Important to know for a home loan seeker

A home loan includes great deal of intricacies which are often include arcane terms and hence making it difficult for a commoner and even difficult for the first time borrowers. Most of the loan applicants do not take the matter seriously and hence are likely to suffer set backs in the later part of the loan tenure.

While sanctioning a loan, lenders are more concerned about the future aspects as they do not want a customer who would default on his loan. To keep things simple they want to make sure in the beginning itself whether the applicant would be able to manage his loan or not, if an applicant does not satisfy a certain criteria then the lenders reject the proposal straight away.

To avoid rejection an applicant must check his loan eligibility before he applies for a loan, which in turn is decided by a number of factors. Loan eligibility of a particular borrower is the maximum amount that he can borrow; it mainly depends on the income of the borrower.

A borrower must have an idea about his monthly expenses so that he can get an idea about the amount that he can pay as the monthly installment for his loan. An applicant must borrow an amount which he can repay easily and it also helps him to avoid the risk of rejection.

Credit score is also an important factor, lenders wants the applicant to have a high credit score as it gives the lender and idea that the person does not default much and can expect that he will not do so with him as well.

The nature of job can sometimes also play a deciding role, a person working with a reputed company is likely to face less difficulty in finding a lender as compared to a person working with a lesser known company. Also, if a person is a constant job hopper then it can also add to certain disadvantage for the applicant.

Prepayment penalty of home loans likely to go

Finally, after initial resistance, lenders have started to waive the prepayment penalty in home loans. The banks used to levy penalty on the customer that borrowed money from some other lender to make the prepayments. However, such a penalty was not applicable to a customer who is making prepayments solely through his own resources.

The Reserve Bank of India was never in favor of this practice which was followed by majority of the lenders. Setting an example for the other lender, the largest lender in the country State Bank of India earlier has waived the penalty for the new customers and now has exempted the existing customers from the penalty.

“Banks have already agreed, but they are not issuing the guideline (to their branches) that you cannot charge prepayment penalty. We are not clear why banks charge the prepayment penalty,” said Mr. K C Chakrabarty, Deputy Governor of RBI.

The Chairman and managing Director of Punjab National Bank, Mr. K. R. Ramath said “If the regulator ultimately wants it, we need to fall in line. The prepayment penalty is not an avenue for bankers to make money, but a mechanism to recover costs due to mismatch in assets and liabilities. If RBI feels we have to do away with that, as bankers we will have to find a way to recover the cost.”

Some other public sector banks including Bank of India, Indian Bank and United Bank of India have also waived prepayment penalty on floating rate retail loans and more lenders are expected to joint the group soon.