Having your home or flat is a dream, but not everyone can afford to pay for it upfront. For most people, taking a loan for a home or a flat is the only option to turn their dream into reality, but taking a home loan is not an overnight decision. Before you make the decision, you need to consider a few things to make it an informed one. That’s why we’ll discuss the essential things to know before taking a loan for a home or flat in this blog.
Considering Factors Before Taking a Loan to Buy a Home or Flat
Let’s see the considering factors at a glance:
- The Flat’s Final Price
- Know Your Budget
- Check Your Credit Score
- Research the Lenders
- Understand the Loan Types
- EMI/Pre-EMI
- Repayment Time
- Down Payment
- Home Loan Costs
- Documentation
- Default
- Insurance Cover
- Go through the Fine Print
- Get Pre-Approved
- Have a Contingency Plan
Let’s discuss these considering factors thoroughly.
1. The Flat’s Final Price:
When purchasing a flat, many people choose to work with a broker or directly approach the owner. Negotiating the final price is often necessary, as banks typically only provide home loans for up to 80% of the price, leaving you to manage the remaining 20%. The amount of financing provided by the bank might vary depending on the relationship you have with the bank.
2. Know Your Budget:
To avoid overburdening yourself with debt, assess your financial situation and determine your budget before taking out a loan. Evaluate your income, expenses, and savings to understand how much you can afford to pay each month toward loan repayments. Calculate your monthly surplus to determine your affordability. Avoid taking out loans that stretch your finances beyond their limits. Understanding your financial limitations is crucial in making informed borrowing decisions and avoiding over-indebtedness.
If you want to know how to reduce the cost of living in Dhaka? Then, read also please.
3. Check Your Credit Score:
Your credit score plays a crucial role in determining whether you are eligible for a loan or not. A good credit score will help you get a lower interest rate on your loan, so check your score before applying for a loan. Lending institutions will check your eligibility based on your job, income level, age, number of dependents, qualification, spouse’s income, and the like.
4. Research the Lenders:
Don’t just settle for the first lender you come across. Research different lenders and compare their interest rates, fees, and repayment terms to find the best deal that suits your needs. Interest rates can be mainly of three types such as floating, fixed, and hybrid interest rates. A floating interest rate is a rate that varies with time; a fixed interest rate remains the same during the whole tenure of the loan; and a hybrid interest rate is a mixture of both floating and fixed rates.
Also, consider all the fees or costs that we’ve covered later in our discussion, and the repayment terms carefully.
5. Understand the Loan Types:
Several types of home loans are available, including:
- Adjustable or Floating Rate Loans: These loans have an interest rate that is linked to the lender’s benchmark rate. If the benchmark rate changes, the interest rate on the loan will also change proportionately.
- Fixed Rate Loans: With this type of loan, the interest rate is fixed at the time of taking out the loan and remains the same throughout the loan’s tenure.
- Combination Loans: Combination loans offer a portion of the loan at a fixed interest rate and another portion at an adjustable or floating interest rate.
Related: Different types of home loan in Bangladesh
6. EMI/Pre-EMI:
EMI or Equated Monthly Installment is the fixed amount that you need to pay the lender each month. It includes repayment of the principal loan amount and payment of the interest charged on the outstanding loan balance.
For under-construction properties, the concept of Pre-EMI is used. This means that the loan amount is disbursed to you i.e. the borrower in stages based on the installment amount payable to the developer. Initially, you need to pay only the interest on the disbursed loan amount, which is called the pre-EMI interest. However, if you wish to start repaying the principal amount immediately, you might opt for tranche disbursement and begin paying EMIs on the cumulative amount disbursed.
7. Repayment Time:
The repayment tenure is the time taken to pay off the sanctioned loan, and it affects your Equated Monthly Instalments (EMIs). Opting for a longer tenure might result in smaller EMIs, but it increases the interest rate, leading to paying double or triple the loan amount. If you have a stable and increasing income, it’s best to choose a short repayment tenure with higher EMIs and lower interest rates. Banks offer attractive interest rates for shorter repayment cycles to encourage faster repayment.
8. Down Payment:
When you apply for a home loan, the bank might approve a lower amount than what you applied for based on your eligibility. This means you might have to pay a certain amount from your pocket as a down payment. For instance, if you applied for a loan of Rs. 70 lakhs and the bank approves only Rs. 50 lakhs, you’ll have to pay Rs. 20 lakhs as a down payment. It’s important to make a down payment without putting a strain on your budget, as it can lower your loan amount and the interest you’ll have to pay. While some banks offer a 100% loan amount based on eligibility, it’s advisable to make a down payment of at least 10% to 20% to avoid paying a significant amount of interest and ensure comfortable repayment.
9. Home Loan Costs:
When considering a housing loan, it’s important to assess its overall cost, including interest payments, processing fees, administrative charges, prepayment penalties, and other relevant expenses. Look for zero prepayment charges for adjustable/floating rate loans, and the ability to switch to a lower interest rate with a nominal fee. Make sure to watch out for any hidden charges, and ensure that all fees are transparently disclosed on the lender’s website.
Read also: How to buy a flat by getting a loan from a bank
10. Documentation:
You need to submit KYC documents, credit/income documents, and property documents to apply for a home loan. KYC documents include identity and address proofs such as a passport and voter ID card. Credit/income documents are used to assess loan eligibility and include salary slips and income tax returns. Property documents such as the agreement to sell and title deeds are required for due diligence on the property.
Submit your loan application along with the KYC and credit or income documents so that your loan gets approved. The property documents must be submitted in their original form for loan disbursement. It’s important to choose a lender who offers safe storage and easy retrieval of your property documents. Make sure the lender has decentralized storage facilities for quick and easy access to your documents when needed.
11. Default:
Consider your future financial condition before taking a home loan as defaulting on loan payments can adversely affect your credit score. If you are experiencing a cash crunch, it’s advisable to speak to your lender and negotiate loan terms. If you have a good credit history with the lender, they might consider your request. It’s crucial to avoid missing monthly installments, as this could result in legal action and the potential sale of your property to recover dues.
12. Insurance Cover:
Research and purchase the best home loan insurance available to cover the loan amount. This will protect your family from being liable for any outstanding loan in case of unfortunate circumstances. Some lenders might require you to purchase insurance when obtaining a home loan.
13. Go through the Fine Print:
Before you sign any loan agreement, go through the papers carefully. Understand the terms and conditions, including the repayment schedule, prepayment charges, and penalties for late payments.
14. Get Pre-Approved:
Getting pre-approved for a loan will give you a better idea of how much you can afford to spend on your home or flat. This will also help you to negotiate a better deal with the seller.
15. Have a Contingency Plan:
In case of unforeseen circumstances such as job loss or illness, it’s essential to have a contingency plan to ensure that you can continue to make your loan payments without defaulting.
Final Words:
We’ve tried our best to cover the things to know before taking a loan for a home or flat in this blog. So, consider these things carefully because investing in your home is a huge decision, and don’t make a hasty decision to harm yourself financially. Please contact Best – Tech Properties Ltd. for further help and queries.
Frequently Asked Questions
Some of the best banks for house loans in Bangladesh are Midland Bank, Standard Chartered Bank, Lankabangla Finance, and Delta BRAC Housing Corporation Limited (DBH).
NCC Bank gives loans for homes at the lowest interest rate, which is 9%, and Agrani Bank gives loans for students at the lowest interest rate, which is 7%.
Getting a loan of 50 lac (5 million) will depend on several factors such as your credit score, income, assets, and liabilities, as well as the loan terms and conditions offered by the lender. Here are some general steps to follow to improve your chances of getting a loan:
- Determine the purpose of the loan: Lenders might ask about the purpose of the loan, and it’s essential to be specific. The purpose could be anything from purchasing a house, starting a business, or funding education.
- Check your credit score: Lenders will check your credit score to assess your creditworthiness. A good credit score improves the chances of getting the loan approved. You can get a free credit report from any of the credit bureaus in your country.
- Gather your financial documents: Lenders might ask for income proof, bank statements, tax returns, and other financial documents to verify your income and expenses. Collect these documents and keep them ready.
- Research different lenders: You can check with banks, non-banking financial institutions, or online lending platforms for loan options. Compare interest rates, processing fees, repayment terms, and other conditions before deciding on a lender.
- Apply for the loan: Once you’ve decided on a lender, apply for the loan by filling out the application form and submitting the required documents. The lender may take a few days to process your application and may ask for additional information if required.
Note that getting a loan of 50 lac (5 million) is a significant commitment, and it’s essential to be financially responsible and make sure you can repay the loan comfortably.
Financing the entire purchase price of a home, also known as 100% mortgage financing, can help buyers overcome the barrier of having to make a down payment. This type of loan is not exclusive to first-time home buyers, as anyone who meets the eligibility criteria can take advantage of this financing option.
It is generally not possible to obtain a 100% home loan from any lender, including banks or housing finance companies. Lenders usually finance up to 75%-90% of the property’s cost, leaving the remaining 10%-25% to be paid by the borrower as a down payment or through other means of financing.
The basic five loan requirements of a bank are as follows:
- Credit Score and History: When assessing a loan application, a lender places great importance on your credit score. This score ranges from 300 to 850 and is based on factors such as payment history, outstanding debt, and length of credit history. Typically, lenders require a minimum credit score of around 600 for loan approval. However, some lenders might be willing to lend to applicants who have no credit history at all.
- Earning or Income: Lenders set income requirements to ensure that borrowers can repay their loans. These requirements vary by lender.
- DTI or Debt-to-Income ratio: Lenders use the debt-to-income ratio (DTI) to evaluate a borrower’s ability to make payments on current and new debts. The DTI is expressed as a percentage and shows the portion of the borrower’s gross monthly income that goes towards monthly debt payments. Ideally, the DTI should be below 36%, but some lenders might approve highly qualified applicants with a DTI of up to 50%.
- Collateral: When applying for a secured personal loan, the lender will require collateral, which is usually a valuable asset. For instance, collateral for a home or vehicle loan is typically related to the underlying purpose of the loan. Other assets, such as cash accounts, investment accounts, real estate, or collectibles like coins or precious metals, can also be used to secure the loan. If you fail to make payments or default on the loan, the lender can repossess the collateral to recover the remaining loan balance.
- Origination Fee: Although not a qualification factor, many lenders charge borrowers personal loan origination fees to cover application processing, credit checks, and closing costs. The fees can range between 1% and 8% of the total loan amount and depend on factors such as your credit score and loan amount. You can pay the origination fees in cash at closing or finance as part of the loan amount, and some lenders subtract them from the total loan amount disbursed at closing.
Before approving a loan, there are several things you should consider to ensure that you are making a sound financial decision. Remember the following things before approving the loan:
- Interest rate: The interest rate on the loan is one of the most critical factors to consider. Make sure you understand the interest rate, whether it’s fixed or variable, and how it will affect your monthly payments and the total amount you will pay back over time.
- Fees: Be aware of any fees associated with the loan, such as origination fees, application fees, prepayment penalties, or late fees. These fees can add up quickly and increase the overall cost of the loan.
- Repayment terms: Review the repayment terms to understand how long you will have to pay back the loan, what your monthly payments will be, and whether there are any prepayment penalties.
- Collateral: If the loan is secured, make sure you understand what assets you will need to pledge as collateral and the consequences of defaulting on the loan.
- Credit score: Understand how your credit score will impact your loan application, as well as the interest rate you’ll be offered.
- Your financial situation: Make sure you understand your financial situation and are confident that you can afford the loan payments, both now and in the future.
By considering these factors and doing your research, you can make an informed decision when approving a loan.
Top-up loans are typically restricted to 70% to 75% of the estimated market value of the property, after deducting the outstanding loan amount, while regular loans are usually capped at 80% to 90% of the total property value.
Top-up loans have a major drawback in that they are only available to current home loan customers, and individuals with poor repayment histories are not eligible. Again, there are no tax benefits available for top-up loans taken for personal purposes.