A young home loan borrower starts off his asset-building with a huge advantage - time. Young people have many years of working life left and that helps in handling a large and long duration financial commitment like a home loan. Even banks consider young borrowers more creditworthy and feel comfortable to lend to them.
Young borrowers are eligible for the maximum loan tenure and consequently get a higher loan amount. Hence, it makes sense to use this advantage intelligently and start the personal asset creation process early.
KNOWING HOW MUCH TO BORROW
The first step is to make a financial plan to understand the current state of affairs. What are the existing assets and liabilities a borrower has? With the average age of the homebuyer coming down, a typical borrower could be in the early stage of career, when the decision to buy the first house is made. At that stage, typically, they do not have many assets but could have some liabilities.
Today, it is common for a young person to require large loans for college itself. A proper financial plan will state the total amount of existing borrowing and the ability to service it. It will give a clear picture of the surplus amount that can service a new housing loan. Very long tenure loans (20 to 25 years) are only available for borrowers young in age. Most banks have a slightly lower interest rate for shorter duration loans. These loans have lower EMIs and therefore increase the loan eligibility of the borrower.
A borrower should know how to budget for monthly payments in order to understand the right amount of loan he can borrow. The total cost of a home loan includes indirect costs such as the one-time processing fee, administration fee, legal fee etc.
Banks have a set of rules and regulations for determining home loan eligibility. Knowing how a bank calculates them will help in determining the quantum of loan.
Good income is the main criteria for home loan eligibility. This is checked based on salary statements or income tax filings. Principally, every lender looks at a borrower from two angles - ability to repay and intention to repay: This is determined from historical records of loans/credit card repayments with the same lender or other lenders. CIBIL scores is an indicator used.
PLANNING FOR DOWN PAYMENT
Bank offers loans for anywhere between 70-80 percent of the salary. The balance is payable as down payment or margin money. The best way to finance margin money is to have accumulated sizeable savings, which can be used for making the down payment.
Young borrowers, typically, will not have sufficient funds for making the down payment. They have to plan for funding from other sources for the down payment like parents and friends. Others source of funds for down payment could be liquidating existing investments.
More risky options are borrowing a bridge loan or gold loan. However, the borrower has to keep in mind that these are very high interest loans and have to repay them within a few months else they can severely impact their finances.
APPLYING FOR HOME LOAN
Before a young borrower applies for a home loan, he must compare at least 4-5 different lenders and rate them on several parameters like ease of applying, ease of repayment, final cost of loan and overall service quality. Getting references from other borrowers would help.It makes sense to go for recognised lenders. Some of the online portals have the facility to compare parameters like interest rate, charges etc. Use them to study and understand the various clauses applicable to each lender. Factors to be checked are reset clause, foreclosure and regulations for prepayments etc.
Home loan enables youngsters to purchase their own home at an early stage in life. But a home loan is a high value and long-term financial commitment. Therefore, it requires a lot of financial planning and discipline.