A Home Loan is a credit facility banks provide to those who require large sums to buy homes. Applicants can get as high as 75% to 80% of their property cost as a loan that can be repaid in Equated Monthly Instalments (EMIs) over a long tenure.
A Home Loan is a huge undertaking and a long-term liability, so it is crucial to know the aspects that impact a Home Loan.
An informed decision can help borrowers take advantage of the lowest Home Loan interest rate.
Top 3 Factors that Impact A Home Loan
Lenders consider several factors to offer a Home Loan and set terms and conditions for borrowers accordingly. Here are three key factors that can impact a Home Loan.
1. Financial Profile
Following are the components that lenders find crucial to look at an applicant’s financial profile:
– CIBIL Score
CIBIL score is a crucial factor to scrutinise the applicant’s creditworthiness. A CIBIL score lets the lenders know how well the loan applicant has treated their finances and past debts. Credit agencies, like TransUnion CIBIL, record individuals’ credit history and assign credit scores based on repayment history.
Lenders require a healthy credit score, generally 750+, for housing loans.
CIBIL score is based on the –
- credit mix (10%)
- length of the credit history (15%)
- existing debts (30%)
- payment history (35%)
Considering these factors, and maintain a high credit score.
Income is a deciding factor for lenders to provide a Home Loan. Loan applicants need to demonstrate steady employment or other sources of income. Lenders need to ensure that borrowers can repay the loan timely. They check if the borrower has an adequate and stable income. It gives confidence to the lender that the borrower can keep up with the loan EMIs on time. Home Loan applicants from Delhi, Mumbai, Bangalore, Pune, and Chennai with a minimum income of Rs. 20,000 per month and Rs. 15,000 per month from other cities can apply for a Home Loan.
– Debt-to-income Ratio (DTI)
DTI is one of the metrics lenders use to assess the borrower’s repayment capacity. This ratio shows an individual’s monthly financial obligations as a percentage of their monthly income. Individuals should prefer the loan EMI amount of less than 36% of net income, considered for manageable debt levels.
A low DTI means the borrower has a low debt obligation and can repay a new loan quickly. It can reduce their interest rate on Home Loans.
2. Home Loan Interest Rate Type
– Variable Interest Rate
Variable or floating interest rate is subject to the current lending rates in the market. It may change during the loan tenure, and the EMI will also change in response to the new rate. It is considered an ideal choice during a reducing interest rate scenario in the market.
– Fixed-rate Interest
Home Loans also come with fixed interest rates. The interest rate and EMIs remain the same throughout the loan tenure. It is considered a good option for borrowers to opt for this open when the interest rate is low, and an upsurge is expected.
Lenders allow their clients to apply for switching their interest rate during the tenure, and for this, they charge a nominal fee. It is easy to determine the lowest Home Loan interest rate using a Home Loan eligibility calculator.
3. The Loan Amount and Tenure
Home Loan amount should be decided cautiously as it impacts several aspects, including interest rate, repayment, etc. For example, a borrower applying for a Home Loan of Rs. 25 Lakh can enjoy a lower interest rate as compared to one applying for a loan of Rs.75 Lakh.
Similarly, Home Loans can be availed for a long term – up to 20 years. A longer tenure can reduce the EMIs but ultimately increases the total interest outgo. On the contrary, a shorter loan tenure can be a burden with huge monthly payments. Individuals should apply for a suitable loan amount with convenient tenure that they can repay comfortably.
Home Loans come with the benefit of income tax deductions under Section 80C, Section 24, and Section 80EE. Borrowers can determine tax-benefit beforehand and know the final payable amount using an online Home Loan tax benefit calculator available at the bank’s official website.
Home Loans can substantially impact one’s financial health. Therefore, borrowers should meet the eligibility criteria well based on monthly income, age, credit score, and existing debt obligations, and consider other important factors to get a Home Loan at favourable lending terms.