I have no savings, but my bank offers me a pre-approved home loan of Rs 85 lakh. Can I buy a flat worth Rs 80 lakh?

I want to purchase a flat worth Rs 80 lakh but have no savings. However, my bank is offering me a pre-approved home loan of Rs 85 lakh. Will I be able to buy a flat and start paying EMIs? My income is around Rs 1 lakh monthly; I am 35 years old. Also, is there a mandatory concept to get a home loan on 80% of the total flat cost? My CIBIL is around 750, so why can I not get a 100% home loan? Please guide.  

By Adhil Shetty, CEO, BankBazaar.com 

Let me break this down into three points. First, there are very clear limits set on the loan-to-value (LTV) by the RBI. These limits determine how much of the property’s value can be financed through a loan. For home loans up to Rs 30 lakh, the LTV ratio can go up to 90%. This means you can finance up to 90% of the property’s value through the loan, and you need to make a down payment of at least 10%. For home loans above Rs 30 lakh and up to Rs 75 lakh, the LTV ratio may be capped at 80%, and for home loans above Rs 75 lakh, the LTV ratio may be limited to 75%, and you will need to contribute a down payment of at least 25%. These are the maximum LTV allowed and the lender may not offer you the entire LTV. 

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Second, pre-approval does not mean you will get the loan for the entire amount. It only means that the bank considers you eligible for a loan of up to a certain amount. Once you apply for a home loan, you will be evaluated based on your income, outstanding liabilities and ongoing debts. Your property will also be evaluated, and based on this you will be able to get an approval for the home loan. This amount may be much lower than the pre-approved amount. Typically, the maximum home loan you will be able to avail would be 4-4.5 times your annual salary. The maximum EMI the bank will allow you would be 30-40% of your income. 

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Third, the cost of a house is not the price of the house itself. There will be other overheads, such as registration and stamp duty charges, furnishing and fixtures, society membership fees, legal charges, processing fees, etc. You will need roughly 15% of your property value for these things as the loan will not cover these. Even if you opt for an NBFC that includes some of these costs in the loan LTV, you will not get 100% of your property value as a loan, and you will still need personal funds for these. 

(Views expressed by the investment expert are his/her own. E-mail us your investment queries at askmoneytoday@intoday.com. We will get your queries answered by our panel of experts.)