Mistakes to Avoid When Opting for Housing Finance

You have finally found your dream home. The perfect location, ideal size, and everything you have ever wished for. But as you start exploring housing finance options, you feel a mix of excitement and confusion. What loan amount should you take? Which bank offers the best deal? In this whirlwind, it is easy to make mistakes that could cost you dearly in the long run.

Let’s explore the mistakes you should avoid when opting for housing finance to ensure a hassle-free experience.

Key Blunders to Avoid When Applying for Housing Finance

Before submitting your application for a collateral loan, make sure to avoid the following blunders.

Not Checking Credit Score

Your credit score is the most important factor to look at when applying for a home loan. Typically, lenders approve funding if the score is above 750. Your credit score reveals how responsibly you have managed previous loans and are currently managing ongoing debts.

If you are wondering where to get this information, visit the official website of a credit bureau like CIBIL and download your credit report. If you have a poor score, it is advisable to wait a few months or even a year before submitting your loan application. Use the following tips to improve your score:

• • Avoid maxing out your credit card balance. Keep the utilisation ratio below 30%. If you rely on credit cards, it’s a good idea to contact the lender and request a higher credit card limit.
• • Refrain from submitting multiple home loan applications simultaneously. Wait for one lender to respond. If they reject your application, ask for the reason and work on improving that specific factor.
• • Automate your monthly debt repayments to avoid missing any EMI payments.

Not Choosing Tenure Wisely

The home loan repayment tenure directly impacts your budget. If you opt for a longer repayment tenure, you can benefit from a lower EMI. However, you may end up paying a much higher amount as interest. On the other hand, with a shorter tenure, you save on the interest payable, but the higher EMIs may make debt management a more difficult task.

Here is an example to explain this better:

Suppose you wish to apply for a home loan of ₹15 lakhs. Based on your credit appraisal, the lender charges an annual interest rate of 12% on the funds sanctioned to you. Here is how different tenures will impact your borrowing.

Parameters	Repayment Tenure
	10 Year	15 Years	20 Years	25 Years	30 Years
Loan Amount	₹15 lakhs	₹15 lakhs	₹15 lakhs	₹15 lakhs	₹15 lakhs
Interest Rate	12%	12%	12%	12%	12%
EMI	₹21,521	₹18,003	₹16,516	₹15798	₹15429
Interest Payable	₹10,82,477	₹17,40,454	₹24,63,910	₹32,39,509	₹40,54,508
Total Payable	₹25,82,477	₹32,40,454	₹39,63,910	₹47,39,509	₹55,54,508

 

Not Considering Down payment

If you are new to borrowing, you might not be aware of how disbursement works. The lender does not lend the entire value of your house; instead, they provide a major portion of it. According to the RBI, for home loans up to ₹30 lakh, the maximum you can receive is 90% of the property’s worth. If the loan amount is between ₹30 lakh and ₹75 lakh, you can get up to 80% funding of the property’s worth. For loan requirements over ₹75 lakh, the maximum funding cap is 75%.

Before you finalise the loan, make sure you understand this parameter and arrange for the balance that needs to be paid upfront. Remember, a higher down payment means lower risk for the lender, which further translates to a lower interest rate.

Not Factoring Additional Costs

Borrowers often focus solely on the interest rate and overlook additional costs such as processing fees, legal fees, valuation charges, and prepayment penalties.

These costs can significantly increase the total loan amount, affecting affordability. It is important for you to request a breakdown of all charges from your lender and factor them into your budget.

Borrowing Beyond Affordability

It is tempting to borrow the maximum amount your lender offers. However, over-leveraging yourself may leave little room for other expenses or emergencies.

Use a home loan EMI calculator to figure out an EMI that fits comfortably within your monthly budget, ideally keeping your loan repayment under 40% of your income.

Conclusion

Opting for housing finance is a major step in fulfilling your dream of owning a home. However, making the right choice involves more than just selecting a loan based on the EMI amount. It requires a proper understanding of loan terms, interest rates, fees, and how the loan fits into your broader financial plans.