Before you opt for a home loan

So you have finally decided to buy your own house? With this single decision a chain of other decisions follow, ranging from choosing the property, choosing a home loan offer to deciding the furniture for the new house. But there are many pitfalls that can turn this smooth process into a bumpy one. Here are some of those pitfalls that you should be aware of and avoid.
Topics

Look deep in your wallet before deciding the property

Evaluate market conditions

Debt liabilities

Increase the down payment

Always prepay

The family bank

The processing fee

The fine print

Look deep in your wallet before deciding the property

So you have chosen and set your heart on a house that is perfect! But have you given some deep thought to whether your wallet will be able to handle your dream? Going for a house that you can’t afford to pay for is like eating more food than you can digest. You end up with indigestion.

• Look closely at your lifestyle and financial capabilities.

• Plan for an unfortunate eventuality like loss of job or illnesses and ensure that your wallet will be able to take the pinch for a few months at least.

• Look at your other debt liabilities before going in for the home loan
Evaluate market conditions

• Understand the real estate market and evaluate if the property prices are stable and not likely to fall further

• Do your research on home loan interest rates, see if they are likely to decrease or increase in future depending on the existing market conditions, you may not want to lose out on a good deal because you jumped in too early

Debt liabilities

Having high credit card outstanding and a number of other loans, not only brings the eligibility for higher loan amount down, it also increases the burden of paying all of these debts off.
If your home loan EMI is around 10% to 15% bracket of your income, it would be a smart deal. It would be even better if your total debt liability is within the 10-15% range, but normally, that is not the case, so try to pay off all your high interest/long tenure debts sooner.

Increase the down payment

When you go for home loan, you have to pay around 10% to 15% of the project cost and around 85% to 90% is funded by the bank or financial institution. If you have more than the required amount for ‘down payment’ then pay more, so that your required debt is reduced significantly.

Always prepay

Also, when you have any loan try not to extend the loan to its complete tenure. As and when you have excess cash, try to prepay. For example, you could prepay from your yearly bonuses or from your savings from the salary hikes that are expected to happen periodically. Prepaying can lower the tenure and help you save on interest. However, check with your bank from when you can start prepaying, as banks do not allow prepayment during the first six months or the first year of the loan period. Even when they allow prepayment after this time frame, there still would be a prepayment penalty attached. Just make sure the interest saved does not exceed the prepayment fee that you will need to pay the bank. As long as that is taken care of, prepayment is the best way to close a loan early and save significantly on interest.

The family bank

It is not essential to opt for the same bank that your brother took his home loan from. Well, brotherly love aside it is better to do your own searching in terms of the deals offered by different banks.

Moreover, your brother's offer for the same loan amount and tenure could be different from what is offered to you, as the offers and interest rates vary according to the credit profile of the borrower. The offer that your brother got is according to his credit profile. So, it is always possible that you might be able to get a better deal from some other bank.
The processing fee

If you have nothing in writing from the bank, it is possible that you might lose the processing fee that you pay to bank in case the loan does not get approved.
So, either you get something in writing from the bank or factor in all this money for these kinds of losses.

The fine print

Most of us just close our eyes and sign on the dotted line. What we forget to read are the clauses that are in fine print in the loan agreement. You need to understand the significance and impact of these various clauses before you sign the agreement. Some these clauses to watch out for include the force majeure clause and Reset Clause on Fixed Rates. Read more on these clauses hereInstead of ending up in a financial hellhole it is better to take some time out to read through the loan agreement carefully.

Loan Guarantor — To be or Not to be


Amit Saxena (name changed) is a software professional who was asked by his friend to be the guarantor for a loan of Rs. 2 L. Being a very ‘close friend’ Amit agreed immediately. Six months through the loan the friend disappeared without any trace and Amit was left with the substantial burden of paying off the loan.



This could be a situation where you could be caught up. Many of us at one point in time or other have been asked to be a guarantor for a friend’s or relative’s loan. Our answer to the request may have been based on any reason. However, in a culture like ours where we are prone to help our friends and relatives, it is important to understand the pros and cons of being a loan guarantor.



Topics

Who is a guarantor?

When is it ok to be a guarantor for a loan?

When is it not ok to be a guarantor?

Is being asked for a guarantor an indicator of the credit worthiness of an applicant?

What can happen if the person who I have agreed to be a guarantor for defaults?

Will being a guarantor impact my chances of obtaining another loan?

How should I decide whether to be a guarantor or not?

Who is a guarantor?

A guarantor is someone who agrees to be responsible for the payment of someone else's debt should the latter default on payments. It is important to understand that being a guarantor is not a mere formality to help a borrower obtain a loan. The guarantor is equally responsible for paying off the loan.



When is it ok to be a guarantor for a loan?

Being a guarantor is always risky because you cannot guarantee another person’s behaviour. However, since it is very subjective, the decision to be a guarantor should be based on the knowledge of the borrower’s financial capability to pay off the loan.



When is it not ok to be a guarantor?

If you come to understand that the bank is asking for a guarantor because of it is unsure about the borrower’s repayment capability, it is important to take a close look and understand the borrower’s financial capability yourself.



Is being asked for a guarantor an indicator of the credit worthiness of an applicant?

While credit worthiness is one of the major reasons a person is asked for a guarantor, it also does not necessarily mean that the borrower’s credit worthiness is being questioned. It could be based on other reasons such as:



• The applicant has a transferable job

• The applicant job’s involves frequent travel abroad

• Loan is applied at a place other than the applicant’s permanent address



What can happen if the person who I have agreed to be a guarantor for defaults?

When you sign on the dotted line and agree to become a guarantor, you are legally bound to pay off the debts if the primary borrower defaults. If the borrower does default, then:



• Banks will hound you to clear the debts

• Personal assets such as bank accounts, cash as well as property could be attached (except for provident fund and agricultural land which cannot be attached under any court decree) and you could turn bankrupt

• Your credit standing could get affected; which means that if you need any credit in future, your chances of getting the same could be dim.



Will being a guarantor impact my chances of obtaining another loan?

Yes, it will. Most banks and financial institutions look at the loan that you are a guarantor for, as a loan that you hold. They will therefore deduct that much amount from your loan eligibility. Also, if the borrower has defaulted on some payments during the course of the loan, this also shows up on the guarantor’s credit history. This can additionally reduce your chances of getting a loan.



How should I decide whether to be a guarantor or not?

An important question to ask your self when you are asked to be a guarantor is ‘Am I ready to repay the loan?’ If the answer is yes, go ahead, be a guarantor. If no, then you have to base your decision on a stronger reason than ‘He is a close friend’.



On a final note, if you do become a guarantor, you have to understand that there is no turning back. You cannot revoke your guarantee after the loan has being sanctioned. So, before you do sign the dotted line, check whether the contract tells you the amount you are guaranteeing, the situations in which you will have to repay the loan and if the amount to be borrowed can be increased without you being told.