Are you planning to buy your dream home in India? Housing loans are a popular option to help you turn your dreams into reality. From buying land and constructing a home to purchasing a flat or renovating an existing home, banks offer a range of home loan options to suit your needs. In this guide, we'll walk you through the different types of home loans available and provide tips on how to apply for a loan. Whether you're a first-time homebuyer or an experienced homeowner, our guide can help answer your questions about home loans in India.

Latest Update on Home Loan Eligibility (August 2023)

If you want to borrow money for a home, you may not be able to borrow as much and you may have to pay back more each month for some home loans when interest rates go up due to new rules from the Regulatory Authority. Banks will now have to give you the option to switch to a fixed rate loan when the interest rates change.

In the future, loan sanction letters sent to you will include the charges for changing a loan from a floating to a fixed rate. If interest rates go up a lot, your lender must make sure that your EMI (Equated Monthly Installment) still covers the monthly interest on the loan and that the loan amount doesn't increase after EMI is paid.

Summary of latest updates:

• If you are planning to take a personal loan, keep in mind that the Regulatory Authority has required lenders to calculate repayment capacity at a higher than prevailing rate to ensure that you can repay even when interest rates rise.
• Most banks currently do not offer fixed rate loans due to short-term deposits.
• If banks are forced to offer a fixed rate, there would be a sufficient mark-up to take care of interest rate risks.

New Home Loan Rules (August 2023 Update)

Here's what you need to know about new home loan rules from the regulatory authority:

• Lenders must calculate repayment capacity at a higher rate to ensure you can repay even if interest rates rise.
• Most banks don't offer fixed-rate loans due to short-term deposits.
• If banks are forced to offer a fixed rate, there would be a sufficient mark-up to take care of interest rate risks.

The regulatory authority said that lenders are required to take into account the repayment capacity of borrowers to ensure that adequate headroom/margin is available for elongation of tenor and/or increase in EMI, in the scenario of a possible increase in the external benchmark rate during the tenor of the loan. They also added that it's necessary to avoid unduly long elongation which sometimes may going forward camouflage the underlying stress in a particular loan. Therefore, the extension of tenure has to be for a reasonable period. It's a commercial decision of the banks.

When do these rules come into effect?

• The new rules take effect on December 31, 2023, for both new and existing borrowers.
• Lenders must now disclose the principal and interest recovered to date, EMI amount, number of EMIs left, and annualised rate of interest or Annual Percentage Rate (APR) for the entire loan tenor.
• Lenders will have to tighten norms for loans against property and probably education loans, which are the other two categories with long tenure.
• Historically, lenders would factor in the rise in income and the cyclical nature of interest rates when deciding borrower eligibility. However, some industries are experiencing pay scales failing to keep up with inflation.
• With home loans being a significant driver of credit growth, most lenders now focus on this segment to grow their advances book.
• Apart from the equated monthly installment loans, these instructions would also apply to all equated instalment-based loans of different periodicities.

What should I remember before applying?

There are several things you need to know, but here are some crucial points you can use as a guide to home loan eligibility.

Here are some tips for applying for a loan:

1. Maintain a good credit score by clearing your dues on time. A score above 750 is ideal.
2. Compare rates in the market to find the lowest rates and best benefits for your loan.
3. Take into account all costs, including processing fees, late payment fees, and penalties.
4. Check your repayment ability using an online EMI calculator so you can set aside enough money in advance.

Eligibility Criteria for Different Types of Home Loans

Before diving in, try the Fi Money EMI calculator to work out the home loan repayments.

Home purchase loans

• Meant for buying a flat, row houses or bungalows
• Can also be taken to build a house from scratch if you already own a piece of land
• Maximum loan amount offered is usually 90% of the market value of the property
• Eligibility criteria include age proof, address proof, income proof, identity proof, existing loan documents (if any), property documents, and home construction loan

Note: If you already own a piece of land and want to design the house according to your preferences, the cost of the plot is also considered during the approval process. The loan amount is decided based on a rough estimate of the construction cost and can also be taken to complete the construction of an unfinished house.

Home Improvement Loans

• Age proof, address proof, income proof, and identity proof required
• Estimated renovation cost and property title deed required

Home Extension Loan

• Age proof, address proof, income proof, and identity proof required
• Property extension documents and property title deed required
• Anyone can avail of this loan, but you must not be over 70 years old at the time of loan maturity

Land Purchase Loans

• Age proof, address proof, income proof, and identity proof required
• Property documents required
• Loan is used for purchasing land for building a home or other investment purposes
• Eligibility criterion: must not be over 70 years old at the time of loan maturity

NRI Home Loans

• Valid work permit proof, passport and work visa copy, copy of employment contract, last 3 months salary slip, and last six months salary account statement required
• General power of attorney and property papers required
• Previous year ITRs required (except for NRIs living in the Middle East or merchant navy employees)
• Loan tenure can go up to a maximum of 30 years, and the lending rate can be kept fixed or floating

Balance Transfer Loans

• Age proof, address proof, income proof, and bank statements showing repayment of current loan required
• Property-related documents and loan statement and property documents in possession of the current lender required
• Loan can be transferred to other lenders who can offer lower interest rates
• Most profitable during the initial loan tenure when the loan EMIs are the highest

A step-by-step guide to applying for a home loan

• Step 1: Check your eligibility criteria.
• Step 2: Decide the particulars of your home loan.
• Step 3: Compare offerings from different lenders.
• Step 4: Fill in the loan application form.
• Step 5: Attach necessary documents.
• Step 6: Pay processing fee.
• Step 7: Finalize loan terms.
• Step 8: Get your documents verified.
• Step 9: Get final approval for your loan.

There's more in this detailed article right here.

What are the prevailing home loan interest rates?

Banks' lending rates vary between 6.5% to 12% due to inflation, repo rate changes, and other factors. Borrowers can choose a fixed or floating rate, with the former maintaining a consistent rate throughout the loan tenure and the latter subject to market fluctuations. Some banks offer special privileges, such as a 0.05% interest rate concession, to women borrowers, senior citizens, and bank staff.

Frequently Asked Questions

What are the latest updates on Home Loans in 2023?

New rules from the Regulatory Authority require lenders to calculate repayment capacity at a higher rate to ensure borrowers can repay even when interest rates rise. Most banks currently do not offer fixed-rate loans due to short-term deposits. If banks are forced to offer a fixed rate, there would be a sufficient mark-up to take care of interest rate risks. Lenders will also have to tighten norms for loans against property and education loans, which are the other two categories with long tenures.

When do these rules come into effect?

New rules for home loans come into effect on December 31, 2023, requiring lenders to calculate repayment capacity at a higher rate.

What are the different types of home loans?

• Home purchase loans: for buying a house or building one from scratch
• Home improvement loans: for renovating an existing home
• Home extension loans: for extending a property
• Land purchase loans: for buying land
• NRI home loans: for non-resident Indians
• Balance transfer loans: for transferring an existing loan to a lender offering lower interest rates

What are the home loan rates in 2023?

Home loan interest rates in 2023 range from 6.5% to 12%. Borrowers can choose between fixed or floating rates. Some banks offer a 0.05% interest rate concession to women borrowers, senior citizens, and bank staff.