So, you’ve decided to apply for a home loan to buy your dream house. Applying for home loan(s) has become easy thanks to digitization and a host of lenders in the space. However, proper financial planning is essential for prudent home loan management at different stages to make the entire journey smooth and hassle-free.

While due diligence is on the radar of borrowers before applying for a home loan, little thought goes for things to be mindful of during and after the process. As home loan is a long-term commitment, it’s crucial to do your homework equally well at different stages of the loan.

This blog will give you a holistic view of financial planning to help you effectively manage your home loan. Let’s get started.

Before Applying for Home Loan

         1. Take Stock of Your Current Investments
Before initiating the home loan process, get back to the drawing board and review your current investments. Home loan is a big-ticket investment that you shouldn’t do in isolation. Find out all the avenues where you have invested your money to gauge your financial positioning.

This is essential as it plays a crucial role in estimating the home loan amount. It’s not sensible to overburden yourself and strain your finances. Biting more than what you can chew can result in significant heartburn. While reviewing your investments, divide them into two broad buckets - necessary and non-necessary.

Necessary investments may include insurance premiums, mutual fund SIPs, PPF contributions, etc. On the other hand, non-necessary investments entail high credit card dues, opting for buy now pay later schemes, lifestyle-related loans, etc. Curtailing non-necessary ones can help you better manage your finances and avail a bigger home loan.

        2. Measure Your Income, Expenditure, and Emergency Fund
This is another essential consideration. While evaluating a home loan application, lenders closely assess your income and the debt-to-income (DTI) ratio. DTI ratio is the percentage of your income that goes towards paying current debts. High income and low DTI ratio enhance your home loan eligibility considerably.

Also, when you keep your expenditure and existing liabilities low, EMI payment becomes convenient and vice-versa. Another crucial consideration is to take stock of your emergency fund. This fund comes in handy in case of contingencies such as job loss, hospitalization, etc., that can put a break on active income.

Covid-19 has highlighted the importance of having an emergency corpus equivalent to at least a year’s expense. Before applying for a home loan, use the Home Loan calculator to have a fair idea of the EMI you need to pay every month, and include this amount in your contingency fund.

        3. Maintain a Good Credit Behavior and Good Credit Score
Your credit score and credit history play a vital role in your home loan application process. A good credit score (also known as CIBIL score) - generally above 750 - eases the application process and allows you to obtain the loan on easy terms and conditions. On the other hand, a poor score makes the process difficult by several notches.

It’s not that you will not get a home loan if you don’t have a good credit score. However, such a loan will come with strict terms and conditions and little flexibility. A good credit score is not built overnight. It’s a long process. To do so:

• Pay your existing EMIs on time

   

• Make full payment of credit card dues

   

• Keep your credit utilization ratio low

   

• Avoid too many home loan applications in a short period

   

• Close any other pre-existing small ticket loans

   

Also, keep checking your credit history regularly and report any anomaly to the concerned bureau. Recently, cases have been reported of identity theft whereby PAN of individuals has been used to obtain loans in their names. Even celebrities have been a victim of such frauds. So, keep monitoring your credit history regularly from credit bureaus.

        4. Select the Loan Amount
Avail a loan amount that you can easily repay. Lenders will not disburse the entire purchasing value of the home. You need to pay a certain amount of money as down payment while the lender will fund the rest. Generally, lenders sanction 75% to 80% of the home value as a loan.

So, if the price is INR 1 crore, you are likely to get INR 75 lakhs as a loan. You need to pay the remaining INR 25-20 lakhs as down payment. Choose the loan amount carefully as it directly affects the EMI. Higher the loan amount, greater is the EMI.

        5. Research on the Lowest Home Loan Interest Rates
Among the several vital considerations while scouting for home loans, interest rates generally occupy the pole position. The reasons are understandable. Home loan rate of interest is directly proportional to the EMI.

Today, lenders specify the home loan rate of interest on their websites. You can look at aggregator portals to know the interest charged by different lenders and choose the one that best fits your requirements.

However, be mindful that rate of interest shouldn’t be the only selection criterion. You must consider:

• The lender’s credibility and reputation

   

• Repayment flexibility

   

• Value-added services offered

   

• Customer service

   

While Applying for Home Loan

        1. Manage Down payment
Down payment is a crucial aspect. As said, no lender will disburse the entire value of the home as a loan. You need to pay a certain amount upfront as down payment. Though the down payment amount is less than the loan, it’s still substantial. Hence, you must make an early start to accumulate it.

To accumulate the down payment amount, you can invest in various financial instruments such as debt mutual funds and bank fixed deposits. An early start gives your money more time to grow and brings compounding into play. Keep saving from the day you start earning to build a sizeable amount for down payment.

        2. Get Home Loan Insurance
Home loan insurance is probably one of the most overlooked aspects of the entire process. Buying home loan insurance keeps you financially guarded in case of any untoward incident. The insurer settles the outstanding home loan amount in case of an unforeseen situation.

After Applying for Home Loan

        1. Manage Repayment
The monthly EMI starts once the lender approves the loan and the amount is credited into your account. You must pay the EMI on time as any missed payment drags down your credit score and sullies your credit history. The NACH e-Mandate system ensures timely EMI repayment and reduces the chances of a missed payment. Also, make sure you have enough funds in your account to prevent EMI bounces. It’s also prudent to direct windfalls such as yearly bonuses in pre-payment to reduce the principal and the EMI.

Pre-payment (part or full) from time to time helps you repay the loan before its tenure. It can help you save on total interest paid towards your Home Loan.

        2. Opt for Tax Benefits
Home loans also help you avail tax benefits under various sections of the Income Tax Act, 1961. Home loan tax benefits are applicable for principal and the interest paid under section 80C and section 24. Click here to know about the tax benefits you are eligible for on Home Loans.

Summing it Up

The tips mentioned above help you remain prudent and financially sound at every stage of the Home loan journey. They make your entire ride smooth, seamless, and bump-free.

Godrej Capital is the financial services arm of Godrej Group which offers home loans, Loan Against Property and other secured loans. With innovative products and offerings, customers can get hassle-free loans on easy terms and conditions. Click here to know more about the offering.

Disclaimer: The above information is for illustrative purpose only. For more details, please refer to the product or service document and/or connect with our customer representative prior to making any financial decision.