Planning to buy a home? That’s great! Buying a home is a dream for many, and achieving it often feels like a significant milestone. A couple of years back, I was exactly where you are today – planning to buy my dream home. I quickly realized that this meant securing a home loan. In fact, this is the most crucial step.
Unfortunately, when I took out my home loan, I made several mistakes that not only cost me money and time but also unnecessary stress. I am here to share what I went through so you can learn from my experience and avoid these challenges so your home loan journey becomes smoother and stress-free.
Ready? Here are the mistakes I made and how you can steer clear of them.
1. Not checking home loan eligibility properly
Yes, you would think that this is the most obvious step, but like me, there are many others who get super excited and overlook this crucial step.
Not thoroughly checking my home loan eligibility before applying is one of the biggest blunders that I made. I simply assumed that I would qualify for the loan amount I wanted without verifying the lender’s criteria, which, in my case, was ICICI Bank.
You guessed it right! This led to a rejected application and rising stress levels. What’s more, this also affected my credit score.
You can avoid all of this by checking your eligibility with different banks before applying. For example, ICICI home loan eligibility criteria include factors such as credit score, income, existing liabilities, and employment type. Reviewing these in advance will save you from unnecessary rejections.
2. Overlooking the importance of a good credit score
I did not pay much attention to my credit score when I was submitting my home loan application. Since my credit score was decent, I figured that would do. Alas, this resulted in a higher interest rate. If I only paid off my outstanding debts and cleared my credit card bills before applying, I could have lowered the interest rate.
Keep in mind that lenders prefer applicants with a credit score of 750 and above. Also, a higher score means you can secure better loan terms and lower interest rates. So, do not forget to check your credit score and improve it if required before applying for a loan.
3. Not comparing loan offers and interest rates
The other huge mistake I made was blindly applying for a home loan with the bank I had my savings account. I did not even think of comparing the offers provided by other lenders. Later, I realized that I was paying a higher interest rate than what some other lenders were offering.
The moral of this is you must always compare processing fees, interest rates, and other terms across different lenders before making your decision.
4. Borrowing more than I could afford
When dreams are involved, it is easy to get carried away. I was swept up in the joy of purchasing my dream home, and I did not calculate how much financial burden I could take on. I applied for a higher loan amount and truly struggled for years to pay the EMIs.
Although the banks lent me the amount I requested based on my income, I forgot to factor in other financial commitments, such as emergencies, travel, household expenses, etc.
You can avoid this by calculating your debt-to-income ratio and ensuring that the monthly EMI does not exceed 30% to 40% of your total income.
5. Selecting a longer tenure without fully comprehending its impact
At the time of my loan application, I thought opting for a longer tenure meant lower EMIs. What I did not account for is that a longer loan tenure also meant paying more interest over time.
I would suggest that instead of choosing the longest tenure available, calculate the total interest outgo. Then, try to choose a shorter tenure that you can comfortably afford.
6. Forgetting to read the fine print
Yet again, I overlooked the fine print of my loan agreement due to my overzealousness. When the excitement subsided, I discovered prepayment penalties, hidden charges, and unfavorable terms that I did not account for.
The lesson to be learned here is that you must always read the loan agreement from cover to cover. Scan it with a fine-tooth comb and particularly look for clauses related to prepayment penalties, foreclosure charges, and loan tenure flexibility. If you have any doubts, do not hesitate to ask the lender’s representative to clarify them.
7. Not making arrangements for a higher down payment
I thought I was saving money when I opted for the lowest possible down payment. It turned out to be just the opposite!
Not only did that increase my loan amount, but also interest payments and EMIs.
If you can save up and afford it, I highly recommend making a higher down payment. This will help you negotiate better loan terms and also reduce your loan burden.
8. Not taking into account the additional costs of owning a home
All my focus was on paying the monthly EMIs. I did not factor in other expenses, such as property taxes, furnishing, and maintenance. As you can guess, this led to significant financial strain after I bought my dream home.
So, before you apply for a loan, consider all the associated costs of home ownership. Create a budget that includes taxes, maintenance, and repairs.
9. Failure to keep an emergency fund
All my savings were exhausted towards making the down payment, and it did not leave me with much. It was a hand-to-mouth situation for my family and me, and things turned from bad to worse when unexpected expenses arose.
I highly recommend creating an emergency fund with at least three to six months’ worth of expenses before taking on a loan.
Conclusion
Applying for a home loan is a financial decision that should never be made lightly or in jest. Even the slightest mistakes can cost you dearly. Learn from my mistakes and make smarter decisions. Happy home buying!
