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Home Loan Basics

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To become owner of a property is a lifetime dream for every individual. There are many home loan providers in the market to make your dream come true. But before you opt for any home loan provider, you need to consider various factors related to the property you are interested in buying and also be familiar with the salient features offered by the home loan provider.

As a prospective borrower, you should be generally aware about the various terms used in the housing finance field. There are different types of loans available in market to meet your needs, including:

Home Purchase Loans: These are the basic form of home loans used for purchasing a home.

Home Improvement Loans: These loans are given for implementing repair works and renovations in a home that has already been purchased and/or occupied by the customer.

Home Construction Loans: These loans are available for the construction of a new home.

Home Extension Loans: These loans are given for expanding or extending an existing home - for example, addition of an extra floor or room, etc.

Home Conversion Loans: These loans are available for those who have financed the present home with a home loan and wish to purchase and move to another home for which some extra funds are required. Through home conversion loan, the existing loan is transferred to the new loan account including the extra amount required, eliminating the need for pre-payment of the previous loan.

Land Purchase Loans: These loans are available for purchasing land for constructing a house.

Bridge Loans: These loans are designed for people who wish to sell the existing home and purchase another one. The bridge loans help finance the new home, until a buyer is found for the existing home and sale proceeds are realized.

Comparative study of loan options: You should compare various loan options on the basis of the following parameters so that you can arrive at an informed decision:

1. Purpose: First analyze the purpose of taking loan. As explained above, banks/HFCs offer loans for purchasing a home from builder/seller, for construction of own house or for the extension of an existing house. You should focus on your purpose of taking loan while comparing the other factors.

2. Loan Amount: Generally, the maximum loan amount is limited to 80% to 85% of the cost of your home or extension. The balance amount or the down payment is required to be arranged by you from your savings. Depending on how much down payment you can arrange, you may select the bank/HFC that can meet your balance requirement of funds.

3. Documents required: You need to submit relevant documents to the loan provider for getting the loan. The documentation varies for different categories - such as businessmen, salaried employees and professionals. And although the basic documents required are same by various banks/HFCs, the complete list can vary from bank to bank based on what category you fall in. So, consider the required paperwork formalities while choosing a loan provider.

4. Prepayment charges: Prepayment is the extra repayment, partially or fully, of the loan capital in addition to the Equated Monthly Installment (EMI), prior to the maturity of the loan. Prepayment reduces the interest burden on a housing loan and also number of EMIs. Banks/HFCs normally impose prepayment charges that vary from lender to lender depending on the type of loan. Some HFIs do not levy prepayment charges on variable rate loans. Fixed rate loans, however, attract prepayment charges usually in the range of 1% to 2% percent of the amount prepaid. Some banks/HFCs do not levy prepayment charge in case the amount prepaid is from borrower's own earnings and not refinanced by another bank/HFC. So, choose a bank that offers a prepayment clause with minimum consequence.

5. Security: Security refers to an asset provided by a borrower to the lender while taking a loan. The lender can sell or convert this asset to his/her use if the borrower fails to repay the loan in full. Before finalizing a bank/HFC, analyze the terms and conditions stipulated by various lenders and choose the one with favorable clause.

6. Loan Term: Banks/HFCs follow different policies for different loan terms. So, first decide whether you want to take a long term or a short term loan, and then choose the lender that offers you the best option as per your needs.

7. Rate of Interest: Interest rates vary from lender to lender. So, you must compare the interest rates offered by various banks and choose the lender that offers you best deal.

8. Insurance: Some home loan providers team up with life insurance players to give you the benefit of insuring your home loan when you take a loan. It is advisable to go with a lender that provides you the home loan insurance benefit - so that you get peace of mind.

9. Processing & Administrative Fees: The processing & administrative fee ranges between 0.5-2% of the home loan amount. While it may seem like a small amount, it can add a considerable amount to your home loan cost. So, choose the bank that offers you the lowest or nil processing & administrative fees.

Which is the best loan option? To choose the best loan option is a challenge in present day home loan market. A sound analysis is the key mantra for selection of best available home loan option as per your requirement. It is advisable to keep the above said key points in mind while finalizing your home loan provider and to minimize home loan related tensions. After you have zeroed in on the loan provider, submit a formal loan application along with supporting documents to the loan provider. Here are a few additional tips while getting a loan:

1. Get a pre-approval letter: This gives you a substantial leverage as you are then seen as a serious buyer by the seller of the property. Also, having the loan approval letter in your hand will set a limit to the amount of money you can commit to a property. This will help in identifying the right property.

2. Bargain for a lower rate of interest: Housing finance institutions will reduce their `rack' rates for customers with a good credit record. A bargain deal will easily fetch a home loan at somewhat lower rate (at times you can get a discount of as high as 0.50%). Here again, get a confirmation of the rate (and for how long it will remain fixed) via a letter.

3. Watch out for predatory lending: Do NOT include false information on your home loan application to get quick approval. Also, do not borrow more money than you need or can afford.

Source: National Housing Bank

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