6 home equity planning strategies for first-time borrowers

Lenders primarily approve home loans based on applicants’ income, creditworthiness, ability to repay, and other factors. Failure to meet the criteria set by lenders can result in rejection of a home loan application.

Here are some of the factors that first-time home loan borrowers should keep in mind to increase their home loan eligibility.

Check your credit on a regular basis

Your creditworthiness is among the first factors considered by banks and HFCs when evaluating home loan applications. Applicants with a credit score of 750 or greater have a higher chance of a loan approval. Such credit scores can also help them in availing home loans at lower interest rates. So if you want to take out a home loan in the future, you should start checking your creditworthiness at regular intervals. This would allow people with low credit scores to take the necessary actions to improve their credit scores. An improved credit rating would increase their chances of availing home loans at lower interest rates.

Try contributing a higher deposit

The LTV ratio is the fraction of the property’s value that a bank or NBFC can lend to the home borrower. The buyer must cover the rest of the real estate costs from his own funds, either as a down payment or as a contribution margin. The final LTV ratio for a home loan application is primarily determined by the lender’s credit risk assessment of the borrower. Therefore, applicants should first try to save at least 10% to 25% of their property’s value to ensure they are financially ready to make a margin contribution or down payment on the loan.

A higher down payment reduces credit risk and improves the chances of a loan approval. Some lenders also offer lower interest rates to borrowers who opt for lower LTV ratios. Therefore, home loan applicants who want to reduce their interest costs should aim to create larger corpuses for paying down their home loans. However, avoid jeopardizing your emergency fund and investment portfolios earmarked for important financial goals with higher down payments or margin contributions. This may force them to take out loans at higher interest rates to cope with financial needs.

Examine your EMI affordability

Home loan lenders also consider applicants’ ability to repay when evaluating their home loan applications. Banks and HFCs typically prefer lending to those applicants whose total EMI obligation, including that on the new home loan, remains within 50-60% of their monthly income. Those who exceed this limit have reduced chances of an approved home loan. These applicants should seek to reduce their loan repayment obligations by calling in or prepaying some of their previous loans, choosing a longer repayment period, or making a higher down payment or higher margin contribution on their new home loan.

Applicants can take the help of online home loan EMI calculators to determine their optimal EMI based on their ability to repay. This reduces the likelihood of EMIs defaulting in the future.

Include your home loan EMIs in your emergency fund

Unexpected financial hardship or loss of income due to job loss, illness, disability or other circumstances can occur at any time, which could adversely affect your ability to repay the loan. In addition, home loan EMI defaults can result in penalties and a decline in creditworthiness. While you can liquidate your current investments to pay off your home loan EMIs, doing so can negatively impact your long-term financial health. Therefore, it is better to include the estimated EMIs for home loans in your emergency fund for at least six months. This allows you to continue making EMI repayments even if you run into financial difficulties.

Compare home loan offers from multiple lenders

Interest rates, loan amount, LTV ratio, loan terms, processing fees, and other associated costs for home loans can vary widely from lender to lender depending on the credit risk assessment of loan applicants. Because home loans tend to be of greater value and have longer terms, even a small difference in interest rates can have a long-term impact. Therefore, home loan applicants should do extensive research and compare the home loan facilities offered by as many banks and home finance companies (HFCs) as possible before settling on a particular one.

Home loan applicants should first approach lenders with whom they have existing deposit or loan relationships, as many home lenders offer preferential interest rates and other terms to their existing customers. Then they should visit online financial marketplaces to evaluate the interest rates and other home loan features offered by other lenders.

Loop in a co-applicant to improve creditworthiness

Many home loan applications are rejected due to low credit rating, insufficient income, high EMI obligations, etc. of the home loan applicants. Such borrowers can improve their credit score and chances of approval by bringing in a co-applicant, preferably someone with a steady income and good credit. Note that accepting a female co-applicant can earn an additional 0.05% interest rebate from some lenders.

(By Ratan Chaudhary – Head of Home Loans, Paisabazaar)

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