Buying a home is a quintessence of the Indian dream; however, this was not the case. That is because only a very few families had cash to buy a home. Looking back at the number of foreclosures, it was clear that the borrowers did not completely understand the terms of home loan.
The loan is a debt offered by equity to another (Individual or Organisation) at an interest rate. The borrower is responsible for the money borrowed thereof called the principal. Typically the money is repaid in regular or partial instalments. Home loan is a secured loan and is availed against a property to be purchased. This also means that the legal system is put in place, which allows the lender to take custody and sell the property in case of default.
Secured loans are also called Mortgage, which means “Death pledge.” Mortgage borrowers can either be individuals or businesses and the lender will be a financial institution as bank and credit union. Mortgage is the primary form of lending used across the globe, though there may be some changes from country to country, but the basic features remain unchanged:
The interest of the lender in the property may entail restrictions on the disposal of property unless the loan is paid off in full.
- Borrower: The person borrowing and has an interest in the property.
- Property: In-case of home loan the physical property is financed.
- Lender: Usually a bank, or financial institution.
- Principal: The original value of the loan.
- Interest: A financial charge for use of lender’s money.
- Repossession or Foreclosure: The likelihood that the lender has to repossess, foreclose or seize the property under certain circumstances.
- Completion: Legal completion of the formalities and the start of the mortgage.
- Redemption: Final repayment of the outstanding amount, which may be a natural redemption towards the end of the said term.
A credit score or rating of an individual or firm plays a crucial role in the loan application process. Once the applicant fills the form and hands it over to the bank, the bank or the lender checks the credit score and the credit report of the borrower. If the credit score is low, the bank might reject the loan then and there. If the credit score is good, the lender considers the application and determines his/her credit worthiness.
For maintaining a good credit score the borrower must:
- Pay all the dues on time, as late payments are viewed negatively.
- Keep the balance low and control the credit utilization.
- Review the credit history once a year to avoid obnoxious surprises in the form of a rejected application.
A dream house is no more a dream… with credit rating; the loan process has become easier and more organised. Lenders look for good credit history, monthly and annual income, a clean title to the property that is being purchased and existing EMI’s of the borrower if any.
It is time to give more energy to your dreams; it is time to buy your Dream home.