You have made up your mind on buying a home for yourself and you feel that it is just the right time to reach for your cheque book. But wait! Take out some time to ponder over things, which can go wrong in the process. As a prospective home loan buyer you should take care to avoid the common mistakes that most people make while availing a home loan.

Choosing your lender before you choose your property? Most people want to know how much loan they will be eligible for before they finalise the property. Nothing wrong with that except that you need not finalise your lender just to get the loan eligibility amount. If you are below 40 years just multiply your (and your spouse’s) yearly gross income by four and that should be a rough and ready amount of loan that you should be able to get. If you have some existing loans or some special requirements you can use the facilities of advanced calculators at various websites (www.apnapaisa.com has one). It is not necessary to lock yourself with a lender just to get the loan eligibility.

Imagine falling in love with a property and then discovering that the lender that you had chosen will not fund that property due to some legal/document issues. While most banks will provide finance for ready-to-move-in properties, some banks do not readily finance a property, which is being self-constructed, or for an under construction property. Also, if the property is very old or is being developed by a relatively unknown builder, the bank might have an issue with providing a property loan.

The best way is to select your property and then find out if any other lender has funded for another flat in the same building. That lender should anyway be a part of your consideration set. Also if you approach lenders now you are likely to get slightly better rates as lenders reserve their best rates for immediate disbursement cases.

Not arranging for the down payment in advance? A lot of people buy under construction property assuming that they can pay the down payment amount proportionately whilst the bank disburses the rest. However, all lenders without exception insist on bringing in the entire amount of the down payment before they will make the first disbursement on the property.

Have you window-shopped? Mantra is bargain and bargain some more. You should short-list four or five banks and get the short-listed banks to compete for your loan. The cost of your loan depends a lot on your ability to negotiate. Remember that all terms and conditions of a housing loan are negotiable. Interest rates offered by banks take your income and repayment profile into consideration, apart from, of course, your negotiation skills. Besides interest rates, also check various charges like processing fees, pre-payment charges, legal fees, valuation fees and other hidden costs.

Fixed or floating? Have you understood your interest rate at all? With the demise of the teaser rate schemes, this eternal debate has more or less been laid to rest. A “True Fixed Rate” ( TFR), defined as a rate that remains fixed for the entire duration of the loan no matter what, is available only from select lenders ( HDFC Ltd. and Axis Bank) and is fairly expensive at 12 per cent and 14 per cent respectively for a 20-year period. All other so-called “Fixed Rate” options remain fixed only for a certain number of years, say 2-5 years, and are reset after that. The best of the lot among those is LIC Housing Finance, where the interest rate is fixed at 10.75 per cent for the first five years and is then reset at the then prevailing floating rate. A regular floating rate is available today at around 10.25 per cent to 10.5 per cent for most 20–year period loans. When going for a floating rate loan, the other things being equal, it makes sense to borrow from banks which work on a “Base Rate” mechanism, which is expected to be more transparent than the mechanism followed by housing finance companies.

Do you want your family to inherit the home loan too, and not just the house? Of course, you do not. In that case, it is important that when you take a home loan, also take a life insurance and critical illness policy along with it. Life insurance policies provide monetary benefit in case of an unfortunate incident like death and ensure that your family members inherit your home but not your home loan. Furthermore, critical illness policy will take care of the home loan liability if your income gets interrupted due to unforeseen, unavoidable critical illnesses such as stroke or organ failure.

Source: 25. July. 2011, ET