, you do not want to end up in a huge financial crisis by taking a huge amount of home loans and at the same time having high monthly expenses too.
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5. Not Comparing Home Loan Offers
Depending on your credit profile as an applicant, lenders can offer you a variety of deals. Their offers can vary in terms of repayment tenure, interest rate, loan amount, processing charges, and much more. If you jump at the first offer you get from a bank, you will never know what better offer could have come your way. Go and personally visit financial institutions with the ones you already have an existing consumer relationship with. With ones that you do not, go on the internet and do your due diligence. Make a list of the interest rate and additional loan features all probable banks offer.
If you are confused and do not know how to decide, choose the one with the lowest ROI and an adequate loan amount.
6. Making Interest Rate the Only Priority
There is no denying the fact that the rate of interest on home loans is a criterion that should be considered when choosing the right bank. However, if you make it the only priority, you might end up losing out on other benefits. While lenders market the lowest ROI possible for the sake of attracting homebuyers, it is possible that the scheme may not apply to you.
Before choosing a home loan, make sure you are eligible for the loan with a low-interest rate. Sometimes, a low rate of interest is applicable only for people who have a low loan to value ratio or a high credit score.
7. High Credit Card Limits
Your credit card limit plays a role in deciding what your maximum borrowing capacity will be. Regardless of whether you use your credit card or not, your credit card limit will be taken into consideration. If you do have a high credit card limit, it may reduce your chances of getting a high amount of loan. A high credit card limit is considered to be a liability when it comes to being granted a home loan.
As a solution, try and reach out to your lender and make an effort to reduce your credit card limit as much as you can.
8. No Awareness of Credit Score
Do you know if you have a healthy credit score? You can not leave it on the lenders to figure this out. If you are aware of your credit score beforehand, you can correct any issues it may have before the lender wants to evaluate it. Remember that a credit score above 700 will surely get you a great offer. However, if your creditworthiness is low then you might not be eligible for good home loan schemes.
A credit score is provided in the form of reports by the credit bureau and is fairly easy to download. We urge you to make some extra effort, figure out your credit score, and repair any damage beforehand!
9. Not Structuring Your Savings Properly
While mentioning savings on your application is a good idea, you also need to be responsible and diligent with these savings. Just saving is not enough - have you saved up enough money to pay your deposit? Has it been saved over a long period without being used? Have you made sure you are not constantly making withdrawals?
If your answer to all the questions mentioned above is not a clear yes, then the only option is to open a separate savings account. You can store your home loan deposit there and make sure it is not hampered for a minimum of 3 months.
10. Submitting Application with Errors
Making mistakes with your home loan application is by far the biggest mistake that you can make! Even if your application has a few minor typos, the lender will automatically assume that you are not credible enough for a loan. The worse that can happen is that the lender can straightaway deny the application without a second thought. If not, then you might face delays in getting it approved since the lender will reach out to you time and again to clarify the errors in the paperwork.
It is your responsibility to be focused and organized with all the paperwork. No matter how much time you have already spent on your application, take out some extra time to double-check before submitting.
11. Opting for a Short Tenure Loan
Most of the applicants believe that opting for a short loan tenure is a good idea. However, it is not. If you opt for a longer tenure, you will have ample time to pay back the money in a way that suits your financial situation. Remember that you need a high credit score and a stable credit history to qualify for loans that have a longer tenure. If you are aiming for favorable terms and conditions of a home loan, you need to make sure you avail one with a longer tenure.
Keep in mind that the shorter the tenure, the smaller the loan amount you will receive.
Taking a home loan to finance your dream home is common, but so are the mistakes home loan applicants often commit. It is a blessing in disguise that you are now aware of these mistakes and can consciously make an effort to ensure that you do not end up committing any of them.
First-time homebuyers are the most likely to commit such mistakes since they have no prior experience of going out into the real estate world, let alone seeking a home loan all on their own. If you are a first-time home buyer, then this article is no less than a jackpot for you!
If you have experienced the process of buying a home before, don't lose heart if you ended up making any of these mistakes! Instead, glance through these rigorously and ensure that they would never be repeated.
For the sake of helping your fellow homebuyers who are on the same journey as you, tell us mistakes that you may have made as a home loan applicant and wish that someone would have warned you about them beforehand.
Tell us your story and let us be a medium for you to help and guide as many homebuyers as possible!