However, with a plethora of misinformation out there, it is important to approach this decision with caution. False information can easily cloud one’s judgement. In this article, we will dispel common myths and provide you with facts about home loans.
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Myth 1: Opting for a shorter loan term is invariably advantageous
Fact: Although a shorter term entails lower overall interest payments, it results in higher monthly EMIs. It is essential to select a term that permits manageable payments without compromising other financial objectives. Many lenders provide prepayment alternatives, enabling you to reduce the loan term later if your financial situation improves.
Myth 2: A high credit score ensures home loan approval
Fact: Although a good credit score (usually above 750 in India) greatly enhances the likelihood of securing a home loan approval, it is not the only criterion lenders evaluate. Even with a strong credit score, home loan approval is not guaranteed. Lenders scrutinise factors such as your debt-to-income ratio, employment history, and existing debts. A high credit score coupled with unstable income or substantial existing debts could still trigger concerns for lenders.
Moreover, despite having a favourable credit score, a small initial payment may require additional scrutiny or potentially lead to rejection. When the loan amount substantially exceeds the valuation, relying solely on a good credit score may not suffice to close the disparity.
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Myth 3: Pre-qualification and pre-approval are interchangeable terms
Fact: While both pre-qualification and pre-approval involve assessing your borrowing capacity for a home, they vary significantly in depth and assurance.
Pre-qualification serves as an initial and quicker step. It relies on self-reported financial details (such as income, debts, etc.) to provide a rough estimate of the potential loan amount you might qualify for. It is considered a soft check, meaning it does not affect your credit score. However, it’s crucial to understand that pre-qualification isn’t a guarantee; rather, it offers more of a ballpark estimate.
Conversely, pre-approval involves a more comprehensive procedure. The lender meticulously verifies your financial documents (such as pay stubs, tax returns, bank statements) and credit report. This leads to a more accurate loan estimate, accompanied by a pre-approval letter detailing the loan amount, interest rate, and terms (if you meet the criteria). Pre-approval entails a hard credit check, potentially resulting in a temporary decrease in your credit score. However, a pre-approval carries greater significance with sellers, indicating that you are a committed buyer with a high probability of obtaining financing.
Myth 4: The lowest interest rate signifies the optimal deal
Fact: While interest rates carry significance, they are not the sole determinant. Evaluate the total loan amount alongside processing fees and additional charges. Do not hesitate to contrast offers from various lenders to identify the one that aligns best with your requirements.
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Myth 5: Fixed interest rates consistently surpass floating rates
Fact: Fixed rates provide stability, yet they might be higher than floating rates. Floating rates can vary with market conditions, potentially leading to savings if interest rates decrease. Choosing between them hinges on your risk tolerance and financial objectives.
Myth 6: Home loans are exclusively for first-time buyers
Fact: This is a prevalent misunderstanding. Home loans serve as a valuable resource for a range of situations beyond solely first-time homeownership. You might find your family has expanded, or you are seeking a smaller space as your children move out. In such cases, a home loan can assist in financing the purchase of a new property better aligned with your current requirements. Various methods exist for harnessing the power of a home loan to accomplish your diverse real estate objectives.
Myth 7: Home loans cannot be used for significant purchases
Fact: While home loans are primarily for property financing, some lenders might permit a portion to be used for renovations or improvements. However, it is prudent to exercise caution when considering using a home loan for non-essential expenses.
As an illustration, certain lenders may permit allocating a portion of the loan for property renovations or improvements. Nevertheless, utilising a home loan for unrelated significant expenses such as cars, vacations, or luxuries is typically prohibited.
Myth 8: A substantial down payment is mandatory
Fact: While a larger down payment diminishes your loan amount and interest payments, certain lenders provide home loans with lower down payment options. Nonetheless, it’s important to note that some lenders may stipulate private mortgage insurance (PMI) if your down payment falls below a specific percentage.
In conclusion, navigating home loans involves grappling with a complex financial product, where having accurate information is paramount for informed decision-making. By grasping essential aspects and conducting meticulous research, you can confidently approach home loans, ensuring your choices align with your financial objectives.
Atul Monga, CEO and Co-founder of Basic Home loan
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Published: 04 Apr 2024, 01:41 PM IST