Home loan/Housing Loan is a lump sum amount of money borrowed from any financial or banking institutions to buy a house. The purpose of the home loan is either to buy a residential property or to repair a residential property. After a
certain time period, the borrower would have to return the loan along with the proposed rate of interest of that amount.
There are two kinds of home loan interest rate:-
1. Floating interest rate
2. Fixed interest rate
EMI of the home loan is calculated either on fixed or floating rate of interest. Before taking any decision the borrower must go through both the patterns of interest rate. In the comparison of the other loans, the home loan is for the longest tenure. The borrower has to pay a huge amount of interest on the principal amount of home loan.
Fixed rate of interest
- Under fixed rate of interest, the percentage of interest is fixed for the entire tenure.
- Throughout the loan, the same percentage of interest is charged.
- Fixed rate of interest must opt by the borrower only when the rate of interest is bottom down.
Floating rate of interest
- With the change in market lending rates the floating rate of interest changed.
- According to the fluctuation in the market lending rates, the interest rates on the EMI might get increased or decreased.
- Under fixed floating rates the bank provides an alternative to increasing the tenure of the loan. There are different interest rates on a home loan provided by the bank.
The documents required for a home loan are more or less uniform among various banks, a few specific requirements may vary from bank to bank, depending on the loan amount, purpose of the loan, tenure etc.
The following are a few factors on which the sanctioned loan amount depends:
- Type of borrower
- Age of the applicant
- Income of applicant
- Agreement value of the property to be purchased
- The purpose of the loan
- Nature of property
Eligibility Criteria for Home Loan
You would be happy to know that the eligibility criteria for the home loans are almost consistent throughout the banks. If there is some deviation, it is because of the intrinsic policies of the bank. However, the basic form remains the same.
- Age: The minimum age of the home loan application is 21 years of age. However, you should be able to repay the loan before you are 60 or 65 years old.
- Employment: This criterion entails two subsequent sub-criteria:
1. The loan applicant should either be self-employed or a salaried individual.
2. The loan applicant should have been in the employment for at least 3 years and should have had the most recent employment for at least 1 year.
Income: Thos with the annual minimum of 5 – 7 lakhs are the only ones that are eligible for home loans.
Residence: The applicant should have had a stable residence for at least 1 year. This criterion is to tell the financial institutions about your financial standing.
Credit Rating: A good credit score is a good eligibility factor. To that end, your credit score is a good way to find out the financial standing of the applicant.
Parallel Debt Channels: While the institutes are issuing loans to the applicant, they also check the current credit balance of that applicant. They check to see if there are any current Loans in progress and if they do, are they able to pay it properly.
Documents Required for Home Loan
1. Completed Loan Application
2. Proof of Identification:
- Driving license
- Ration card
- PAN card
- Voter’s ID card
- Employee ID
- Bank passbook
3. Proof of Age:
- PAN card
- Birth certificate
- 10th class marksheet
- Bank passbook
- Driving license
4. Address Proof:
- Bank passbook or Bank account statement
- Voter’s ID
- Ration card
- Utility bill (telephone, electricity, water, gas) – less than 2 months old
- LIC policy/ receipt
- Letter from a recognized public authority verifying the customer’s residence address
5. Income Documents:
Salaried individuals (any one of the following):
- Form 16
- Certified letter from Employer
- Pay slip (Last 2 months)
- Increment or Promotion letter
- IT returns (for 3 years)
Apart from the proof of income of the salaried individual, he would also have to furnish any investment proofs (like fixed deposits, shares, etc) and his passport- size photographs.
Self Employed or businessman (any one of the following):
- Last 3 years Income tax returns of the applicant along with computation of income duly attested by a Chartered Accountant
- Last 2 years Balance Sheet and Profit & Loss account of the firm- duly attested by a Chartered Accountant
Apart from these, a self-employed individual also has to submit:
- A brief introduction of his profession/business
- Passport size photographs
- Photocopy of Registration Certificate of establishment under Shops and Establishments Act/Factories Act
- Photocopy of Registration Certificate for deduction of Profession Tax
- Proof of investments
- Certificate of Practice
- Receipts of advance tax payments (if any)
6. Property Documents:
- Sale deed, agreement of sale with the builder (original copy)
- Land and building tax paid receipts, location sketch of the property certified by the revenue authorities, possession certificate
- Letter of allotment given by the Housing Board/Society/Private builder
- Original receipts of the advance payments that are made towards the purchase of flat
- An approved copy of the building plan (key plan/floor plan in case of purchase of flats)
- Original of the land tax paid receipt and possession certificate as issued by the revenue authority
- Original No objection certificate (NOC) from the housing society or builder
- Detailed estimate of the cost of construction of house
- Letter from the builder/society/housing board, stating their account number and name of their bankers for the remittance of installments
Benefits of a home loan
1. Tax benefits: – To encourage more and more people buy their own house, government of India provides tax deduction on the principal as well as interest paid on home loan. An individual is eligible to claim a deduction of up to Rs 1.5 lakh under Section 80C of Income Tax of India 1971 Act in a financial year. While a deduction of up to Rs 2 lakh is allowed on the interest portion under Section 24B of Income Tax of India Act. The deductions under income tax are only available after the construction of the house is complete. You can’t claim the income tax deductions while the property is under construction. Read: to know more about home loan deductions.
2. Tax benefits on second house:- In case of second house, you are eligible to claim deduction for the entire amount of housing loan interest paid under Section 24B of Income Tax Act.
3. No prepayment charges: – Unlike other loans where lenders charge prepayment penalties on payment made towards home loan , there are no prepayment penalties on floating rate home loans . So, whenever you have surplus money, you can utilize it for making part payment towards your home loan and lower your burden. However, there will be prepayment in case of floating rate home loan.