Home Loan – Meaning, Types, Eligibility, and Features

Buying a house is one of the biggest dreams come true for most people and an extravagant affair altogether. Imparting life to such a dream requires a lot of effort from the buyers’ end and the best one can do to accommodate the home in their budget is through a home loan.

A home loan can be opted to buy a new house/flat or a plot of land where you construct the house, and even for renovation, extension, and repairs to an existing house.

Types of Home Loans in India

Home Loan

This is the most common type of home loan availed to purchase a house. There are many housing finance companies, public banks, and private banks that offer housing loans where you borrow money to purchase the house of your choice and repay the loan in monthly instalments.

You can get up to 80%-90% of the house’s market price in the form of financing. The lender will hold the house until you completely repay the loan.

Home Construction Loan

This is the right home loan type if you already have a plot of land and you need financing to construct a house in that land. 

Home Extension Loan

Say you already own a house and you would like to extend the house with another room or another floor to accommodate the growing family. Home extension loan provides financing for this purpose.

Home Improvement Loan

A home improvement loan provides financing for renovating or repairing the house if there’s any fault in the existing system, such as painting the house’s interior or exterior, plumbing, upgrading the electrical system, waterproofing the ceiling, and more.

Home Loan Balance Transfer

The current home loan interest rate may be overwhelming, or you may not be happy with your current lender’s service; you can transfer the home loan’s outstanding balance to a different lender who offers a lower interest rate and better service. Upon transfer, you can even check out the possibilities of a top-up loan on your existing one. 

Composite Home Loan

This type of home loan provides financing for purchasing the plot of land where you would like to construct a house and for the construction, both within a single loan. 

Benefits of Taking a Home Loan

Tax benefits

The foremost benefit of a home loan is the income tax deduction you can claim on the interest and principal repayments. You can claim up to Rs.1.5 lakh on principal repayments u/s 80C, up to Rs.2 lakh on interest repayments u/s 24B, up to Rs.2 lakh on interest repayment in special circumstances u/s 80EE and 80EEA, and up to Rs.1.5 lakh on stamp duty expenses u/s 80C.

Lower interest rate

The home loan interest rate is much lower as compared to any other loan types available. If you come across a cash crunch, you may get a top-up on the existing home loan at a lower interest rate than a personal loan to solve the issue.

Due diligence of property

When you go through a bank to purchase a house, the bank will conduct thorough checks on the property from the legal perspective and check if all the documents produced are valid.

This due diligence check from the bank’s end will reduce the risk of you being scammed. If the bank approves the property, that means you and your house are safe.

Long repayment tenure

Unlike any other loans, home loans come with longer repayment tenure, as much as 25-30 years. This is owing to the significant loan amount one will have to borrow to purchase a house.

Spreading the loan amount and interest applicable over a longer tenure will reduce the monthly EMIs reducing the borrower’s burden.

No prepayment penalty

When you take a floating-rate home loan, you can make prepayments towards the loan whenever you have a lump sum at hand without having to pay any prepayment penalty. This will help you close the home loan much before the set loan tenure.

Balance transfer facility

You can transfer the home loan from one lender to another for several reasons, such as the interest rate, service charges, customer service experience, and others. 

Home Loan Interest Rates

The average home loan interest rates are from 6.5% to 12.00% in India as of March 2021. The rates usually vary from lender to lender, RBI-prescribed repo rate, inflation, economic activities, and many other factors. 

Some banks also give a special privilege to women, bank staff, and senior citizens by providing a 0.05% concession on the home loan interest rate.

Further, a home loan interest rate can either be fixed or floating in nature. A fixed-rate home loan remains the same for a period specified by the bank. This type of home loan is immune to market fluctuations.

In the case of floating-rate home loans, the interest rate applicable varies based on the market fluctuations. It may or may not be beneficial for the borrower. 

Eligibility

Banks have a list of eligibility criteria for home loans. The first thing banks look at is one’s credit history to understand their repayment habits. Typically, a credit score of 750 and above is preferred. Some other important factors taken into account are as follows:

• Age
• Employment Type
• Minimum Annual Salary
• Collateral Security
• Margin Requirements
• Assets, liabilities, stability, and continuity of occupation
• Residency status (Resident Indian/ Non-Resident Indian)

Documents Required

The following documents are required, along with your duly-filled loan application.

Agriculturists	Salaried Customers	Businessmen/Non-Salaried Professionals
Application form with photograph	Application form with photograph	Application form with photograph
Identity and Residence proof	Identity and Residence proof	Identity and Residence proof
Last 6 months bank statements	Last 6 months bank statements	Last 6 months bank statements
Processing fee cheque	Processing fee cheque	Processing fee cheque
Copies of Title Documents of Agricultural Land depicting Landholding	Latest Salary Slip	Educational Qualifications Certificate and Proof of Business
Copies of Title Documents of Agricultural Land depicting crops being cultivated	Form 16	Business Profile and Previous 3 years Income Tax returns (self and business)
Statement of previous 2 years of loans availed		Previous 3 years Profit/Loss and Balance Sheet

EMI Calculator

Generally, an EMI calculator is a simple and handy tool that calculates the monthly amount payable to the lender (bank) in terms of a loan.

You can try our Home Loan EMI Calculator to find out the EMI you may have to pay every month for a specific loan amount and figure out your affordability well in advance.

The home loan calculator is easy to use as you have only to enter the values of the principal loan amount you are planning to borrow (P), the time duration (N), and the rate of interest (R). 

Process of Applying

Availing a home loan has gotten easier than before, thanks to the various mediums that exist now with the advent of technology. One can either go to the bank branch directly, inquire about the home loan options, or go for an online application. 

Upon applying, the bank collects the required documents from you. It initiates the processing of your application, including checking of CIBIL score, the value of the asset, eligibility calculation based on your income and liabilities, and more.

After evaluating and verifying all the documents, the banks decide to approve or reject the loan.

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