Avoid These 7 Costly Mistakes When Applying for a Home loan

Avoid These 7 Costly Mistakes When Applying for a Home loan

Written by Gagandeep Arora || Printed on - Date - 07 October 2024

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Buying a home is one of the most significant decisions in a person’s life, and for most of us, a home loan is essential to make that dream come true. However, the process of securing a home loan can quickly become a source of stress if we’re not careful. Since home loans typically have a long tenure and involve large amounts of money, it’s crucial to avoid common mistakes that can cause trouble in the future. Here are seven mistakes to watch out for when applying for a home loan, and how to avoid them for a smooth borrowing experience.

 Not having enough funds for the down payment

Most banks provide home loans for up to 80% of the property’s value, depending on factors like your credit score and repayment ability. The remaining 20% must come from you as a down payment. For example, if the property costs ₹1 crore, the bank will lend you ₹80 lakhs, and you'll need to contribute ₹20 lakhs upfront. It’s important to have this amount ready before applying for a loan because the bank will disburse the loan only after you make the down payment.

 Borrowing more than you can afford to repay

It's tempting to opt for a bigger loan, especially when you’re eager to buy your dream home. But you should always consider your current financial situation. Ideally, your EMI payments should not exceed 30-40% of your monthly income. It’s risky to take a large loan assuming that your salary will increase in the near future. If your income doesn’t rise as expected or if other expenses pop up, you could find yourself in financial trouble. Always ensure you’re leaving enough room for savings and other expenses.

 Choosing the wrong loan product

There are several types of home loans available in the market, such as floating rate loans, fixed rate loans, semi-fixed loans, and loans with overdraft facilities. Each product has its own benefits and drawbacks. For instance, a floating rate loan’s interest rate can go up or down over time, while a fixed rate loan locks in the rate. Choosing the wrong loan type can cost you more money in the long run or make repayment difficult. It’s important to choose a loan product that suits your needs and financial situation.

 Opting for a short tenure

Banks offer home loans with tenure up to 30 years, depending on your eligibility. It might seem like a good idea to go for a short tenure to clear the loan faster, but this comes with higher EMIs. If you fail to repay an EMI due to a financial crunch, penalties and a damaged credit score could follow. Instead, opt for a longer tenure and prepay the loan when you have extra funds, as there is no penalty for early repayment.

Not comparing offers from different banks

With so many banks offering home loans, it’s essential to compare their interest rates, processing fees, penalties, and other terms. Thanks to online comparison tools, you can easily see what each bank offers and choose the best deal for yourself. Not doing this can lead to higher costs and unfavourable terms, putting unnecessary financial pressure on you.

Ignoring your credit score

Your credit score plays a critical role in getting your home loan approved. A poor credit score due to unpaid credit card bills or personal loan EMIs can reduce your chances of getting a home loan. Before applying, ensure that your credit score is healthy by paying off any outstanding debts. A good score not only increases your chances of approval but can also help you get better interest rates.

 Failing to get insurance for the home loan

Life is unpredictable, and if something unfortunate happens—like an accident, illness, or even death—it can become difficult or impossible to repay the loan. Home loan insurance ensures that your family will not be burdened with loan repayments in such situations. This protection can keep your loved ones from losing their home if something goes wrong. It’s a small price to pay for the peace of mind that comes with knowing your home is secure.

The Importance of Reading the Loan Agreement

When you take a home loan, always read the fine print of the loan agreement. Many important clauses are hidden there, and ignoring them can lead to issues later on. For example, there could be hidden charges or unfavourable terms that you didn’t notice. If something doesn’t seem right, ask the lender to clarify or make changes. It’s always better to be safe than sorry when signing such important documents.

By avoiding these common mistakes, you can ensure a smooth home loan process and enjoy the journey to owning your dream home without unnecessary financial stress.

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