Purchasing an asset like a house, especially for a first-time homebuyer, is a very expensive milestone in their respective lives. Owning a house could have different meanings to different people but the cost remains the same. The huge cost attached with buying property could equate to years of efforts clubbed with years of projected salary. Many in such situations, opt for a home loan. A home loan can be easily understood as the money borrowed from a third-party towards buying a house.

Home loan as a topic is a vast area to discuss. First of all, the prime distinction is between a formal and an informal loan. To swiftly understand an informal loan, it is the one which one takes from an acquaintance or an unorganised money-lender, having little or no legal withstanding and a Rate of Interest (ROI) not governed by the central bank directives, which in case of India is the Reserve Bank of India (RBI).

Formal loans are the ones which are under the purview of RBI, follow a defined legal and banking process adhering to policies of the concerned bank. In a formal loan, there are many factors determining nuance details of a formal loan like the ROI, tenure, processing fee, processing time, credit score, the income of the borrower, and several other things encompassing the entire structure of a loan-sanction.

Let us see how all these determining factors divert the clauses of a formal loan.

The rate of interest

The ROI is possibly the easiest determinant to compare and choose amongst a variety of home loans offered by different banks. Mostly, the ROI depends on the other factors which define the approval rate of a loan. In case of credit score, for example, the ROI would be slightly lesser for the person with a better score as compared to a person who scores badly in credit-ratings. The ROI is of two kinds; Fixed and Variable (or floating). It is advised to opt a fixed ROI for shorter and a variable one for longer loan tenures. Select the loan with the lowest interest rate, of course, but keep the bull's eye attention on the fine print and the terms of the loan.

Tenure

Tenure is the length within which the borrower has agreed to borrow the sum and after which he is liable to return the monies owed. A typical loan tenure varies from 5 years to 20 years. Often, loans are designed where the interest payment starts immediately, if not otherwise mentioned, while the instalments towards principle start only towards the completion of the tenure. It is advised not to go with the either extreme because while repaying the loan very early might be a serious concern for some, early repayment of loans also attract a negative charge as the banks are making less money as promised earlier. It's better to go with a bank which allows slight flexibility with the tenure; also lately, some banks are having a clause of a possible extension of tenure in future.

Processing fee

The processing fee differs from bank to bank, also depends on multiple conditions. Generally, processing fees vary from 0.25% to 0.75% of the loan amount. We advise looking into the subject matter before making a call because a cheaper processing fee might take longer for your loan to get approved.

Processing time

It is the time that the banks or a financial institution take to approve a loan. It generally is between 5-10 working days but could be quicker or lengthier to process some special cases. It is also observed that the public sector banks have a longer processing time but they compensate that with having competitive charges as compared to the private ones. Plan your home loan application well in advance to reap the maximum benefit.

Credit Score

It is a very important factor for a bank to decide whether a person deserves a loan or not, or if they do then till what amount would they be allowed to borrow. The credit score is a calculated intelligence which is curated tracing an individual's buying, spending, borrowing and repaying capacity with respect to their income. So something as little as not paying your credit card bill on time might affect your credit score. It is advisable to favour private banks or non-banking financial institutions in a case where your credit score is low because mainstream public banks might decline your application. When your score is good then you should go seek the bank with the most competitive rate.

Income of the Borrower

The annual income is the most important factor in determining someone loan worthiness. For a salaried person, this process is much easier as it is easy to project their future incomes but it is slightly trickier in the case of self-employed professionals or business owners. Again, every bank has a different benchmark for deciding the income threshold for sanctioning loans. To project the best case for yourself, we advise meeting a chartered accountant or a financial planner to make a projection report for your bank. These professionals can analyse your situation and present it in a fabricated yet honest manner to your bank.

When the bank approves a loan and enables you to either move-in in a ready house or await completion of an under-construction unit, the ownership documents lie with the bank till the complete repayment of the loan. This is also known as a hypothecated loan. Since you would invest in decades worth of efforts, finance and time in securing your house (which will lie with your bank until you pay), some fulfilling and concrete preparation is definitely needed.