This is a guest post by my brother, Jayakumar N., on step by step home loan approval process while applying for a mortgage. Do you have your own home loan tips and advice to buy a home that you think would be beneficial to our readers, which you would like to share as a guest post? Don’t shy away. Read the guidelines, open your veins!
In your endeavor of making ideal living conditions for you on this earth, nowadays you have to strive to at least fulfill the basic needs and amenities before you could think of any luxury! Among the basic needs, shelter plays a vital role in the life cycle of a person. There are hardly any feelings that match the pride of owning a home! At the same time, a home is the biggest investment that you make in your life, parting with significant portion of your lifetime savings. Thus buying a house requires calm analysis and informed decision making.
If you avail a home loan to acquire your home, the repayment often spans a greater part of your work life. Hence, if you can’t afford to pay in full the value of a home, acquiring a home loan is the crucial part of the home-buying process. Therefore, prior knowledge of home loans is a must, so that you could choose the best one that suits you.
Home loans are readily available at competitive rates, with quicker processing. One can now get preapproved loans, which are approved on the basis of one’s creditworthiness.
Home loans vary from each other in three major ways, and these differences could have serious implications on your finances. First of all, they differ on the length of their tenures. Secondly, they vary in the ways in which their interest rates are calculated. The third difference is the various processing fees that are charged. These three parameters should be used to evaluate the cost-effectiveness of various options.
Loan Tenure
Loan tenure varies from 5 to 30 years, and you need to choose the term depending on your repayment capability and cash flow which in turn is dependent on various factors like number of working years left, the nature of the job, number of dependents and their various needs, the debt that has already been availed of like car loans etc. The longer the tenure, the greater will be the total interest costs. The longer tenure will reduce the amount on each equated monthly installment, but you will end up significantly paying more for your home as interest. Experts advise to aim at clearing the home loan before retirement, so that the retirement/terminal benefits will not be dented by repayment obligations.
Interest Rate Calculations
A very important differentiating factor to be considered before deciding upon a home loan is the way by which interest rates are calculated and charged, whether fixed or variable. While fixed-rate mortgages have fixed interest rates for the entire tenure of the loan, for the adjustable-rate mortgages (variable rate mortgages or floating rate mortgages or tracker mortgage), the rate is benchmarked to a retail/prime lending rate of a lending institution and moves in tandem with it. In an adjustable-rate mortgage, the rate of interest is decided periodically (eg., quarterly or half yearly) with relation to the then prevailing credit market conditions, and the interest payable on the principal is recalculated and added/adjusted to the repayment amount. The third option would be a combination of both fixed and variable rate home loans (combination mortgage or split mortgage or hybrid mortgage), where initially the interest rate would be fixed for a stipulated tenure and thereafter switched to the variable rate. Else, you may have a certain percentage of the loan as variable while the other percentage fixed. You may have half fixed and half variable, 60% variable and 40% fixed, 70/30, 80/20 or rather any combination you prefer. The better way to approach fixed and variable rates is from the wealth creation perspective. Since owning a home fully at the earliest possible is the prime motive in acquiring wealth, you need to look at ways and means to repay the loan at the earliest. This can be done by prepaying a part of the loan in the initial years (within the lender’s permissible limits linked to the outstanding amount) and later fully prepaying it.
Lender’s Fees
The fee charged by a lending institution for processing the loans is another parameter to consider while evaluating home loans. Primarily, you need to understand what these charges are all about. Next, before opting for a home loan, you need to compare the various options on this parameter to decide which option suits best. Needless to say, these fees add to the loan cost. There are a host of charges a lending institution may levy, some of which include Processing and Administration charges, Mortgage Fee, Commitment Charges, Conversion Fee, Prepayment (early redemption) Charges, Loan Swap Charges, Technical and Legal Valuation Fee etc.
To get a good home loan deal and to become the proud owner of your dream home, the following five-step process can be adopted:
Step 1: Organize Required Information
To begin with, you need to provide the lender certain documents, and it is best to organize these papers before you start looking for a home loan. These include income related documents, documents that can prove your creditworthiness and the capability to repay the loan. These papers are very essential in order to make the lender fully satisfied and convinced that the loan is being approved and disbursed to a trustworthy person whose credentials would vouch for his repayment.
Step 2: Shop Around
Make a sincere attempt to find out what exactly are the offers made by all the lending institutions, and compare these offers taking into consideration all the relevant factors such as the loan amount, tenure, rests, interest rate options, safety of your title documents, post-disbursement services, besides a range of fee structure applicable to the loan amount to be availed. Most of the institutions have websites that give out maximum information. Competition in the home loan industry is intense. Therefore, it should be borne in mind that all charges, fees, and rates are negotiable. Apply for loans jointly with relatives, friends, and colleagues who are planning to take a home loan; join hands with them to negotiate better rates from the lender, who would generally love to offer concessionary rates to a group of creditworthy people. Also, look out for any property fair by home loan lenders, as lower rates are offered at these venues.
Step 3: Seek Loan Approval
Once you decide the lender, it is time now for seeking a loan preapproval if you haven’t still selected the home that you intend to buy. If it has been selected, then apply for the loan, giving details of the home that you would like to own and the proof of any upfront payment that has been already made. A good lender will be the one who approves the loan at a mutually agreed rate with the customer, within a fairly decent time. The lender might seek additional financial information, and you might have to answer queries about the information provided in the application form. Some institutions might require a personal discussion with the applicant, and may request you to bring along the originals of the supporting documents. Your credit report plays a significant role in influencing the lender in your favor. So try to keep your creditworthiness on a high score in their rating. In case the lender offers an insurance plan that covers life, property, and loan, it is always better to avail it, as normally it would be a one-time premium and can be added to the loan amount.
Step 4: Apply for Loan Disbursal
The applicant reaches this stage after the house has been identified and got already a preapproval or a loan Approval Letter. Now, two more processes are there to be completed to avail disbursement of the loan amount. Those two processes are legal vetting of the title documents and technical evaluation of the property. The legal and technical scrutiny is of great help to the lay home buyer too, as he receives an assurance on the safety of his investment because all the necessary screening would be carried out by the experts in the business.
Step 5: Close the Loan Process
The applicant can close the loan process when he is about to move into the home. While this may happen at a reasonable pace if the applicant selects a ready-to-live-in home, the wait will be a little more for a property under construction, until the builder is ready to give possession. While in the case of a ready-to-live-in house, the disbursement will be for the full amount whereas for the under-construction projects, it is based on stages related to the project’s progress.
Identifying the home and making the right choice of the lender with whom the home loan facility is to be availed considering all the variables before a final decision could be arrived is indeed a herculean task, and let me hope the aforementioned guidelines should be of great help in making your final decision.
Byline: Jayakumar N., is a lawyer and also has a masters in business administration. Currently, he is pursuing his doctoral program on the topic “Study on Customer Preference Over Property Type and Location with Relation to Rural and Urban Population, and is employed as Deputy Manager, Operations, in a leading housing finance company.