HOME LOAN MISTAKES

While buying a home, particularly if you are going for bank loans, you need to consider various aspects to ensure you do not over stretch to the point of becoming financially suffocated. Here are some guidelines from an experienced banker on how to handle your finances while acquiring a home, er, home loan.
From the desk of C.R. Ravichandran
Assessing means available to fund margin money and planning for possible escalation of cost during construction are two important factors to consider while buying a home.
Suggested Cautions

1. First assess your maximum eligibility for home loan from various banks. This would help you make the right choice.
2. As a borrower from bank, you will be expected to set apart margin money, which may be anywhere between 10% and 25%. The percentage varies from banks to banks and also schemes.
3. Ensure that margin money to be funded by you is maximum so that you can have a reduction in interest, which would result in lesser EMI amount.
4. Be prepared for unexpected expenses and always look out for hidden charges, if any.
5. While going for an independent construction of house, estimates escalate by the time construction reaches lintel stage. This, in turn, may result in shortage of funds causing further delay, which again would impact negatively on your finances. You may end up paying more interest to the bank. These are the times when many buyers resort to borrowing at higher interest rate.
6. The absence of transparent construction agreement results in the escalation of estimates by about 25%.
7. To meet such situation, it is suggested to avail loan with lower interest. This additional fund may be used to meet the expenses.
8. While planning your budget it is highly recommended to take into account the monthly interest you need to pay for the money disbursed by the bank. You will be paying interest till commencement of EMI.
9. If you happen to have surplus funds, save them for September and March where IT advance tax will be due for payment.
10. It is best to avail the services of a professional architect or an experienced person to advice you on how to maximize your living space and how to improve the appearance of your home. You will be guided on all important factors including additional amenities, quality of tiles, electrical and plumbing work with the cost involved in mind.
11. Missing to pay your EMI may cost you dearly. An increase in EMI amount is possible under two circumstances – if you fail to pay your EMI on time and if there is a change in the interest rates. Failing to pay EMI will result in the unpaid interest for the month adding up to the loan amount resulting in higher EMI in the subsequent months. In case of change in interest rates, it is advised to keep yourself updated as banks may ignore to inform the borrower about the change in interest rate. Under such circumstances, borrowers who continue to pay original EMI amount are really in for trouble as they will be asked to pay the overdue along with expenses incurred in the process of legal proceedings undertaken to recover the additional amount. As a borrower you have every right to be informed. Make sure you monitor the account and insist on obtaining loan statement periodically.
12. The bank will also debit incidental charges for insurance premium for building and life cover, obtaining periodical encumbrance, inspection charges, mortgage fees and cost of legal opinion certificate, if required. Such situation may arise if there are changes in local body / state rules etc, acquisition by highway authorities and any other department which will affect the construction).
13. Some banks sanction loans up to Rs. 2 lakhs for furnishing the house. This loan will be over and above the housing term loan. It is advised to look for banks that make this offer to ensure you do not end up looking for additional resources at a later stage.
14. It is also suggested to obtain both life cover and insurance (the premium amount is not substantial) for the building to ensure any damage to the building does not negatively impact your finances. The insurance firm may reimburse the expenses incurred up to that stage to facilitate liquidation of bank loan.
15. Yet another important factor to consider is the value of the insurance cover. Make sure the insurance cover is for the building value and not for the loan amount. For example, let us assume that the building value is Rs. 25 lakhs and the loan amount is Rs. 20 lakhs. If a situation so arises that necessitates insurance claim, your claim amount will be restricted to 80% if the insurance cover is for the loan amount. If the damage cost is Rs. 10 lakhs and even if the claim submitted is for Rs. 10 lakhs, the insurance company will sanction only 80% of the claim. Hence, ensure that insurance cover is for the building value as per bank’s estimation.
16. Study all the available schemes and make the right choice. Go for schemes which cover life also (one time premium covers only outstanding loan) as life cover will ensure insurance firms remit the loan outstanding in case of the demise of the borrower. A few banks offer both. Some banks finance premium amount as loan over and above the housing loan.
17. It is suggested that you remit EMI for housing loan periodically to avoid any future litigation by the insurance firm for settlement.