The pandemic has hit businesses and working professionals alike. The economic sentiment is subdued with layoffs and pay cuts all around us. In this situation, banks are now following a more cautious approach towards lending. If you are a young investor in need of a home loan at this time, it can be an uphill task to get the loan sanctioned for a sufficient amount as per your requirement. This article covers some tips on how you can increase your eligibility for a home loan.
#1: Close off your existing loans:
The bank checks your debt-to-income ratio while taking a decision on your loan eligibility. This ratio is basically a percentage of your monthly EMI payments to your total monthly income. The higher this ratio, the lower is the surplus available for servicing EMI for any new loans and lower your eligibility for a loan. Hence, it is a good idea to close or prepay your existing loans as much as possible before applying for a home loan. Ensure that before you apply for a home loan, you get a no-dues certificate from the bank and ensure that the loan status is reflected as closed in your credit report.
#2: Increase your credit score:
Banks rely a great deal on your credit score while deciding on loan eligibility. So, you need to have a good credit score before applying for a loan. Following are some action points you can take to improve your credit score:
- Make timely repayments for your loan EMI and credit card bills. You can do this by setting up a standing instruction for these payments on your bank accounts.
- Keep a low credit utilisation ratio – use a maximum of 30% of the total credit at any given point in time. Do not use credit cards to the maximum. If you get an opportunity to Increase the credit limit, do so.
- Do not stop your credit card payments or settle the total outstanding for a lower amount. Pay in full and then raise a dispute with the credit card issuer.
- Do not apply to too many banks for a loan in one go. This will constitute a “hard enquiry” on your credit report and can impact your score.
- Check credit report periodically for any errors and proactively resolve the same.
#3: Apply for a joint loan:
This is one of the most preferred ways for people to increase their home loan eligibility. If your spouse is working, you can add her as a joint applicant to the home loan. As a result of this, her income is also included in calculating the eligibility for the home loan. Before you opt for a higher loan, ensure that your spouse plans to continue her work for some years. If you are single, you can also check with your bank to allow your working parents to be co-applicants to the loan.
#4: Explore step-up home loan:
Step-up home loans are a boon for young professionals who want to achieve their dream of building their own homes. A step-up loan can help you get 20-30% more eligibility than a standard loan. Contrary to a traditional home loan with a flat EMI amount across the tenure of a home loan, the EMI is low in the initial 3-5 years in a step-up loan, which goes up with time. This assumes that a young professional’s salary will rise over time and help cover the increase in EMI. Different banks have different policies for step-up loans. Still, banks generally insist that there should be no running loan at the time of the application.
#5: Choose a longer tenure of loan:
If you choose a longer tenure of loan, the EMI amount becomes less, and you can get a higher loan amount. The only flip side to this approach is that the overall interest cost increases with increased loan tenure. For example, for a Gross Monthly income of INR 1 lac and an interest rate of 6.75%, the loan eligibility for a 20-year loan is INR 66 lacs. However, if you increase the term of the loan to 30 years, the loan eligibility rises to INR 77 lacs. However, the flip side is that compared to a total interest cost of INR 54.24 lacs for a 20-year loan, the total interest cost for a 30-year loan comes to INR 1.03 crore, a whopping 190% increase! In such a case, a better approach is to prepay the loan at the earliest as and when you have disposable savings at hand.
#6: Make a higher down payment:
As per RBI guidelines, a bank can finance up to 75-90% of the property value. If you make a higher down payment, it reduces the loan amount and consequently the EMI amount and thus allows for a higher loan value. Also, it reduces the credit risk of the bank, so you may expect better rates. However, in a rush to make a higher down payment, do not compromise your emergency fund requirement and savings towards your other financial goals. Also, do not take loans from markets at higher rates to fund the down payment, as this can prove costly in the long run.
Owning a home loan is a dream for every young professional. Step up home loans is an excellent way for young professionals to increase their eligibility for a higher loan amount. However, careful preparation regarding having the right credit score and closing all existing loans can go a long way to make your house buying dreams a reality.
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