In an urban setting, most buyers prefer (and need) the aid of home loans while purchasing a house. On the surface, it may seem that the process of applying for a home loan has become easier and digitized (read about the process here). But, one still needs to understand the intricacies involved in the entire process, and the conditions that come attached to it.

We recommend taking into account the following before/while applying for a loan:

Factors affecting eligibility criteria

The two primary factors that decide an applicant's eligibility are his income level and his credit score. His income level will decide various things: the total loan amount sanctioned, the EMIs, and the tenure of the loan.

The bank's decision of approving the loan application also depends on the applicant's credit score. A credit score reflects the credibility of the applicant; a score above 700 is considered a good score.

Loan type

According to banks' policies, loans are of two types, based on their interest rate. Fixed interest rate loan is one where the interest rate does not change with market fluctuations. Floating interest rate loan is one where the interest rate changes in accordance with the market conditions. Usually, the fixed interest rate is 1-2.5% higher than the floating rate.

Negotiate the rate

Yes, banks have an upper hand in the entire loan process, but one can still negotiate with the organization for a lower interest rate. A good relationship with the bank can prove to be profitable to the applicant.

Longer tenure translates into a costlier loan

When people cannot afford higher EMIs, they arrange with the banks for a longer tenure of the loan. However, while this may seem like a relief temporarily, eventually a longer tenure will mean a costlier loan since one would end up paying more interest than the principal amount.

Co-applicant

Mostly, banks make mandatory a co-applicant. If the said property has a co-owner, he/she necessarily needs to be the co-applicant for the loan. In case one is the sole owner of the property, an immediate family member can become the co-applicant.

MCLR

The Reserve Bank of India introduced a rate based on the banks' marginal cost of funds, called MCLR. It indicates a bank's marginal cost of borrowing and is used as a benchmark rate for setting the interest rate on bank loans. Banks cannot lend below this rate.

Home loan prepayment

Banks provide lenders with the option of pre-closing the loan ahead of its original tenure. If the loan has a fixed interest rate, some charges may be applicable for pre-closing.

Insurance for home loan liability

It is recommended to cover one's home loan liability with an insurance to cushion against any financial crisis in the near future.

Switch lenders

If one is getting a significantly better deal from any other bank, it is possible to switch the loan to that bank. One will be liable to pay a processing fee.

Common documents required

There are some common documents that every applicant, regardless of profession and income level, has to submit. These are:

• Home loan application form (properly filled) with one passport size photograph
• Photo ID proof: Passport/Driving License/Voter ID/PAN
• Residential proof
• Residence ownership proof
• Property documents
• Advance Processing Cheque

Apart from these, there are some specific documents that are exclusive to salaried employees, business owners and senior citizens.

Documents required for Salaried Individuals

• Income proof: Payslips from the past 3 months, Form 16 from the past two years, Copy of Income Tax Returns
• Bank Statement: Bank statements of the past six months showing salary received from the employer, and payment of EMIs for current debts

Documents required for Self-Employed Professionals

• Office Address Proof: Property documents, utility bills
• Office Ownership Proof: Property Documents, Utility Bills, Maintenance Bills
• Business Existence Proof: 3-year Saral Copy, Company Registration License, Shop Establishment Act
• Income Proof: Income Tax Returns of the past 3 years including Computation of Income, Profit & Loss Account, Audit Report, Balance Sheet
• Bank Statement: Bank Statement of the last financial year

Documents required for Senior Citizens/Pensioners

• Age Proof: PAN/Passport
• Income Proof: Pension Returns/Bank Statement