This article is authored by Rajiv Raj, Director & Co-Founder of CreditVidya.
Earlier I had advised individuals on hybrid home loans. This time, I want to guide readers how to go about planning for a home loan. But let me start by explaning what happened to one our customers. Raj Mundra, a Bangalore-based techie, wanted to opt for a home loan.
Last year, when he pulled out his personalised credit score from Cibil.com, it stood at a healthy score of 785. The Credit Information Bureau Limited, or CIBIL, is India’s first credit information company founded in 2000. A couple of months ago, he applied for a home loan for a property in Bangalore, which was rejected as his credit score had gone down to 554. Naturally, Mundra was shocked. He had always made his loan payments on time. On probing, he found that a multi-national bank had reported a credit card with 150 days past due (DPD) and an overdue amount Rs 65,000.
Mundra checked his old records to realise that it was an unsolicited credit card account and he had returned the credit card to the bank. The bank had also spelt his name incorrectly. After requesting the bank to close his account, he had not received any communication from the bank. So, he considered it a closure.
He contacted the bank and produced the statement which the bank had sent demanding a fee of Rs 2,000. He declined, as the card was returned to the bank. The bank realized its mistake and communicated the following to Mundra:
“We wish to confirm you that your card account has been permanently invalidated in our records. As on date, there is NIL balance in your card account.
Accordingly, the appropriate status with regard to your account will be updated in the Credit Information Bureau India Limited (CIBIL) records. This will reflect in your CIBIL Database within 45 working days. Please bear with us till then in the period.”
If you are planning to take a home loan, here is how you should plan for it. As a first step, I suggest you read How to get a good credit score.
3-6 months before taking a loan
Ideally, ask for your CIBIL credit report and check it thoroughly a few months before taking the loan. This will give you time to repair any damages which are pulling down your credit score. Lenders look for a credit score of 750 and above.
If your score is lower than 750 then try to understand why you have a low credit score. Defaults or late payments on another loan? Have you utilized your credit card or previous loans to create a credit history? Are there any misreported transactions? If there any mistakes, it is time to make corrections in your credit report.
It is also a good time to set a budget for your property. You will need to make a down payment of a minimum of 20% of the agreement value for the property. If you do not have that money, ensure you arrange for it in the coming months.
1-3 months before taking the loan
Once you have made corrections in your credit report, it is time to scout around for a lender. Do not apply for a pre-approval as this stage. Any pre-approval application triggers a hard enquiry with the credit rating agency and multiple hard enquires will negatively affect your credit score.
Meanwhile, check the rates of interest on home loans offered by the banks. While comparing rates include administration / processing costs and any other charges to arrive at the total cost. Add these in to understand what will be the final rate of interest that will be payable by you.
Penalty clauses are also an area that needs to be considered. There will be penalty for pre-payment of loans and delayed payments. While all banks include these penalty clauses, some levy a very steep penalty rate. It might make sense to avoid such a bank. Choose a lender who gives you the flexibility to prepay or part-prepay the loan when required.
Just before taking the loan
Before taking the loan, shortlist the banks you find the one best suited to your needs. Ask for the loan documents and do read through them. Ask the bank’s sales person for clarifications if any required.
If you have chosen a property then it is time to take a pre-approval for the loan. Do ensure that the equated monthly installment, or EMI, does not go beyond 40% of your disposable income. It is also important to understand that a longer loan period effectively increases the interest that you are paying.
Negotiate hard for favourable rate of interest and the terms of the loan. Banks are flexible to some extent and with some negotiation you can enjoy a better deal.
