17 AUGUST, 2022

Buying a home is a great deal because it is a big-budget event. This budget factor makes home loans intrinsic to the entire process.

When you apply for home loan, you are leveraging your future income to fulfil your present dream. However, as a first-time home buyer, you cannot throw caution to the wind.

Getting a home loan might be necessary to finance your project and get the blueprint of your homemade on the ground. Therefore, you must get your act together.

To aid you in this process, we’re here with the seven golden home loan strategies for first-time home buyers like you.

1. Know Your Credit Score

What is the first thing a bank look at when you apply for home loan? It’s neither your name nor your job- it’s your credit score! The first impression is the best; to make it the best, you must have a good CIBIL (Credit Information Bureau Indian Limited) score.

A credit score acts as your progress report vis-à-vis the lending institution, reflecting your creditworthiness. It determines your eligibility for the home loan and influences the interest rate and the total loan amount.

An excellent credit score is quintessential to getting a home loan. You will find multiple platforms where you can check your CIBIL score.

But how much score you should have?

If above 850, it is an outstanding score, implying high creditworthiness.

A score between 750 and 849 is excellent.

You are less likely to face severe issues if you have a credit score between 650 and 749.

However, having a credit score below 600 raises red flags, and you must do the needful to increase it.

2. Pay the EMI

Now, do you have the financial capacity to repay the home loan?

The bank will sanction the home loan only if you can make timely EMI (Equated Monthly Installments) repayments. They will calculate your FOIR (Fixed Obligation to Income Ratio) to assess your capacity to repay the loan in EMIs.

As the name suggests, FOIR is the percentage of the ratio of your fixed obligations and total income. Usually, banks require you to have a FOIR between 40% and 60%, including the new EMI for home loan approval.

A lower FOIR means that you will have enough income to meet your daily expenses and repay the home loan in EMIs after meeting your fixed obligations. The logic behind it is simple- your chance of loan approval is high if your FOIR is low.

So, before you apply for home loan, calculate your FOIR and see if it falls within the permissible range. If not, take necessary steps to reduce it, like prepaying/ foreclosing the outstanding debts.

3. Consider Joint Home Loans

Taking a joint home loan has its advantages.

If you have a lower credit score and collaborate with someone with a higher score, the chances of home loan approval will increase.

Since the burden of EMI gets equally divided, you can reduce your FOIR, increasing the chances of approval.

You can apply for a higher loan amount as the bank considers the combined income of both applicants for approval.

4. Co-Borrow with Your Spouse

Now, if you are a married man, you can co-borrow with your spouse. Female borrowers enjoy a lower interest rate and usually get relaxation while applying for a home loan. Though it might not appear to be a significant amount, since a home loan is a long-term commitment, the cumulative benefits will be high.

5. Trim the Tenure

A home loan is a long-term commitment. It can stretch up to 30 years, gulping your entire professional life.

Try to choose a repayment tenure of not more than twenty years. Yes, it will increase your EMI. However, the higher the repayment tenure, the higher the interest outflow. In essence, the more time you take to pay back your home loan, the more amount you pay as interest.

Moreover, when it comes to loans, the earlier you wrap it up, the better. According to the directives of the Reserve Bank of India, banks cannot charge any prepayment fee on a home loan. Therefore, you can close it before the schedule and invest in another home!

6. Hunt for Affordable Housing Schemes

Before you apply for home loan, see if you are eligible for any housing schemes by central/ state governments.

For instance, Pradhan Mantri Aawas Yojna is an affordable housing scheme by the Government of India. To be eligible for this scheme, you must not own a pucca house, and your family income must be less than Rs. 18 lakhs per annum.

Therefore, if you qualify for this scheme, you can get interest subsidies on your home loan, depending on your annual income. You can search for similar schemes and see if you are eligible.

7. Search for the Lowest Interest Rates

Searching for a home loan is a daunting task. Captivated in the world of credit scores, taxes, interest rates, down payments, and EMI, you might be tempted to give a green flag to the first deal you get. However, little research on interest rates can change the game.

Different lending institutions offer different interest rates. Though they may not vary significantly, even the slightest home loan interest rate reduction might save you a lot in the long run. Therefore, you must look for the interest rates on home loans offered by different banks and choose one wisely.

The Endnote

To sum up, buying a house is one of life's most significant financial events. Gone are the days when one could buy a home with savings accumulated over time.

However, taking a home loan is not a cakewalk. You cannot afford an ignorant leap as it’s a long-term commitment. A single mistake might be your nightmare for 20 years. A solid strategy of how to go about applying for a home loan can make the entire loan application procedure seamless. Therefore, these seven practical tips will guide first-time home buyers like you toward a meaningful decision.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.

Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.