A Complete Guide to Home Loan Management

Securing a home loan to buy the home of your dreams has become easier with digitization and the presence of various lenders. However, effective financial planning is vital for managing your home loan responsibly at every stage, ensuring a smooth and stress-free experience.

While borrowers often focus on due diligence before applying for a home loan, it's equally important to consider key factors during and after the loan application process.

Given that a home loan is a long-term commitment, thorough research and planning is necessary at each stage of the loan application journey. To give you a holistic view of financial planning to help you effectively manage your home loan, here are a few tips:

Before Applying for a Home Loan

1. Evaluate Current Investments

Before initiating the home loan process, evaluate your current investments. A home loan is a major financial commitment that should not be taken lightly. Examine all your investments to understand your financial position accurately.

This step is crucial as it significantly influences the home loan amount you can comfortably afford. It's important not to strain yourself financially, as taking on too much debt can lead to significant stress. When reviewing your investments, categorize them into two groups: necessary and non-essential.

Necessary investments may include insurance premiums, mutual fund SIPs, and PPF contributions. Non-essential investments, on the other hand, could include high credit card balances, buy now pay later schemes, and lifestyle-related loans. Cutting back on non-essential expenses can help you manage your finances more effectively and potentially qualify for a larger home loan.

2. Measure Income to Expenditure Ratio

Lenders carefully evaluate your income and debt-to-income (DTI) ratio when assessing a home loan application. The DTI ratio represents the percentage of your income used to repay current debts. A high income and low DTI ratio significantly improve your home loan eligibility.

Moreover, keeping your expenses and existing liabilities low makes it easier to manage EMI payments, and vice versa. It's also important to assess your emergency fund. This fund is essential for handling unexpected events such as job loss or hospitalization, which can disrupt your regular income.

The COVID-19 pandemic has established the importance of having an emergency fund equivalent to at least a year's worth of expenses. Before applying for a home loan, use an EMI Calculator for your Home Loan to estimate the EMI you'll need to pay, and factor this amount into your emergency fund.

3. Maintain a Good Credit Score
   A good credit score and credit history are crucial factors in the home loan application process. A good credit score, typically above 750, streamlines the application process and allows you to secure the loan on favourable terms. Conversely, a poor score complicates the process significantly.

Having a less-than-ideal credit score doesn't mean you won't get a home loan, but it may come with stricter terms and less flexibility. Building a good credit score takes time and requires consistent effort. To improve your credit score, ensure you:

1. 1. Pay your EMIs on time

1. 2. Fully pay off your credit card balances

1. 3. Maintain a low credit utilization ratio

1. 4. Avoid applying for multiple loans within a short period

1. 5. Close any existing small loans

Regularly check your credit history for any anomalies and report them to the relevant bureau. Identity theft, where loans are fraudulently obtained using individuals' PAN details, has been reported. Even celebrities have fallen victim to such scams. Therefore, it's important to monitor your credit history regularly through credit bureaus.

4. Select the Loan Amount Carefully
   Ensure you borrow an amount that you can comfortably repay. Lenders typically do not finance the entire purchase price of a home. You are required to make a down payment, with the lender funding the rest. Usually, lenders approve 75% to 80% of the home's value as a loan.

For example, if the home is priced at INR 1 crore, you may receive a loan of INR 75 lakhs, requiring you to pay the remaining INR 25-20 lakhs as a down payment. Carefully consider the loan amount, as it directly impacts the EMI. A higher loan amount results in a higher EMI.

5. Research on the Lowest Home Loan Interest Rates
   When searching for home loans, interest rates are typically a top priority. This is because the home loan interest rate directly impacts the EMI. Nowadays, lenders often list their home loan interest rates on their websites. You can also use aggregator portals to compare interest rates from different lenders and choose the one that suits your needs best.

However, it's important not to make the interest rate the sole criterion for selection. Other factors to consider include the lender's credibility and reputation, repayment flexibility, value-added services, and customer service.

Also Read: Is Interest Rate Everything in Home Loans?

Before you apply for a Home Loan:

1. Manage Down payment
   The down payment is a critical factor in home buying. Lenders do not finance the entire home value, so you must pay a portion upfront. While the down payment is less than the loan amount, it is still significant. Therefore, it is advisable to start accumulating it early.

To save for the down payment, consider investing in financial instruments like debt mutual funds and bank fixed deposits. Starting early allows your money more time to grow, leveraging the power of compounding. Start saving as soon as you begin earning to build a substantial down payment amount.

2. Get Home Loan Insurance
   Home loan insurance is often overlooked but is a crucial aspect of the home-buying process. It provides financial protection in the event of an unexpected incident. In such cases, the insurer pays off the outstanding home loan amount, ensuring your financial security.

After you apply for Home Loan

1. Manage Repayment
   The EMI begins once the lender approves the loan and credits the amount to your account. Timely EMI payments are crucial for maintaining a good credit score and a positive credit history. The NACH e-Mandate system ensures prompt EMI repayment and reduces the risk of missed payments. Ensure you have sufficient funds in your account to avoid EMI bounces. It's also wise to use windfalls such as yearly bonuses to make pre-payments, reducing the principal amount and the EMI.

Making pre-payments, either in part or in full, from time to time can help you repay the loan before its tenure ends. This can lead to savings on the total interest paid for your Home Loan.

2. Opt for Tax Benefits
   Home loans offer tax benefits under different sections of the Income Tax Act, 1961. Tax deductions are available for both the principal and interest payments under sections 80C and 24 respectively. Click here to learn more about the tax benefits you can avail on Home Loans.

The tips outlined above ensure you remain financially prudent and secure at every step when you apply for a home loan. They contribute to a smooth, seamless, and trouble-free experience throughout the process.

Also Read: Myth vs. Facts: 4 Home Loan Myths Busted

Godrej Capital is the financial services arm of Godrej Group which offers home loans, Loan Against Property and other secured loans. With innovative products and offerings, customers can get hassle-free loans on easy terms and conditions. Click here to know more about the offering.

Additional Benefits for Women Entrepreneurs:

Beyond the core MSME schemes, women entrepreneurs in India enjoy several additional benefits designed to level the playing field:

• Relaxed Collateral Norms: Some schemes offer easier loan approvals with minimal or no collateral requirements
• Subsidies on Machinery and Equipment: Financial assistance is provided to purchase essential machinery and equipment, reducing the need of initial capital investment burden.
• Reservation in Government Procurement: Women-owned businesses get a specific quota in government procurement contracts, increasing their access to market opportunities.

Finding the Right Scheme: Your Pathway to Success

The Indian government offers a diverse range of MSME schemes and business loans for women. They cater to different business sectors, stages, and financial needs. To identify the most suitable option for your venture, consider the following factors:

• Your Industry: Different schemes cater to specific sectors like manufacturing, services, or coir. Choose the scheme that aligns with your industry focus.
• Business Stage: Are you starting afresh (greenfield) or looking to expand an existing business? Certain schemes prioritize new ventures, while others offer assistance for growth and development.
• Financial Requirements: Study your capital needs and choose a scheme that provides an adequate loan amount with suitable repayment terms

Accessing MSME Schemes:

The process for availing benefits under these schemes and obtaining small business loans for women is generally streamlined. You can visit the websites of the Ministry of MSME (MSME) https://msme.gov.in/, Startup India https://www.startupindia.gov.in/content/sih/en/women_entrepreneurs.html, and DCMSME (Development Commissioner for MSME) https://msme.gov.in/women-entrepreneurs to explore available schemes and application procedures. Don't hesitate to reach out to designated government officials or women entrepreneur support organizations for further guidance.

Disclaimer:

The contents of this article are for information purposes only and not a financial advisory. The information is subject to update, revision, and amendment and may change materially.
The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements.
Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any decisions, financial or otherwise based on the contents and information mentioned. For more information, please visit www.godrejcapital.com