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Home loan applications- Top misconceptions worth avoiding

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Home loan applications- Top misconceptions worth avoiding

There are several misconceptions which often come into the picture when it comes to applying for a home loan. There are some myths and wrong perceptions which often hinder decision making at the time of applying for a home loan. However, it is important to be aware of these common misconceptions in order to avoid careless mistakes while availing of a home loan. This is because a home loan is probably the biggest and most important loan that you will ever take in a lifetime. You should ensure that you get it right by all means.

Here’s looking at the commonly held misconceptions regarding home loan applications:

  1. It is better to choose a shorter loan tenor- Shorter home loan tenors will naturally have lower costs of interest for the home loan in comparison to longer tenors, assuming the same rates of interest. However, shorter loan tenors also mean considerably higher monthly EMIs in comparison to loans with a longer tenor. The huge EMIs may negatively impact your financial position if it leaves you with too little to invest in other instruments for accomplishing future goals. An aggressive tenor for early repayment without a proper buffer may also lead to EMI defaults in case of any financial emergency. This will again impact your credit score negatively, thereby eating into your future eligibility for loans.
  2. Lowest interest rates are all you need- The home loan interest rate is one of many factors to be looked at, while choosing the right lender. The other aspects include the processing fee, LTV (loan to value) and the loan tenor. For instance, extension of the lowest interest rate by a lender may require the borrower to choose a lower LTV ratio which means that you will have to make a higher down payment. Some lenders also charge lower rates of interest for customers availing of loans for a longer period of time. Similarly, those lenders charging the lowest possible rates of interest may charge higher processing fees as well. Always take a well-rounded look at things and do not just plunge for the lowest rates of interest.
  3. A good credit score is a guarantee of the loan being approved- The credit score is not the only aspect used for assessing your creditworthiness. Other key aspects include your monthly income, age, employer’s profile, stability of the job and so on along with the property title, location and existing EMI payments. Each of these factors plays a really vital role when it comes to analyzing your credit profile. Not meeting the criteria in this case will lead to your home loan application getting rejected even if you have a good credit score.
  4. You will have to pay penalties for home loan prepayment- Many borrowers put off prepayments for their home loans for this misconception. The RBI has already barred HFCs and NBFCs from charging prepayment penalties or foreclosure charges in case of loans with floating interest rates. This has naturally freed up floating rate home loan customers with regard to foreclosing loans or making prepayments without bearing any penalties. Even when there are fixed rate home loans, many lenders do not have prepayment charges if the borrower prepays the loan with his/her own fund sources.
  5. Fixed rates are better than floating rates- Home loan interest rates are continually coming down in the market and are possibly at their lowest levels now. As a result, simply going for a fixed-rate home loan may be a mistake. Those lenders offering fixed rate home loans, usually charge higher rates of interest for lowering their own interest rate risks. Mixed rate home loans are sometimes offered where rates will be fixed for a certain period and then they will become floating rates. Interest charged in the fixed rate period will be higher than the floating interest rate at the time of sanctioning of the home loan. Floating interest rates, while more volatile (your EMI will keep changing regularly), may give you more interest savings on the loan.
  6. It is always better to apply directly for a home loan- Many home loan borrowers contact several lenders directly for learning about the best interest rates and other aspects. However, did you know that each time you directly apply for a loan with any bank or housing finance company (HFC), the lender will naturally be contacting credit bureaus for getting your credit report and assessing your creditworthiness. These are considered as hard enquiries and each enquiry will lower the credit score by some points. Multiple applications for loans will naturally lower the credit score multiple times. This will lower your eligibility for the home loan in the first place. You should instead look for the right online platform where you will find all the guidance and information necessary for choosing a suitable lender along with being able to compare rates, eligibility aspects and other factors.

These are thus the commonly held misconceptions that you should do away with when it comes to applying for a home loan.

 

 

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