With the festive season just around the corner, the residential property market is set to be inundated with enticing offers from developers and home finance companies (HFCs). If you plan to buy a house during this period, start preparing for it right away, for unlike the Jack and the Beanstalk fairytale you are unlikely to find any magic bean. The preparation would start with doing five things.
Getting The Budget And Basics Right
Your budget has to be realistic, i.e., figure out how much you can spare comfortably. Check the prevailing capital values in the locality of your choice. Properties listed on realty portals and other property advertisements are a good indicator. So is the list of approved projects by HFCs also displayed on their websites. Pranay Vakil, chairman, Knight Frank (India), a real estate consultancy, suggests checking out municipality ready reckoners that provide prices for different localities, which are in tune with the prevailing market prices. Pay the booking amount once you identify a property that fits your budget.
Putting your money down. When it comes to downpayment, HFCs typically insist on an amount that is 15-20 per cent of the property's cost since they want you to share some of the risk involved.
So, how much downpayment should you make? Maximise the dowmpayment as the greater it is, the lower the loan amount needed.
Raising the downpayment money. Suggests Kamlesh Rao, head, Retail Assets, Kotak Mahindra Bank: "It is not advisable to borrow the margin money." Make a list of investments you would need to tap. Kartik Jhaveri, director, Transcend Consulting (I), a financial planning and wealth management firm, says: "Invest for downpayment 3-5 years in advance. If you are 2-3 years away, invest 20-30 per cent in MIPs." For periods from 4-5 years onwards, equity exposure can be taken. For periods of 2 years or less, rely on FDs and short-term debt funds. If you fall short, borrow from parents or siblings.
Other costs. These would include the loan processing fee, which is charged by the lender, and the lawyer's charges (if you want a lawyer for the property's due diligence). The loan processing fee could be 0.25-0.50 per cent of the loan amount, or a fixed amount, whichever is lower. It is non-refundable. However, if you plan to buy a house on the secondary market, you will need to pay brokerage as well, which is typically 1 per cent of the agreed sale price.
How Much Should You Borrow?
Before you venture into buying a house, you have to understand how much loan you are eligible for and how much you should borrow. This will depend on, among other things, a number of factors such as your monthly take-home pay, the downpayment required and the monthly miscellaneous expenditure. Here's the example of a person who has a monthly take-home pay of Rs 80,000 and has to pay Rs 7.5 lakh as downpayment.
| Regular Surpluses Do Wonder | |
| | |
| a) Monthly take-home pay (Rs) | 80,000 |
| b) Loan tenure (years) | 20 |
| c) Interest rate (%) | 9 |
| d) EMI per lakh (Rs) | 900 |
| e) Debt-service ratio (%)* | 45 |
| | |
| Scenario 1 Linked To Loan Eligibility | |
| f) Max. EMI possible (a * e in Rs) | 36,000 |
| g) Loan eligibility (f/d * Rs 1 lakh) | 40,00,000 |
| h) Downpayment (Rs) | 7,50,000 |
| i) Max. home purchase price (g+h) (Rs) | 47,50,000 |
| | |
| Scenario 2 Linked To Downpayment | |
| j) Downpayment (Rs) | 7,50,000 |
| k) Min. downpayment (%) | 15 |
| l) Max. loan amount (Rs) @ 85 % | 42,50,000 |
| m) Max. home purchase price (Rs) | 50,00,000 |
| | |
"*Debt-service ratio is the maximum portion of the take-home pay that can be used to pay the EMI Experts suggest that you should opt for whichever is lower between i and m. In this case, it is Rs 47,50,000 Calculation is based on the assumption that the person wants to buy a Rs 50 lakh-house
Near-Possession Properties
Most new projects in major markets are 25-30 km away from the city centre and usually under different stages of construction, with an average completion time of 2-3 years. Properties where you can move in rather quickly usually come at a premium. However, with rampant project delays, the premium is worth it.
If you want to stick to the primary market, check projects that are due for completion within a year. However, for immediate possession, look at the secondary market. In fact, you will find some lenders more forthcoming in such cases. Says C.S. Jain, head, Personal Banking Group, IDBI Bank: "I am willing to lend slightly more (for resale properties) as they are ready-to-use, and have no risk of the property not being handed over."
Old house, evergreen rules. Go through property papers carefully before you start any negotiations. If the property has changed many hands, examine the paper trail and stay clear of those with incomplete documentation or involved in dispute.
Online portals such as Makaan.com, magicbricks.com and 99acres.com can come in handy in your search. You can also get a list of real estate agents operating in the area of your choice by referring to the classified section of national dailies. Once you have identified the property, take the help of a property valuer to assess the house's actual value.
Lenders are usually a little skeptical about sanctioning loans for properties over 10 years old, fearing the building's durability. They also get weary if the property has changed many hands in the past and want to make sure that all the documents related to previous transactions are in place. Look for a lender who has prior experience in lending for resale properties. Be prepared to pay a greater downpayment if there is a difference between the property's agreed sale price and the bank/HFC's evaluation.
Some Soul-Searching
Know your worth. Approach the lender you plan to borrow from and ask it to assess your loan eligibility. It will issue you a letter stating the maximum eligible loan amount for you. Use online EMI and home loan eligibility calculators of HFCs and banks.
Build some credibility. "It is important to regularly check your credit report to avoid disappointment later," says Samir Bhatia, managing director and CEO, Equifax India, an information services company. To get a copy of your credit report, apply to Credit Information Bureau (India), Cibil with an identity proof, an address proof and a fee of Rs 142 along with a filled CIR request form (demand draft if you are sending it by post).
Harsh Roongta, CEO, Apnapaisa.com, a comparison portal, suggests filing a 'mistake report' with Cibil if you spot any discrepancies. And file a complaint on the bank's site with the same details. Make the complaint only in writing. If neither reverts within 30 days, file a complaint with the banking Ombudsman against the bank and the Reserve Bank of India (RBI) against Cibil.
Clear any outstanding small-ticket loans before seeking a home loan since your lender will take into account the total loan amount you are servicing at the moment. "Normally, we would be comfortable if 50-55 per cent of your net salary is going towards servicing all your loans put together," points out Rao.
Jargon Demystified
- Margin/Downpayment money While taking a home loan, this is the amount you have to pay from your pocket. Normally, the HFC will ask you to put in 15-20 per cent of the total cost and give the rest to you as loan. This is to make sure that you share a part of the risk. So, if the cost of the house is Rs 100 and the downpayment required is 15 per cent, you will need to pay Rs 15 as downpayment. The balance will be funded by the bank/HFC subject to certain conditions being met.
- Processing fee This is the fee charged by the bank/HFC to process your home loan application. It is usually a fixed percentage of the loan amount or a fixed amount, whichever is lower. You will need to pay it at the time of applying for the loan. It is non-refundable.
- Prepayment penalty Earlier, if you foreclosed a loan, your bank/HFC would charge a penalty. But now, if you do so with funds from your own resources, most lending institutions do not charge anything. However, the original lender will levy a pre-payment penalty if you get your loan refinanced by another institution.
- Equated Monthly Instalment Abbreviated as EMI, it refers to the monthly payments you make towards servicing a home loan. The EMI comprises principal and interest. Principal is the cost of the asset for which you have taken the loan and interest is the cost you pay for the loan.
- Stamp duty It is a state tax on the transfer of property, calculated on the property's total value.
- Fixed rate of interest This means the rate of interest is fixed for the entire duration of the loan. However, lending institutions usually have a clause that allows them to take a
relook at rates after a specified time period, especially when the cost of funds goes up drastically. - Floating rate of interest The interest rate is flexible and moves in tandem with market interest rates. As per RBI's directive, from 1 July 2010, banks/lending institutions have to link their floating rate to their base rate.
- Approved projects Refers to housing projects that have been approved by a lender. Your loan application will get processed faster if the housing project has the lender's approval as they have already done a complete enquiry on the project. If the project where you plan to buy property is not approved, the lender will have to do a check on the project, builder, title document, among other things. Only if they are satisfied, will they approve your loan application.
- Secondary market The market for used properties that are up for sale.
- Credit Information Report It's a report that shows the borrower's credit payment history, which is compiled from the information provided by different lenders. You can get your CIR from Credit Information Bureau (India), Cibil.
- Loan tenure Refers to the duration for which the bank/HFC has sanctioned the loan. While most lending institutions give home loans for 20 years, some do so for 25 years as well. You are supposed to repay the loan in full by the end of the loan tenure.
Know Your Loan's Pricing
While applying for a loan, educate yourself on the Base Rate system introduced on 1 July 2010 by the RBI. Base Rate is the lowest possible rate (barring a few exceptions) below which lenders cannot lend. Loans are now given by adding some product- and customer-related premium to the Base Rate. Hence, any change in the Base Rate affects existing and new customers equally. Though banks are free to select any methodology to calculate their Base Rate, it should be consistent and in the public domain. This is unlike the previous Benchmark Prime Lending Rate (BPLR) regime that was not transparent and under which the benefits of a fall in interest rate were rarely passed on to the existing customers and allowing banks to offer lower rates only to new customers.
Hassle-Free Borrowing
Once you identify a property, check with the developer if it has a bank approval. "Once your builder has informed you about the lenders with whom the property is listed, confirm it with the lenders", says Shveta Jain, director, Residential Services, Cushman & Wakefield (India), a real estate solutions company. Before you pay the booking amount, get the title check done through a lawyer.
Broadly speaking, this is how you should prepare for a home loan. In the next few pages are the remaining 16 things that you cannot afford to miss in your quest to finding that perfect abode.
