Home purchases require large sums of money. Getting a home loan allows you to buy your dream home now, while considering your future earnings and repayment capacity. Home loans are usually taken out for a long period of time, up to 30 years.
Even with these current low rates, they won't last forever, and homebuyers should consider other important factors that could impact their loan decisions in the long run, as well. Here are the 10 most critical things you should keep in mind when applying for a home loan in the current financial climate.
1. A regular source of income
Long-term repayment commitments are required for home loans. The lender evaluates your repayment capacity when you apply for a mortgage, but they do not look at your future financial plans. Make sure that your income is regular, you have the potential to earn money in the future, and that you have multiple options for generating income, and assess if you will be able to comfortably meet your financial goals after obtaining the home loan.
2. Margin money is available
Banks and other lenders usually finance up to 90 percent of the value of a property; the rest must be paid out of pocket, which is known as the "down payment". As well as the costs of registration, stamp duty, interior decoration, etc., there are many other expenses that are not covered by financing.
A borrower's credit score, age, property cost, loan amount, and loan tenure are all factors that affect margin money requirements. Therefore, don't just look at low interest rates. Make sure that you have enough margin money in your account before applying for a home loan so that your other critical financial commitments will not be hampered.
3. Get the best rates by having a good credit score
A low credit score (i.e. less than 750) will typically result in a higher interest rate on a home loan. Borrowers whose credit score is below their criteria pay a greater risk premium. Be sure that your credit score is high before applying for a home loan and take steps so that it won't fall in the future.
4. Ability to increase borrowing capacity with co-applicants
Even though you may see a low interest rate, will you be able to get a loan at that rate? Co-applicants should be considered if your loan amount is likely to exceed your borrowing capacity. Your borrowing power increases if you have a co-applicant. Having a co-applicant can improve your chances of getting a loan and bring down the interest rate, too, if your credit score is not so good.
5. Manage your household budget
When taking out a loan to purchase a home, don't go over your budget. Overspending on a home can increase your home loan requirement and EMI obligation, thereby reducing your borrowing power. You may also have to pay higher interest rates if the loan amount is greater.
6. Current debt situation
You should ideally try to close the smaller loans that you have already taken out before taking out a home loan if you have already taken out several loans in the past. If you have existing EMI obligations, it could reduce your repayment capacity to such an extent that it may be difficult for you to obtain a big loan. However, even if you get the home loan, the combined debt obligations that you have could put a strain on your finances. In general, the rule of thumb is that all your loans, mortgages and other payments should not exceed 40 per cent of your monthly income.