Types of Home Loans in India
Table of Contents
Banks in India offer different types of housing finance options for different purposes. Based on a study of the products offered by some of the top banks, here is a list of the leading types of housing loans in India:
New Home Loans: New Home Loans are offered to eligible customers who are looking to purchase a home or property for the first time.
Pre-Approved Home Loans: Banks offer pre-approved home loans to eligible borrowers once their creditworthiness, income and financial status are taken into consideration for in-principle approval of the loan.
Home Purchase Loans: Home purchase loans are specifically given to borrowers who want to buy a house or flat.
Home Loan for Construction: Home loan for construction is offered to customers who want to build their own house on an existing piece of land.
Plot Loans: Plot loans are loans to customers who want to purchase a piece of land or a plot for the purpose of constructing a house on it.
Home Loan Top Up: Home loan top up is a facility offered by most banks and NBFCs that allows existing customers to borrow a specified amount over and above the existing home loan.
Home Extension/Renovation Loans: Home loans for home extension or renovation are offered to borrowers who wish to renovate/extend their existing house/property.
Balance Transfer Home Loan: Individuals can use the balance transfer option to transfer their home loan from one bank to another. Most people choose this option to get better interest rates.
Home Loan Fees and Charges
Depending on the type of loan you are applying for, the following charges may be levied:
Processing fees: This is a one-time non-refundable fee that is to be paid to the home loan provider after the loan application has been approved. The processing charge varies depending on the bank and the loan scheme you are applying for.
Prepayment charges: Prepayment penalty is the fee you will have to pay the lender if you plan on repaying your home loan before the completion of the loan tenure.
Conversion fees: Some banks also charge a conversion fee when you decide to switch to a different loan scheme in order to lower the interest rate associated with your current scheme.
Cheque dishonour charges: The fee is levied when the loan provider find that a cheque issued by the borrower is found to be dishonoured due to reasons such as insufficient funds in the borrower’s account.
Fees on account of external opinion: In some cases, you might want to consult an external expert such as a lawyer or a valuator for his/her opinion on the loan. This fee should be paid directly to the concerned person and not the lending institution.
Home insurance: The premium should be paid directly to the concerned company during the term to ensure that the insurance policy is running during the home loan tenure.
Default charges: Loan providers also charge a penalty on delayed repayments i.e. if you fail to make your Equated Monthly Instalments (EMIs) or Pre-EMIs on time. The defaulting charges vary from one bank to another.
Incidental charges: This charge covers for the expenses incurred by the bank to recover dues from a borrower who has failed to make his monthly instalments on time.
Statutory/regulatory charges: The fee includes all charges associated with Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI), Memorandum of Entry and Deposit, and stamp duty. You can visit www.cersai.org.in to know more about these charges.
Photocopy of documents: The fee is payable to the bank if you require a photocopy of your home loan documents for any personal needs.
Change in loan term: Some banks also charge a nominal fee if you wish to change the tenure associated with your loan.
What to do if your home loan application is rejected?
You can always reapply for a home loan if your first loan application is rejected by the lender. However, before doing that, you should consider some aspects.
Credit Score: Since housing loans are generally long-term retail Home loans, lenders check the repayment capacity of the applicant before approving or rejecting the loan application. Your credit score plays a major role in determining your repayment capacity against a loan.
If you have a poor score in your credit report, the chances of your loan application being rejected are high. An unsatisfactory credit score is a measure of your creditworthiness that banks and financial institutions consider before processing your loan application. Therefore, it is advisable to go through your credit score and credit report before you apply for a loan.
If you have a poor credit score, consider improving your score by paying off your debts on time before you reapply for a housing loan. If you don’t know what your current score is, you can get your credit score with a credit report on BankBazaar.
Loan Amount: Since buying/building a home is a one-time investment, we often overlook the financial costs involved. Banks and financial institutions determine the maximum loan you are eligible for by taking your current monthly income. The chances of your application being rejected are high because of the loan you have applied for.
If the loan amount applied for a loan exceeds your eligible loan amount, the lender may decide to reject your application. In such cases, you can consider increasing the down payment on your home loan to reduce the loan amount.
Other ongoing Home loans: Banks may also choose to reject your home loan application if you have too many ongoing Home loans. Because home loan lenders see to it that not more than 50% of your monthly income is contributed towards your loan repayments, any other ongoing long-term loans may result in your application being rejected.
Taking out too many ongoing Home loans will not only affect your personal finances but also affect your repayment capacity. Therefore, it is advisable to clear the ongoing Home loans, if any, before you apply for a housing loan.
Co-applicants: There may be cases where applications are rejected due to low income. In such cases, you may consider adding a co-applicant such as your immediate family member. This will increase the maximum amount you are eligible for as the co-applicant’s income and creditworthiness will also be considered while determining your eligibility.
Employment: In some cases, the applicant’s employment can act as a deciding factor whether the loan application is being approved or rejected by the lender. If the lender finds that you are frequently switching between jobs, your application may be rejected.
Unstable employment can sometimes have a negative impact on your loan application. On the other hand, steady employment with a recognized organization can have a positive impact on your application.
If your housing loan application has been rejected and you are working only for a short period with the current employer. You may want to consider giving it some more time before reapplying for another one.
Documentation: A housing loan involves a lot of documents like identity proof, residential proof, bank account statements, income tax returns, income proofs, property papers, documents approved by the concerned authorities etc. Your lender may reject your loan application even if the required documents are not submitted.
Frequently Asked Questions on Home Loans
What is a home loan?
A home loan is a secured loan taken from a financial institution for the purpose of purchasing a residential property. You can avail home loan for move-to-move purchase of a house or apartment or an under-construction house. Home loans can be availed from both banks and non-banking financial companies (NBFCs).
These have different interest rates that are often tied to your credit score. Home loan tenure is usually up to 30 years and is to be repaid in equal monthly installments. You can also avail tax deduction on both the principal and interest component of your home loan under Section 80C and Section 24 of the Income Tax Act respectively.
Which is the best bank for home loan?
Before signing up for a home loan product, it is best that you compare the Home loans offered by various banks and lending institutions. When comparing, consider the interest rate, loan-to-value (LTV) ratio, processing fees and tenure offered by the bank. Use a home loan EMI calculator and calculate your EMI based on these factors. Compare multiple home loan products from different banks using this method. Also, some lenders offer home loans with reduced interest rates from time to time. Also keep it in mind while taking loan. Also, know your requirements before applying. You can go through the above list to get an idea of which bank home loan will suit your requirement.
How long does it take to get a home loan approved?
Generally, home loan approval takes 3 to 4 weeks. However, you need to keep some factors in mind for a better understanding. First of all, you need to get your home loan pre-approved from the respective lender to get your loan sanctioned. However, pre-approval does not always mean that your loan will be disbursed immediately and depends on certain external as well as internal factors. For instance, if there is a delay in submitting documents related to property or income, your loan approval may be delayed.
What factors determine my home loan eligibility?
Banks/financial institutions consider the following factors while determining your loan eligibility:
Type of Resident [Indian Citizen, Non-Resident Indian (NRI), Person of Indian Origin (PIO)]
Number of co-applicants
Income of co-applicants
Other ongoing loans, if any
What is the difference between fixed rate and floating rate home loans?
The interest rate associated with a fixed rate loan remains constant throughout the tenure of the loan. On the other hand, interest rates applicable on floating rate loans may be revised from time to time based on RBI’s key policy rates. In case of floating rate type of loan the same monthly installments may increase or decrease depending on the prevailing RBI rates.
Can I prepay my outstanding home loan amount?
Yes, you can choose to pay off your outstanding loan amount in part or in full before the maturity of your loan. While banks do not charge any prepayment fee on floating rate loans, fixed rate home loans charge a penalty of up to 2% of the loan amount if prepaid through refinance.
Can I get tax deduction on my home loan?
Yes, you can get tax benefits on both interest and principal paid against your home loan. As per Section 80C of the Income Tax Act, you can deduct Rs. Can get deduction up to 1.50 lakhs.
Under Section 24 of the IT Act, taxpayers are also eligible for benefits of up to Rs.2 lakh on interest paid against home loans annually.
Who can be a co-applicant?
A co-applicant can be an immediate family member such as your spouse, your parents or even your older children. It is also mandatory for all the co-owners of the property to be co-applicants while applying for the loan. However, a co-applicant need not be a co-owner.
What is Pre-EMI?
Pre EMI is defined as the interest that is paid to the loan provider until the full loan amount is disbursed. The pre-EMI is payable on a monthly basis till the last disbursement, after which the regular EMI comprising principal and interest components will apply.
What types of home loans are available?
Home Purchase Loan: Suitable for those looking to purchase a new house/flat or under construction property.
Home Construction Loan: Those who want to construct a house/property as per their own plan can avail it.
Home Conversion Loan: Suitable for people who want to move and buy another property when they have purchased a home with a home loan.
Plot Loan: Can be availed by eligible borrowers who wish to purchase a residential plot for the purpose of construction of a house/dwelling unit.
Home Improvement Loan: This loan is sanctioned to those who want to repair/improve/renovate an existing property.
Home Extension Loan: Suitable for those who want to extend/extend/alter their existing structurean Balance Transfer: Can be availed by those who wish to transfer their outstanding home loan balance from their existing lender to another lender due to reasons
such as reduced interest rates or better customer service.
Home Loans for NRIs: These home loans cater to the housing needs of NRIs in the country. They also include PIOs and OCIs.
What is MCLR?
Marginal Cost of funds-based Lending Rate is the benchmark rate set by a lending institution below which they cannot provide Home loans to their customers.
Can I switch from a fixed rate to a floating rate during my home loan tenure?
Yes, you can switch from a fixed to floating rate of interest on your home loan during the repayment tenure. However, you will be charged a conversion fee by the lender in such cases.
When does my loan repayment period begin?
The loan repayment period begins only after the loan provider has disbursed the entire home loan amount. However, you will be required to pay the interest i.e. Pre-EMI on the partially disbursed loan on a monthly basis, in most cases.
Can I take 2 home loans at the same time?
Yes, you can take 2 home loans at the same time provided that your lender approves your eligibility to manage 2 Equated Monthly Installments (EMIs) at the same time. However, the tax benefits on the second house will be different and you will be required to establish the property as self-occupied or let-out property.
Can I get 100% financing on a home loan?
No. Banks/financial institutions do not grant 100% of the property value as home loan. Home loan lenders establish a margin on their loan i.e. the percentage of the cost that the lending institution will be covering. For example, if the margin on the loan is set at 10%, the bank will cover 90% of the property value. In such cases, you will be required to make a down payment of the balance amount, i.e. 10% in order to cover for the rest of the cost.
Does having a personal loan affect home loan eligibility?
When determining your home loan eligibility, the lender makes sure that your monthly repayments are not being affected by any other ongoing Home loans such as personal loan, two-wheeler loan, etc. However, other ongoing loans ultimately tend to affect your eligibility as your overall spending power is reduced. If your other loan commitments exceed 50%-60% of your monthly income, your home loan application may be rejected.
Is personal loan better than home loan?
If you are buying a house, home loan is the best option. Usually you will not be eligible for a personal loan for as high an amount required for the purchase of a house. If you want extra money for non-specific personal needs, then go for a personal loan. Home loans also have an added advantage of top-up Home loans wherein you can request a top up on your loan amount to cover additional needs such as furnishing your house.
Can I buy a house with two loans?
No, you cannot avail two home loans for the same property. Any such practice will be considered fraudulent. The Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI) ensures that fraudulent practices such as availing two housing loans for the same asset/property are prevented.
How do joint home loans work?
A joint home loan can be availed by adding a co-applicant such as your spouse, parents, or an immediate family member on your application. Adding a co-applicant will increase your home loan eligibility as the lending institution will also be considering the co-applicant’s income and credit score when determining your loan eligibility. All co-owners of the property are required to be the co-applicant for a loan. However, the co-applicants need not necessarily be the co-owner of the concerned property.