A steady rise in housing prices has made home loans one of the sole means for many to realize their dream of owning a home. However, lenders approve the home loan after credit risk evaluation of applicants based on their credit score, income, repayment capacity and others. Loan tenures of up to 30 years clubbed with big-ticket loan amounts of Bank of Baroda Home Loan or other lenders’ home loan make it crucial for the home loan applicants to become financially prepared before accepting such long term financial commitments.
Here, we will state step by step approach for preparing the applicant for Bank of Baroda Home Loan or other lenders’ home loan:
Evaluate your credit report
Credit score is one of the most pivotal parameters factored in by Bank of Baroda Home loan or other lenders. Those with a higher score of 750 or more hold higher chances of home loan approval, while those with lower scores have reduced chances. Note that many lenders have also begun providing preferential rates to home loan applicants having excellent credit scores. Thus, prospective applicants must initially evaluate their credit report before submitting an application for a Bank of Baroda Home loan or other lenders’ home loan. Doing this will permit those with poor scores to undertake apt steps to initially ameliorate their score and then apply for Bank of Baroda Home Loan or other lenders’ home loans with a higher credit score.
Note that applicants of Home Loan can avail of a free credit report by approaching four credit bureaus each year. Alternatively, they can even approach financial lending markets to fetch free credit reports along with monthly updates.
Build a corpus for contributing towards the home acquisition
As per the guidelines of RBI, home loan lenders can fund up to 75-90% of the property’s market value via a home loan. Note that the final proportion to be funded is decided according to the lender’s credit risk evaluation of the applicant. The remaining amount requires to be contributed by the loan applicant from his own funds. Thus, applicants must aim to at least accumulate 10 to 25% of the property’s value before submitting the application for a home loan.
One should always try and contribute a higher down payment amount from their own funds as it would lower their interest cost. Opting for higher contributions even enhances chances of availing of home loan approval because it lowers the lender’s credit risk.
However, ensure not to compromise your emergency fund and important financial goals to make higher contributions as a down payment for a home loan. Doing so might propel you to apply for costly loans to face financial emergencies or to fulfil important financial goals.
Ensure to compare amongst multiple lenders
Loan repayment tenures, rate of interest, processing charges, LTV ratio and loan amount provided by home loan lenders can differ widely based on the home loan applicant’s risk evaluation. With various lenders offering home loans, including the Bank of Baroda Home loan, it might not be possible to reach out to each and every lender for striking a comparison. One of the best ways for doing so is to approach online lending markets to compare different home loan offers offered by different lenders on the basis of the applicant’s credit score, monthly income etc. When you compare, ensure to factor in Bank of Baroda home loan interest rates or interest rates being offered by other lenders as opting for a lower interest rate can help reduce your overall interest cost.
Evaluate your EMI affordability
Lenders consider the applicant’s repayment capacity of a home loan when evaluating their home loan application. Usually, lenders require the applicants’ repayment obligations on a monthly basis, including the new loan and existing loan EMI, to be under 60% of their GMI or NMI. The ones exceeding this specific limit usually have reduced chances of getting their application approved.
Thus, ensure that you contain your repayment obligation under 60% of NMI or GMI before finally submitting your Bank of Baroda Home loan application or home loan application with another lender. In case your monthly repayment obligation is not under 60% of your GMI or NMI, you must first bring down your existing EMI by foreclosing or prepaying some of your existing loans. Alternatively, you may even choose longer repayment tenure or a higher down payment to lower your overall EMI amount and enhance your chances of availing home loan.
Form sufficient exigency fund
Financial emergencies such as illness, job loss etc., generally are unannounced in nature and can extremely affect your financial goal corpus, income cash flows and your loan repayment capacity. Failing to repay your loan EMIs by the due date not only attracts heavy charges but even negatively impacts your credit score. While in such situations, one can redeem their investments to repay their home loan EMIs, opting for this route can extremely affect their long term financial health.
One of the prudent ways to face such a situation is to form a sufficient emergency fund. The fund must be at least six times your monthly unavoidable expenditures, involving your existing loan EMIs and new home loan EMI. Thus, the moment you start off with the plan for availing of a home loan, ensure to simultaneously increase your emergency fund size by nearly six times your home loan’s expected EMI amount. As emergencies can come up anytime, make sure to park your funds in instruments that are extremely liquid in nature, such as fixed deposits and savings bank accounts.
The next prudent and cost-effective alternative can be to choose home loan variants such as the home loan interest saver option or the overdraft option. This specific option comes with an overdraft account, which may be in the form of savings or a current account directly connected with your home loan account. Home loan borrowers can deposit all their surpluses in such overdraft accounts & withdraw the amount whenever they need any funds. As the interest component of the home loan account gets calculated after reducing the monthly average balance of the overdraft account from the outstanding home loan amount, parking all your surpluses in the overdraft account can help serve the same motive as in the case of prepayments. On the other side, the availability of easy liquidity provided by such overdraft accounts makes it an efficient tool to park your emergency fund.