Owning a house is a dream that several families and individuals share. However, many such dreams have remained unfulfilled because of the exorbitant prices in the real estate and construction industry. Many people can only afford their dream homes through loans and different types of home loans have been developed to meet the borrower’s needs better. Keep reading this blog to discover everything about the Housing loan scheme in India, including its different types and benefits.
What is a Home Loan?
A home loan is an encumbered loan used primarily to buy or build a house, with the house itself acting as the security for the loan. Home loans are available in a number of different forms, but they are usually at relatively low rates of interest for much longer periods and repaid in the form of EMIs. The ownership of the property is handed over to the buyer after complete payment of the loan.
Like any other loan, a home loan is repaid in monthly installments. Nowadays, most banks provide home loans to help purchase ready-made houses and houses built from scratch. Home loans can also be used for renovation or construction work.
Types of Home Loans in India
We have listed the most popular types of Govt home loans in India based on their purpose.
1. Basic Home Loan
One of the most conventional types of loans that many consider while buying a house is the standard home loan, which allows a person to borrow money from the lender to purchase the appropriate property. The borrowed amount must be repaid monthly to the lender after the purchase.
A lender can generally grant a maximum of about 75 percent of the home property value as a Home Loan, provided that the applicant is fully eligible as per the criteria established for the loan.
2. Bridged Loans
This type of home loan is availed by borrowers intending to sell their present home and acquire another. The fund helps fulfil short-term monetary requirements like the down payment on a new house until the old one is sold. Bridge loans normally charge a higher interest rate and have a maximum repayment period of two years.
3. Home Construction Loans
Such a home loan can also be availed by persons who own at least one plot of land and intend to make mortgage payments for building a new house. This loan can also be taken to complete the construction of a partially built house, but has a different approval system since it also considers the cost of the plot. It is important to mention at the time of application that the plot should be purchased within a year of applying for a home construction loan so that the plot cost can be included in the loan amount.
The amount of such loans is determined approximately according to the construction cost. The money may be provided in a single installment or stages.
4. Home Renovation Loans
You can opt for this financing scheme if you wish to upgrade the space in your house. Most financing institutions normally provide such loans with a maximum amount of up to 90 percent of actual construction costs. Unlike improvement loans, the sanctioned amount is determined based on the loan-to-value ratio & the loan amount.
5. Home Loan Balance Transfer
Once you have taken a home loan and repaid parts of it, you can also switch lenders. Borrowers usually resort to this move when they can get a home loan from another lender for a lower interest rate. But before transferring a home loan, one must consider the actual savings with the new lender, which might include hidden costs like processing fees and more.
6. Home Extension Loan
Are there any space additions, perhaps an extra room that you are adding in your house? The best home loan one could avail of in this case is a home extension loan. Home extension loans are similar to home renovation loans granted for a term of up to 25-30 years.
Some banks pigeonhole home extension loans in different categories, while others incorporate them in the general category of home renovation loans. You must present the following documentation for this Home loan subsidy: income papers, KYC documents, title deeds, locally approved plans, etc.
7. CLSS Scheme Under PMAY
The latest addition to India’s offerings on home loans, Pradhan Mantri Awas Yojana-CLSS, was introduced in 2016 as a Credit Linked Subsidy Scheme, for the EWS (Economically Weaker Section) only. Subsequently, it was enlarged to include middle-class family groups. This program’s principal goal is to provide low and middle-income persons with interest reductions on house loans.
The upfront interest subsidy is directly administered through Primary Lending Institutions to make the housing loan and EMI effectively lower to the beneficiaries. It computes the NPV of interest subsidy at a 9% discount rate.
8. Reach Home Loans
Home loans are available to people working in the unorganised sector. Reach loans can be taken out for buying new or existing properties, building a home on freehold or leasehold land, allotment from any development authority, and extending and improving existing houses.
Eligibility Criteria for Home Loans
- Current Age and Loan Repayment Tenure: Your age has an important impact on your eligibility for a home loan. If you are younger, your chances of getting a home loan approved are better.
- Financial Profile: The consistency and amount of your earnings have a very good impact on determining how much you are eligible to borrow. Whether you are a salaried employee or self-employed, it is important to have a continuous income gain.
- Credit Score: A high credit score and clear recordings of repayment would assist you with fast-tracking approval for a loan.
- Other Financial Obligations: Most lenders check current liabilities like personal loans, credit card bills, car loans, etc., to judge whether the borrower has sufficient financial capacity to repay home loans.
Documentation required for a home loan
To apply for a home loan, borrowers must provide the following paperwork:
- Identity Proof: Passport, voter ID card, Aadhaar card, PAN card, or driving license.
- Address proof: This could also include an Aadhaar card, a voter ID card, a passport, a utility bill, or a ration card.
- Proof of income: Salary slips, Form 16, income tax returns, bank statements, or any other income-related documents.
- Documents related to property: Property papers, NOC from society or builder, land agreement, or sale deed.
- Proof of employment: The lender requires an employment certificate, appointment letter, or any other document for a home loan.
Benefits and Features of Home Loans
Easy Availability
Various banks and NBFCs are providing attractive housing loans. Customers can easily obtain a home loan according to their requirements with a personal eligibility check.
Multi-Purpose
Housing loans can be used for several purposes: to buy a new residential building or flat, construct a house on an individual plot, renovate an existing home, or even to extend the house.
Low Interest Rates
Home loans are generally construed to have a lower interest rate than all other loan options because they are secured loans.
Process Loans Quickly
A home loan is one type of loan that requires minimum documentation and has not-so-stringent eligibility criteria. Thus, financial institutions and NBFCs can provide the loan amounts in a very short period.
Long Tenure
Since housing loans tend to have a requisite amount, the tenure for repayment can also extend up to 30 years. This gives the borrower an EMI within affordability limits without compromising the monthly budget.
Home Loan Types: Things to Consider
Financing a house through online banking has now become common. However, before applying for a home loan, consider some of the factors mentioned below to get a good deal:
1. CIBIL Score
CIBIL, which stands for the Credit Information Bureau of India, is a licensed credit information company by the Reserve Bank of India. This institution plays an important role in tracking the payment history or record of entities or individuals and will furnish that report, including the all-important CIBIL score, a three-digit number that defines your credit history and ability to repay loans.
The report’s score lies within the 300-900 range. Generally, a CIBIL score of more than 750 is considered very good. Therefore, higher CIBIL scores are more likely to ensure loans at better interest rates.
2. Total Loan Amount
Loan amounts that lending institutions provide can be anywhere from 75-90 percent of the total cost of a property, depending on various factors such as eligibility criteria and credit score, among others. Thus, you must check how much the bank or NBFC will finance that amount.
For instance, let’s say your property is worth 80 lakhs; according to this rule, the bank would give you Rs. 60 Lakh (75%). The bank will not give you Rs. 20 lakhs and this amount will have to be arranged through other means like personal savings.
3. Floating vs. Fixed Interest Rates
You can also select between fixed and floating interest rates for the various types of home loans you can avail of. In fixed IR-based loans, the interest rate for the loan is fixed at the time of taking the loan, which will remain unchanged throughout the tenure, so your EMI will be constant. Meanwhile, floating loans are pegged to the repo rate from which they would rise or fall in accordance with the change in repo rates.
If you feel the IR is at its lowest possible limit at the time of applying, you can think of fixed-interest rate loans. The only thing to remember is that fixed-rate loans are generally at a higher interest than floating rates, but floating rates may be more risky.
4. Equated Monthly Installments (EMI)
Every kind of home loan involves an EMI. It is an equal monthly installment to be paid to the financing institution along with the amortisation amount. This installment also covers interest on the outstanding value. One can avail of the pre-EMI facility if the property is being constructed and one wants a loan for it. In this scheme, you will only pay the interest accrued. The principal is repaid once the construction of the house is complete.
5. Repayment Tenure
Repayment tenure denotes the time taken to repay the outstanding loan fully. Many types of home loans can be sanctioned for repayment periods of up to 30 years. For such a long repayment period, it becomes essential to understand the relationship between EMI and repayment tenure to select the most suitable loan.
The longer the tenure of your loan, the less the EMI amount, but it will increase your interest burden. This would work well for individuals with a very tight budget yet stable income. A shorter loan period increases your monthly EMI, but the interest accrued would be lower.
6. Calculate Cost-to-Benefit-Ratio
Before opting for or obtaining a balance transfer, it is always advisable to verify the cost-benefit ratio. Despite the lower rates, the bank-switching charges must also be weighed in favor of the benefits. To determine the difference, appraisal charges, stamp duty charges, and the processing fee, among other things, must be considered.
Conclusion
Home loans in India help several individuals and families realize their dream of home ownership. With different kinds of government home loan schemes designed for users, attractive benefits, competitive interest rates, and long repayment tenures have never been easier in a home loan. Understand the eligibility criteria and documentation requirements to make an informed choice and pivot your search toward the right home loan.