A constant rise in housing prices has made many opt for home loans to meet their dream of owning a home. However, LIC Home Loan or other home loan lenders approve home loan applications based on their credit risk evaluation of home loan applicants made based on their income, repayment capacity, credit score etc. Long term repayment tenures of up to 30 years and huge loan amounts even make it crucial for many home loan applicants to become financially prepared before availing of such financial commitments.
Here, we will present a stepwise approach that LIC home loan applicants or applicant’s of other home loans must adopt for availing home loan at the best LIC home loan interest rates or lowest interest rate from other home loan lenders:
Evaluate your credit report
All lenders consider 750 and above credit scores to be excellent. Thus, the ones with such credit scores hold higher LIC home loan or other home loan approval chances. Most of the lenders consider a 750 and above credit score as good. Thus, the ones with such a score hold higher chances of home loan approval. Many of the lenders even have begun to provide preferential rates to home loan applicants with excellent credit scores. Thus, a prospective home loan applicant must initially evaluate their credit report before submitting an application for a home. Doing so permits those applicants with a credit score of below 750 to take correct measures to initially ameliorate their score and afterwards place an application for a LIC home loan or for a home loan with another lender on availing a higher score.
Note that applicants of home loans can simply avail their credit report from each of the bureaus every year. Also, home loan applicants can visit online lending markets to fetch credit reports that come with monthly updates.
Build a corpus for a down payment of a home loan
As per guidelines by RBI, home loan lenders, including LIC home loans, can fund up to 75 to 90% of the property’s value in the form of a home loan. The final proportion of the home loan gets fixed according to the lender’s credit risk evaluation of the home loan applicant. The remaining component requires contributions by applicants themselves from their own funds. Thus, applicants of the home loan must aim to accumulate at least 10 to 25% of the property’s value before submitting their home loan application.
Note that contributing a higher home loan amount from your own funds helps to lower your interest component. Opting for higher down payment contributions even enhances one’s chances of availing of home loan approval because it lowers the lender’s credit risk. However, in this process, you should avoid compromising your contingency fund, and important financial goals in an attempt to make higher down payment contributions, as doing so might propel you to apply for high-cost loans to deal with financial emergencies or meet financial goals.
Compare amongst multiple lenders.
Processing fee, loan repayment tenures, interest rates, loan amount, LTV ratio provided by the home loan lenders can drastically differ based on the home loan applicant’s risk evaluation. With multiple lenders, including LIC home loans available for a home loan, it might not be an apt option to approach each home loan lender to strike a comparison. A subtle way to do so is to approach online lending markets to compare among different home loan offers based on the home loan applicant’s credit score, monthly income etc.
Evaluate your EMI affordability
Home loan lenders consider the Home Loan applicant’s repayment capacity at the time of evaluating his/her home loan application. Generally, lenders need the home loan applicants’ month on month loan repayment obligation involving the existing loan EMI and new loan EMI to be under 60% of their monthly income. The ones exceeding this specific limit usually have reduced chances of availing an approval on their LIC home loan application or application with other lenders.
Thus, ensure to contain your month on month loan repayment obligation to be under 60% of your monthly income before you submit an application for a home. In case it does not, first, consider lowering your existing debts by either foreclosing or prepaying some of your existing loans. Also, you can choose for longer repayment tenures or opt for making a higher down payment amount to lower your overall EMI outgo for enhancing your chances of availing home loan.
Formation of sufficient contingency fund
Financial emergencies such as illness, job loss etc., generally are unannounced in nature as they can severely impair your cash flow, income, financial goal corpuses and loan repayment capacity. Inability to repay your loan EMI on time not only costs heavy penalties but even affects your credit score. Though one always has the option to redeem their financial goal linked investments to repay their home loan EMIs. Doing so may massively affect your long term financial health.
One of the prudent ways to face such situations is to form an adequate backup in liquid instruments to face emergencies. This backup must be at least six times your month on month unavoidable costs, including your existing EMIs as well as new home loan EMIs. Thus, as soon as you start your home loan planning, try and simultaneously enhance your emergency fund size by nearly six times of expected new loan EMI. As any financial emergency can come up at any time, make sure to park your backup fund in liquid instruments such as fixed deposits and savings bank accounts.
The next cost-effective option can be to choose home loan variants such as overdraft or home loan interest saver option. This specific option provides one with an overdraft account in the form of savings or a current account attached with their home loan account. The home loan borrowers can deposit their surplus fund in an overdraft account & later on withdraw as and when the need for funds come up. As interest components of a loan account are calculated after reducing the monthly average balance (MAB) of the overdraft account from the outstanding loan amount, parking your monthly surpluses in an overdraft account serves a similar purpose as prepayments. Note that, availability of easy liquidity in case of overdraft accounts makes it one of the efficient tools for parking one’s emergency fund.