A home is more than just a place of shelter. It offers a space to make memories for you and your loved ones. It also helps build equity and create a sense of belonging and community. For many, owning a home is strong ambition. However, property prices have been relatively high, making purchasing a home a big ordeal. Fortunately, you can buy your dream home relatively easily with a home loan. Here’s a comprehensive guide to home loans.
What is a Home Loan?
Home loan is a type of secured loan from a bank which allows you to borrow money to purchase a ready-to-move-in home or construct a home. You must repay the loan to the bank with interest over a set period of time. The house in question serves as the collateral until the loan is repaid.
Types of Home Loans
Depending on the end-usage of the home loan amount, a home loan can be of the following types:
Home Purchase Loan:
This is the most basic type of home loan. It is used for purchasing a new residential property.
Home Construction Loan:
This type of loan is used when you are constructing a new house on a plot of land that you own. The loan is typically disbursed in stages as the construction progresses.
Home Improvement Loan:
This type of loan is used for making renovations or repairs to an existing residential property.
Home Extension Loan:
If you need funds to extend your existing home, such as adding an extra floor or creating additional living spaces, a home extension loan can be suitable. The loan amount is based on the estimated cost of the extension project.
How Does a Home Loan Work?
When it comes to home loans, you ought to know the following process:
Loan Application:
The first step is to approach a bank and submit a loan application along with the necessary documents. These documents typically include proof of identity, address, income and property details. Some banks may also allow you to apply for a loan before shortlisting the property.
Loan Approval:
The bank evaluates your loan application which includes evaluating your creditworthiness, income and the value of the property. If you meet the eligibility criteria and the property meets the bank’s requirements, the bank will most likely approve your home loan.
Loan Amount and Interest Rate:
The bank determines the loan amount based on factors such as your income, repayment ability, credit history and the value of the property. Home loan interest rates are based on the repo rate set by the Reserve Bank of India. Interest rates can be either fixed or floating.
Disbursement:
Once the loan is approved, the bank disburses the loan amount to the borrower or the seller of the property.
Repayment:
You must repay the loan in regular instalments over a predefined period, known as the loan tenure. The repayment is typically made monthly and consists of both the principal amount and the interest.
EMI:
Equated Monthly Instalment (EMI) is the fixed amount that you must pay towards the loan repayment each month. It includes both principal and interest components. The EMI amount depends on the loan amount, interest rate and tenure.
Documents Required for a Home Loan
While specific document requirements may vary from lender to lender and the type of home loan, here are some common documents that are often required:
Identity Proof:
- Passport
- Aadhaar Card
- Voter ID Card
- Driver’s License
- PAN Card.
Address Proof:
- Aadhaar Card
- Voter ID Card
- Utility bills (like electricity bill, water bill, etc.)
- Bank statements
- Rent agreement (if applicable).
Income Proof:
- Salary slips (for salaried individuals)
- Income Tax Returns (ITR) for the past two to three years
- Form 16 (for salaried individuals)
- Profit and Loss Statement, Balance Sheet and Tax Audit Reports (for self-employed individuals)
- Business or professional license (for self-employed individuals).
Employment Proof:
- Employment offer letter
- Employee ID card
- Appointment letter
- Work experience certificates
Property Documents:
- Sale agreement or purchase agreement
- Title deed
- Property tax receipts
- Building plan approvals
- No Objection Certificate (NOC) from your specific housing authority, if applicable
Bank Statements:
- Bank statements of the past six months to one year
- Proof of investments (like Fixed Deposits, Mutual Funds, etc)
Consent Letter:
- In case of co-ownership of the property, a consent letter from all co-owners may be required.
Additional requirements:
- Passport-size photographs
- Loan application form (filled and signed)
- Processing fee cheque or demand draft
- Any additional documents as requested by the lender.
Home Loan Eligibility
The eligibility criteria for a home can differ across banks. Here’s a general guide:
- Age: 21-65 for salaried and self-employed individuals
- Minimum salary: ₹25,000 per month
- Minimum income for self-employed individuals: ₹2 lakh per annum
- A clean repayment history
Benefits of a Home Loan
Home loans offer several benefits to individuals either looking to purchase a home or invest in real estate. Here are a few:
Homeownership:
A home loan allows you to fulfil your dream of owning a home. Instead of waiting to accumulate the full cost of the property, you can leverage a home loan to buy a home and start building equity.
Tax Benefits:
Home loans come with certain tax benefits that can reduce your overall tax liability. You are eligible for deductions on the interest paid on the home loan and principal repayment.
Asset Appreciation:
Real estate is often considered an asset that appreciates over time. By taking a home loan, you can benefit from the potential increase in property value, which can contribute to your overall wealth.
Potential Rental Income:
A home loan can help you generate rental income. This can be an additional source of revenue and potentially offset your loan repayments.
Factors affecting Housing Loan Eligibility
Here are the key factors that can affect your housing loan eligibility:
Credit Score:
Your credit score plays a crucial role in determining your eligibility for a home loan. A healthy credit score can increase your chances of getting a loan at favourable interest rates. Banks consider factors such as your repayment history, existing loans, credit card dues and past borrowing behaviour to assess your financial credibility and repayment capacity.
Existing Debt Obligations:
Existing debts means lower income available to undertake a new home loan. Consider reducing your debt to increase your chances of securing a home loan.
Income:
Your income plays a vital role in determining your loan eligibility. Banks set a minimum income criterion based on the city in which you live and work.
Age:
Banks are typically concerned with the number of years you have left as a salaried or working professional so that you can repay the loan comfortably.
Property Details and Loan-to-Value (LTV) Ratio:
The value of the property serves as the security for the loan. If the property has a higher value, you may be eligible for a higher loan amount.
Tax Benefits of Home loans
The following are the various tax benefits associated with home loans:
Tax Deduction on Interest Repayments:
Under section 24b of the Income Tax Act, homeowners can claim a deduction for interest paid on a home loan. The current limit is ₹2 lakh per annum for a self-occupied property.
Principal Repayment:
The principal amount repaid for a home loan is exempted under section 80C of the Income Tax Act, with an overall limit of ₹1.5 lakh per annum.
Deduction for First Time Homeowners:
Under section 80EE, first time homeowners can claim an additional deduction of ₹50000 per year on interest repayments (Note- this is on top of the deduction under section 24b), provided the loan was sanctioned during a specific period and the amount does not exceed ₹35 lakh and the property value does not exceed ₹50 lakh.
Tax Deduction on Registration Charges and Stamp Duty:
Registration charges, stamp duty and other expenses which are directly related to transferring the property can be claimed as a deduction under section 80C within the same year of the purchase.
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FAQs
How can one apply for a Home Loan in India?
Home loan application typically involves a step-by-step process such as evaluating home loan eligibility, selecting the right loan type, comparing various lenders and interest rates, filling the application form, submitting required documents, and finally accepting the loan after lender approval.
What is a Home Loan EMI and how are they calculated?
Home Loan EMI is the monthly payment a borrower makes to repay the home loan. It includes the principal loan amount and interest. The EMI is calculated based on the principal amount, loan tenure and the interest rate.
What happens in case of non-repayment or default of a Home Loan?
In the case of non-repayment or default of a home loan in India, the lender has the right to seize and auction off the property to recover the pending dues.