Biggest question is how are you going to fund ?
– Loan or internal savings (cash buyout)?
A. Total Ownership cost
Before one starts drawing up a purchase plan, it is most essential to arrive at the tentative total ownership cost during the time one holds the property.
A property incurs different costs when buying a property. Just like you calculate total ownership costs of vehicles, we can also arrive at the total ownership cost of a property by understanding different expenses to be incurred during the lifetime of the property owned.
These are the costs/expenses incurred during the pre-purchase, purchase, post-purchase & during disposing/selling the property.
Below is an indicative chart describing the costs to arrive at total ownership cost. One can add or delete any expense that can be relevant or irrelevant.
Once you arrive at the expected cost, we can start planning for the sources of funds assuming your affordability & needs meet at a common point.
Arriving at the total ownership cost helps you to take the next logical question –
Can I buy the home from my savings accrued or should go for a home loan?
We will discuss on the loan part here as funding from own sources is nothing but arriving at total amount available in your savings. But availing a home loan is a whole new journey filled with defined processes & compliances before your financier evaluates, approves, releases the amount, mortgages your home & starts collecting EMIs (Equated Monthly Instalments)
Let us now understand the process in the simplest language as the final process depends upon bank to bank & their credit policies. But the below aspects & approaches are common to all financiers while processing your loan. So a ready understanding of these processes will help you navigate the journey hassle-free.
B. The funding agencies & Options
Post-liberalization & evolution of the banking system, a home buyer now has a lot of options to choose from when seeking funding/loan to buy his/her dream home. Below are few types of funding agencies one can look at when looking for a loan to buy the home.
Most of the banks have a dedicated Home Finance subsidiaries like ICICI Home Finance Company – a subsidiary of ICICI Bank Ltd. or say CanFin Homes Ltd.- a subsidiary of Canara Bank Ltd.
A Home loan can be extended by a variety of funding agencies like:
- Home Finance Companies
- Banks
- NBFCs
- Employer allowance
- Private registered/Un-registered lenders
C. The Home Loan Process
I. The role of CIBIL & its importance:
CIBIL or the Credit Information Bureau of India Ltd. is an independent credit ratings agency in India & has been a pioneer in computing & rating the credit worthiness of the people or companies looking for loan funding. Most of the private & many nationalized banks, NBFCs, employers etc. are subscribed members to this bureau. These member organizations share the details of the loans extended & their repayment history with CIBIL. CIBIL in turn computes these reports & publishes a parameter-based credit rating scores to the people.
You can visit their website for more information: https://www.cibil.com/
It is important to have a CIBIL score of more than 600 to get a well negotiated bank loan.
II. Loan Eligibility:
Your eligibility to avail a home loan depends on your credit ratings, existing relationships with the bank, bank’s credit policy on eligibility etc.
But as a common understanding every bank or financial institution willing to offer a home loan assesses an borrower’s eligibility & capability through some common criteria. A common approach at arriving your eligibility can be as per below chart. An Excel sheet is also attached to calculate the approximate loan you can get as a head start before you approach any financier.
If you look at the chart above, the first thing a banker determines is how much is yours ( and if you wish to add your spouse too) take home salary p.m. On this Net Salary, most of the financiers take out 50% as your domestic financial requirements like fulfilling livelihood expenses, education, leisure etc.
They will allot around 50% of your net salary to take as the benchmark to further calculate the actual EMI you can afford every month to arrive at the loan amount. Some banks even discount up to 70% of your net salary as your livelihood expenses.
Once they arrive at this amount, commonly called as INSR (Income to Net Salary Ratio), they will arrive at your FOIR (Fixed obligation to Income Ratio)
Fixed obligation to Income ratio is nothing but adding all your monthly financial obligations like existing vehicle loans, employer loans, education loans etc. & then deducting from the INSR to arrive at a ratio. In our chart above, the average ratio is 32% (which is =sum(34+30)/2.
The banker will assume that out of INSR of Rs 1,00,000/- (Yours & your spouse’s combined), Rs 32,000/- is the fixed monthly combined obligation or 32% of the INSR.
The banker will now assume that Rs 68,000/- can be dedicated & made available for a new loan servicing per month i.e. the EMI. Based on this amount he will calculate the amount of loan that can be sanctioned to you & your spouse together.
Note: Loan obligation can be on both i.e. self & your spouse, but the ownership of the property (home) can be in the joint name or either of you.
Eligibility with respect to applicants: It is important to keep in mind that the banks accept certain joint loan applicants only who are immediately related to you. Below is an indicative list of relationship that are acceptable to the bankers to add as joint loan applicants.
- Spouse
- Father
- Mother
- Unmarried brother
- Unmarried sister
- Son or daughter
III. Documents for loan pre-sanction:
Banks or the financial institution processing your loan proposal will require certain documents to assess process & approve the loan. Every financier has his own checklist of documents to be submitted, but they can be broadly classified as below:
Basic KYC documents:
| SL No | Document Category | Document |
| 1 | Application Form | Loan Application Form of the financier duly filled with all details required & signed along with photos attached |
| 2 | For salaried borrowers: | |
| Identity proof | Copies of Passport, PAN card, Voter identity card, Driving license etc. | |
| Mandatory | Aadhar card & PAN card | |
| Address proof | Passport, voter identity card, Driving license, Aadhar card, bank account statement, electricity bill, rent/lease deed, ration card, telephone bill etc. | |
| 3 | For business borrowers: | Company registration certificate Partnership deed if it is a partnership firm Memorandum & Articles of Association for Pvt. Ltd. companies Latest list of shareholders & Directors with their DINs etc. |
Income documents:
| SL No | Borrower Type | Document |
| 1 | Salaried | – 3 to 6 months salary slips – 6 months bank statement that shows credit of the salary into the account. – 6 months bank statement of other bank accounts Held latest or last 2 yrs Form 16 statement – Repayment proof ( Loan statement of any existing fixed obligations viz. loans) |
| 2 | Business/self employed | – Income tax return of the firm for last 3 yrs with computation of income or full copy of ITRs – Individual income tax returns for last 3 yrs. – Financial statements for last 3 yrs along with audit report if audited (If not audited, an CA attestation along with self assessment tax challans may be mandatory – Form 26AS for last 2 yrs – Rent agreement, ownership documents, bank credit proof if the borrower has rental income – Proof of any other additional income not computed in the ITR – One year bank statements of all company accounts as well as individual SB accounts if it is a partnership, Pvt. Ltd. or public compan |
Additional Documents for loan sanction – For NRIs – Please check with the specific banker as it varies from financier to financier.
Post-sanction documents: These will also vary from financier to financier. Please check wherever required.
Post sanction disbursement documentation: These will also vary from financier to financier. Please check wherever required.
IV. Loan repayment options
With the evolution of the banking system, the funding institutions have introduced different ways or options of loan repayment to their buyers. Among these options, some provide flexibility in repaying the loan, while others are linked to the construction progress or status of the home. Home loan companies offer these options to derive benefit to both, the borrower & the lender. Some options even increase the repayment capacity of the borrower along with some tax benefits.
Let us briefly discuss the various options offered by the Home Finance Companies. It is important to remember that the banker offers these options at their sole discretion & their assessment of the borrower.
1. Equated Monthly Instalment (EMI):
This is the most common option given for repayment. Each EMI is a fixed amount throughout the tenure of the loan repayment. It is made up of interest payable on your loan and part principal repayment. During the initial years, the interest component in the EMI will be higher & the principal component will be lower. As the tenure gets close to completion, the interest component decreases & the principal component increases.
You can know of a sample EMI for the full tenure of the loan as per the EMI calculator attached.
2. Delayed EMI scheme (loan moratorium):
This option offers the home loan borrower to begin the repayment of their home loan later. In this option, the borrower is not bound to make payments for a certain agreed period, which can vary from 24 to 60 months. In this period known as moratorium, the home loan borrower will only pay an agreed rate of interest on annual basis – to be paid annually, bi-annually or monthly.
3. Step-Up Repayment plan:
Step up repayment plan is structured in such a way that the EMI will be least initially & will keep increasing at a certain frequency – may be annually or every 3 years.
4. Step-Down Repayment plan:
The opposite option of step-up repayment plan is the step-down repayment plan. In this option, the EMIs increase in the initial years & decrease in later years at a certain frequency. This option suits borrowers who are young & have higher repayment capacity in the initial years before they start families & want their lesser EMI payments.
A home loan borrower can explore all options depending upon his financial profile & the eagerness of his lender to extend a mutually beneficial option.