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Home Loan

A home loan is a secured loan which is taken for purchasing or constructing a home or for making improvements in the residential property. It is offered by the lending institution against the security of the house/property. It means, if the borrower will default in repayment of loan, the lender will be allowed to retrieve the lent money by selling the property. You can apply for a housing loan from banks and registered housing finance companies.

Salient Features Of Home Loan

  • Loans can be availed by salaried, self-employed and Non Resident Indians (NRIs).
  • One can apply for loan for flats, under construction properties and residential plot.
  • The housing loan comes along with a flexible repayment option, varying from 1year-25 years.
  • Loan repayment can be done with easy Equated Monthly Installments (EMI).
  • Loan transfer facility is available, if you intend to change your lender.
  • Prepayment of loan is available in case you are interested in repaying your whole loan amount.

Tips To Find The Right Home Loan Lender

A good lender is one who clearly discloses all terms and conditions, is responsive to your requirements and gives you a loan at easy rates. A home loan demands constant servicing for next 15-20 years, and therefore, interest rate should not be the only base of choosing the lender.

  • Check credentials of the lender- You can find various small and new companies who are offering good rate of interest to new customers. You should not fall for it, as the interest rate may change over the period of time and many times, small companies offer low interest rates to their new customers and after some months, they start increasing the interest rates in the name of rising funds cost. It should be remembered, that the Reserve Bank of India (RBI) has no control over what the loan provider will charge. Each lender has its own cost of funds and they accordingly decide the charge whatever it deems fit. So, you should compare what a lender is charging as interest rate to new customer and on loans which are already running with them for past 2-3 years. After comparison, if you find that you are being charged a low rate as compared to other customers then you can guess what would happen to you two years down the line.
  • Negotiation- If you are earning good income and have a decent CIBIL score then you should try to negotiate for home loan rates from lender. You might get 0.25 to 0.75 percent rate lower than normal. It also involves doing negotiation for processing fee. Many lenders are charging 0.5 per cent- 1 per cent as upfront fee but if you will do negotiation then it can be lowered to 0.1 per cent.
  • Stick to one lender- Never make a mistake of applying to 5-6 banks at a time as after the introduction of CIBIL, each new loan enquiry can lower your credit score by approximately 10 basis points. It means, too many enquiries may cost you anywhere near to 30 basis points-50 basis points. A low credit score can impair your power to demand an easy rate. So, you should first do a proper research on all available options and short list only two lenders for discussing the final deal.
  • Which should be selected- Fixed or variable interest rate?- Interest rate varies from time to time and it is a good idea to do a proper analyzing of liability portfolio on the regular basis in order to get maximum benefit out of it. It means, if you are borrowing for a short period, i.e., for 2-5 years, then you should go for fixed rate, or else, you can choose the variable interest rate, in the hope that the interest rate will come down in the longer tenure.
  • Right selection- Since loan is for the long-term, therefore, you should select that company which is offering other loan products also, like, personal loan, car loan, education loan, etc. If required, you will be able to get preferential interest rates on other products also on the basis of your track record with the lender. Furthermore, you are not required to run from one lender to other for your varied financing requirements.

Fees/Charges Associated With Home Loan

Before the loan disbursement-

  • Processing fee-Most of the lending institutions would charge home loan processing fee along with the application fee, which is non-refundable.
  • Legal & technical charge- Before approving the home loan, lenders do the legal and technical verification of the property. The cost involved in it can be recovered by lender from the applicant.
  • Stamp duty- You would be required to pay stamp duty to the government on the purchasing of house. Many lenders also recover stamp duty from the applicant which is paid at the time of registration of the agreement.
After the loan disbursement-

  • Foreclosure charges- Foreclosure charges will be applicable when you will repay the entire home loan amount before the actual tenure. Nowadays, banks are levying these charges only when you are doing the home loan balance transfer from one lender to other and not when you are foreclosing out of your own funds.
  • Duplicate loan statement charges- Every year, the lending institution will send you a statement detailing the loan amount that you have paid during the year. The amount can be broken into interest paid and the principal amount. However, if you lose this statement then your lender might charge you for issuance of the duplicate statement.
  • Delayed EMI payment and cheque bounce charges- The lender can levy delayed EMI payment charges if you will make the payment after the due date. If any of your post-dated cheques get bounced then you may be required to pay cheque bounce charges also.

Tax Benefits Available On Home Loans

You would be allowed to avail tax benefits on both principal amount and interest of housing loan.

Interest paid on the housing loan

According to the Section 24 of the Income Tax Act, 1961 a deduction of up to Rs 1,50,000 towards the total interest payable on the home loan, which is availed for purchasing/constructing house property can be availed. There will be deduction of interest payable for the pre-acquisition or pre-construction period in five equal annual installments, which will start from the year in which the house has been bought or constructed. Such kind of deduction is allowed only in case of self-occupied property. The interest which is paid towards home loan, taken for construction, repairs, renewal or reconstruction of current house, can also get tax deduction under the Section 24.

Repayment of principal amount of home loan

According to Section 80C of the Income Tax Act, 1961, the principal repayment up to Rs 1,00,000 on the home loan for purchasing or construction of the residential house property will be given as the deduction from the gross total income. Tax benefit will be available only if you are the owner or co-owner of the house. Two or more people, who have jointly applied for home loan in India, can get tax benefits in the ratio of the EMI payment in which they are paying.

Documents Required For Getting Home Loans

Generally the documents which are needed for processing the home loan application are almost similar across all lenders; however, banks can demand additional documentation depending upon the specific requirement. Below documents are needed by lending institutions for processing the loan application-

In case of salaried applicant
  • Salary slips/certificate for last few months along with TDS certificate.
  • Latest Form 16.
  • Last six months bank statement.
  • Photographs.
In case of self-employed applicant

  • Photocopy of audited financial statements for the past three years.
  • In case of a partnership deed, photocopy of partnership deed is required. However, if it is company then photocopy of memorandum of association and articles of association will be required.
  • Profit and loss account for the past three years.
  • Income tax assessment.

Different Categories Of Home Loan

Home loans in India can be categorized into following heads-

  • Home purchase loan: It is one of the basic types of housing loan which is taken for buying the new house.
  • Bridge loan: Such kind of housing loan helps in financing the new home of the borrower when he is interested in selling the current house. It is mainly a short term loan which is given to the applicant for the period when he is interested in selling the old house and wants to buy the new house.
  • Home extension loan: It can be used for extending or expanding the current home, like, adding an extra room or bathroom, etc.
  • Home improvement loan: Such kind of loan is for doing renovation or repairing of the house which you have already purchased.
  • Home conversion loan: It is the loan wherein the borrower has already taken a home loan for financing his current house but is now interested in moving to some other home.
    With the help of the home conversion loan, borrower can transfer the current loan to the new house which needs extra funds. With the help of the new loan, you can make the payment of the earlier loan & arrange sufficient funds for buying the new house.

Steps Involved In Home Loan Process

  1. Finding the property- The first step of the home loan process is to find the property of your choice, which will be followed by verification of property documents. Simultaneously you can start your search for the lending institution that can provide you best interest rates.
  2. Knowing the loan eligibility- Lenders provide information on loan amount only after checking the profile of the applicant and it is done after evaluating varied eligibility criteria's, such as, age, income & salary, etc.
  3. Deciding the lender after evaluation- Doing the proper comparison of interest rates is the primary feature of selection of the home loan. However, you should not overlook other fees and charges, such as legal charges, processing fees, application fees, etc.
  4. Applying for the home loan- After selecting the lender, you will be required to fill in the loan application form, wherein the lender will be required to give complete information on financial assets, liabilities and varied other personal & professional details along with the property details.
  5. Submission of documents- You would be required to submit all necessary documents to the lender, which will be then verified along with information given in the loan application.
  6. Checking the credit report- Lenders check the credit history by obtaining it from CIBIL. The CIBIL score plays a major role in deciding and approving the home loan application. If you have a low score then it means that the bank will upfront reject the application. However, if you have a good score then your loan application will be immediately accepted.
  7. Sanctioning of loan amount- Once the lender is satisfied with the credit report of the lender, the bank will decide the final amount and will sanction the loan amount. The lender will send an offer letter to the borrower, which will include other details, like interest rate, repayment options, loan tenure, etc.
  8. Acceptance copy to the bank- The borrower would be required to send the acceptance copy to the lender. It means, the borrower agrees to terms and conditions of the offer letter.
  9. Checking of legal documents- The lender will ask for legal documents of the property in order to verify the authenticity of the same. The lender will also do the valuation of the property, which in turns decides the loan amount sanctioned by the lender.
  10. Signing of loan agreement- When the borrower will sign the loan agreement, the lender will disburse the loan amount.
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