Lenders generally prefer to lend to those who have their monthly loan payment obligation, including the EMI of the new home loan, within 50-60% of their monthly income.
The home loan is a long-term financial commitment that involves a higher loan amount and a longer payment tenure. The down payment or contribution to the margin also requires a substantial investment on the part of the borrower. In addition to this, lenders consider the credit score and repayment capacity of borrowers when evaluating their credit worthiness. Therefore, the possibility of obtaining a home loan depends on your current financial health.
Before applying for a home loan, you must address 4 crucial questions to assess your financial readiness to use the loan:
Do you have the right corpus to make the down payment or margin contribution on a mortgage loan?
The RBI allows lenders to finance up to 75-90% of the cost of home ownership through a mortgage loan. The applicant must dispose of the remaining amount from his own resources in the form of a contribution to the margin or advance. This relationship between the loan amount and the borrower’s own contribution is called the LTV relationship. Although most home loan applicants prefer higher LTVs, opting for a lower LTV has its advantages.
Choosing a lower LTV ratio results in a lower loan amount, which leads to a lower cost of interest to the borrower. Since a lower LTV ratio reduces the lender’s credit risk, opting for a lower LTV ratio increases the chances of loan approval at a lower interest rate. However, opting for a higher down payment at the expense of your emergency fund or bailing out investments made for crucial financial goals should be avoided. Doing so can push you to take advantage of a higher interest cost loan later to reach crucial financial goals or deal with an unforeseen financial shortage.
What is your credit score?
Lenders consider a credit score of 750 or higher to be “good.” Applicants with good credit scores have a better chance of getting a loan. Many lenders also offer prime rates to home loan applicants with good credit scores. Therefore, home loan applicants should ideally aim to maintain a credit score of more than 750. It is equally important to review credit reports at regular intervals. This would allow enough time to take the necessary steps to improve and build your credit rating before applying for a home loan. Following healthy financial habits like paying existing credit card bills and EMIs on time, keeping your credit utilization ratio within 30%, and avoiding multiple loan or credit card applications in a short period will consistently improve your score. credit.
Those without a credit history can improve their score by opting for a credit card and paying fees on time. Those who are unable to make use of regular credit cards due to inadequate income, risky work profile, unusable location, etc. they can opt for secured credit cards.
Do you have the ability to repay mortgage loans?
Lenders generally prefer to lend to those who have their monthly loan payment obligation, including the EMI of the new home loan, within 50-60% of their monthly income. Those who exceed this limit should ideally exclude or prepay their current loan obligation to reduce their monthly EMI expense. If this is not possible, try lowering the EMI of the home loan by opting for a longer tenure of the home loan.
Applicants should use online EMI calculators to estimate the optimal EMI for a new home loan after taking into account their ability to repay and their monthly investments. Being aware of your ability to pay would help reduce the chance of missing or compromising other goals.
Have you included the EMI of your expected home loan in your emergency fund?
Loss of income due to job loss, illness, or disability can negatively affect your ability to repay your loan. Failing to meet the home loan EMIs would result in a heavy penalty and negatively affect your credit score and your eligibility for future loans. On the other hand, liquidating your existing investments to pay for home loan EMIs can hamper your long-term financial health. The best way to ensure timely home loan repayment during financial emergencies is to include an EMI obligation of at least six months while you reserve your emergency fund.
(By Ratan Chaudhary, Director of Home Loans, Paisabazaar.com)
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