For any investment to succeed, you must consider certain factors and plan adequately for any surprise. Taking a loan to invest in the real estate market is a smart move that you must back with intuition. Repaying a loan will require many years and lots of cash, so ensure that you take one that matches your budget.
A loan against property (LAP) is a type of loan that you take based on your property’s value and other factors. It remains one of India’s most sought-after financial options. However, before taking the first deal that a bank or non-banking financial company (NBFC) offers you, you must evaluate some factors.
You only qualify for a loan against property if you meet the requirements set by a lender. Though the requirements vary among lenders, some are common and they include age and credit score. We recommend that you only apply when you meet the requirements.
Read on to learn about the factors that you must study before taking a loan against property.
Five Factors to Consider when Applying for a Loan Against Property
Below is a list of five factors to consider before taking a loan against property.
Your Credit Score and Credit Report
Your credit score is calculated using the information in your credit report. A credit report shows your financial history, detailing your expenses and loan, whether current or former. Asides from these, it also serves as a medium through which a lender determines your creditworthiness.
To secure a loan against property or any type of loan with friendly terms, you must be a low-risk borrower. Having a credit score below 725 is not good enough for a loan. Lenders will see you as a high-risk borrower, thereby reducing your chances of getting approved.
You can improve your credit score by doing the following:
- Paying your debts
- Correcting any errors in your credit report
- Paying your rent and other utility bills
The type of property you own determines whether or not you qualify for a loan against property. It also determines the value of the loan that lenders will disburse to you. Provided that you have a residential or commercial property, you are eligible.
How do you determine your property’s value? The process of knowing a property’s worth is known as “valuation” and only professionals perform this action. The property’s age, location, size, and current market price play a key role in its valuation.
Upon completing the valuation, the lender calculates the loan to value ratio (LTV) which is 70%-75% of the property value. This is computed by dividing the property value by the desired loan amount.
A loan tenor is a timeframe in which you must repay the loan amount, with interest included. The tenor for a loan against property ranges from 0 to 18 years depending on the financial institution. So, before applying, ensure that you opt for a tenor that allows you to conveniently repay the loan.
Your Personal Loan Repayment Strategy
While preparing a payment schedule, it’s wise to consider your current income and existing financial obligations. This is because banks and financial institutions will not grant you a loan against property based on what you hope to earn in the future but on what you currently earn.
Repayment for a loan against property typically occurs in instalments. You can make prepayments to close the loan early, though some lenders charge you for this operation. Barring other plans, the amount will be deducted from your bank account when due.
Insurance for Your Loan Against Property
You must ensure your LAP against unforeseen circumstances. This insurance covers the loan balance when you are unable to. Some lenders mandate that you have an insurance plan that can cover the loan repayment if the need arises. While it may be costly to maintain, you must do so if you have the means.