Owning a home is one of the top priorities on many people’s list of life goals. However, with property prices increasing each day and real estate prices almost doubling in some cities over the last few years, buying a home is nearly impossible without a home loan. Financial institutions offer many different types of home loans these days and understanding the various options available to you is important to ensure you are choosing the right home loan type for you. This article discusses the different types of home loans available to home buyers these days.
Types of Home Loans: Everything You Must Know
Conventional Home Loans
Conventional home loans are offered by banks and NBFCs. Under these loans, lenders sanction up to 80% to 90% of the home’s value as a loan. The loan borrower must pay the remaining amount as a down payment. Loan approval is easy and quick if you have a high credit score, a stable income and employment, and a low debt-to-income ratio or FOIR. Lenders sanction loans on three different types of home loan interest rates: fixed, floating, and hybrid. Individuals seeking to close the home loan deal at low home loan interest rates must opt for floating home loan interest rates as loans availed of on these loans are the cheapest. Conventional home loans are repaid through home loan EMIs.
During the early years, the interest component of the home loan is much higher than the principal component. Hence, foreclosure and prepayments must be opted for during the early stages of the loan’s tenor. Maintaining a high CIBIL score, a low debt-to-income ratio and LTV ratio, and a stable income and job are the easiest ways to secure these loans on the most profitable loan terms.
Affordable Home Loans
Affordable home loans are loans designed to make it easier for lower-income groups and economically weaker sections of society to afford a home. Under these loans, the loan amount is sanctioned at highly subsidized home loan interest rates, which helps keep loan EMIs economical and easy to repay. The processing fee is also low for these loans and the repayment terms are most flexible. Central and state governments along with banks and NBFCs offer these loans.
However, affordable home loans have strict eligibility requirements and only those who meet the qualifying criteria can apply for these loans. In India, the government of India releases these loans under PMAY, CLSS, etc. Various state governments also offer affordable home loans.
Home Construction Loans
One of the most popular types of home loans is home construction loans. Banks and NBFCs offer these loans to individuals looking for funds to construct a home. Not everyone wants to buy an apartment or a villa in a gated community. Some people prefer to construct their homes to suit their tastes. If you belong to this category, you must consider applying for a home construction loan. The most important thing that people must know about these loans is that under home construction loans, financial institutions disburse loan funds in installments based on the progress on the construction site.
To obtain a home construction loan, in addition to the standard home loan documents, you will need to submit a copy of your construction plan and tentative milestones. The lender will disburse funds according to the progress of the submitted plan. Most importantly, you will pay interest on the loan amount sanctioned. Financial institutions offer lucrative terms, such as interest-only payment options and flexibility regarding loan repayment, to make loan repayment easier.
Plot Loans
Plot loans are loans that buyers secure to fund the purchase of a residential or commercial plot. All financial institutions, including banks and NBFCs, offer these loans. Lenders sanction plot loans based on important factors, including the location and size of the plot as well as the loan borrower’s creditworthiness.
Final Words
When planning to secure housing finance, it is essential to understand the various options available and select the one that best suits your needs. More importantly, you must read extensively about the home loan process and the factors that influence the terms and conditions one is offered on a home loan, including your credit score, employment, and income stability, debt-to-income ratio, LTV ratio, type of property, external market factors, etc. You must also plan repayment beforehand to avoid any hassles later and pay the loan without defaulting.
