Home Loan Guide for First Time Home Buyers

A Home Loan is nothing but a sum of money availed from financial institutions to buy, build or renovate a residential property. Home Loan is a secured loan, meaning that in case you are unable to pay the loan back, the financial institution can legally take possession of the collateral to recover their money.  

Home Loan and Its Basic Types:

There are several different types of home loans, depending on the purpose they are used for. Some of the most commonly seen ones are:

1. Home Purchase Loans - Home purchase loans are the most common type of home loans, easily available and offered by every bank. But, each bank follows their own interest rate policy and loan terms. This type of loan is typically taken to purchase an under construction or a newly built house/ apartment.
2. Land Purchase Loans  - Land purchase loans, as the name suggests, are used to fund the purchase of a land where an individual is planning to construct their home. Lenders usually provide a maximum of 85%-90% of its cost, while the other 15% should be put together by the applicant. This type of loan solely funds the purchase of a land with the condition that the land is non agricultural and located in an approved area.  All the major banks and NBFCs like HDFC Bank, Axis Bank, Punjab National Bank, Piramal Finance, Tata Capital, and other leading lenders offer land purchase loans, albeit under different names.  
3. Home Construction Loans - These types of loan are available for individuals who are planning to build a house of their own land. The application and approval process to avail this loan though is a little tricky. Take for example, if the individual wants the cost of land to be included as a component for the total price of the house, they must have bought the property within the previous year.Again, every major bank in India like HDFC, Axis, State Bank of India, Canara Bank, UCO Bank, Bank of Baroda,  etc offer this type of loan. Loan disbursement is done in several installments known as “construction linked payments” which would correspond with construction milestones.
4. Home Improvement Loans - Home improvement loans are taken by individuals who are unable to mobilise enough funds to renovate the house they are living in. The maximum home improvement loan an individual is eligible for depends entirely on their debt-to-income ratio and their financial standing.The loan amount is also based on the estimated cost of renovations.
5. Balance Transfer: In case you have an existing home loan with one bank, but find another bank offering a lower rate of interest, you can avail a balance transfer loan. It involves moving your existing home loan from one bank to another to get a lower interest rate. The main aim of this type of loan is to reduce your loan tenure and your EMIs. The new lender would pay off the loan amount remaining to the old lender & you will begin repayment to the new lender under set terms and conditions. 

What are The Eligibility Criteria for a Home Loan?

All banks and NBFCs in India have their own eligibility criteria a prospective home loan buyer has to meet. Here's a list of the primary requirements.

• You need to be aged between 18 and 60 years. The younger the applicant is, higher are the chances of loan getting sanctioned.
• You need to be a salaried or a self-employed individual with a steady income.
• You need to earn more than the minimum income quoted by the banks.

These three aspects qualify you for a loan. However, there are a few other factors on which your application hinges. They are:

• Your monthly income: When you apply for a home loan, lenders assess your FOIR (Fixed Obligation to Income Ratio). Most banks allow a FOIR of 40%–55%, depending on income stability and credit score.  
• Other loan commitments: Having a high monthly income doesn't necessarily guarantee you a home loan. Also, if you are in the pursuit of repaying any other loans, the total loan amount you'll be eligible for will significantly decrease. This is why you need to make sure to clear every other loan commitment before applying for a home loan.
• Your down payment capability: A lender never gives out the entire loan amount you've applied for.  If you are applying for a new home loan, you should make sure to have the down payment fund ready so that your application doesn't get rejected.

As per updated RBI norms, lenders finance based on LTV (Loan-to-Value) ratio:

1. Up to Rs.30 lakhs→ Up to 90% LTV
2. Rs.30 lakhs to Rs.75 lakhs → Up to 80% LTV
3. Above Rs.75 lakhs → Up to 75% LTV

What are The Documents Required to Apply for a Home Loan?

Every home loan provider more or less follows the same documentation process before signing off on the loan application. Here is a list of documents you need to keep ready when you decide to take a home loan.

• Fully filled and signed application form along with a photograph.
• Identification proof and residence proof: For ID proof you can provide anything like your PAN Card and for residence proof, you need to provide a copy of your passport/driving licence or any of the latest utility bill.
• Cheque for the processing fee.
• Bank statements of the previous 6 months.

Most lenders now accept Video KYC, CKYC, and DigiLocker documents as valid ID/residence proofs. Online bank statement fetching and e-signing of loan agreements are also commonly used in 2025.    

Besides these, there are also a few other documents you need to provide depending on whether you are a salaried or a self-employed professional.

Salaried professionals need to provide their pay-slips for the last three months along with their Form 16 or Income Tax Returns (ITR) filing.

Self-employed professionals, on the other hand, need to provide proof of education qualification certificate and proof of their business' existence. Apart from this they need to provide proof of ITR for the previous three years which should also include the computation of income. Lastly, they need to provide a CA audited/certified balance sheet and profit-loss account for the previous three years.

How is the Interest Rate for a Home Loan Fixed? 

The RBI has a specific formula for the calculation of home loan interest rate; 

Home Loan Interest Rate = Repo Rate (External Benchmark) + Spread (Bank's Margin) 

1. Repo Rate:  

• From 2019 onward, all new floating-rate home loans are linked to an External Benchmark, the RBI Repo Rate. 
• It is the rate of interest at which the RBI lends money to commercial banks. 
• Your home loan interest rate is directly proportional to the repo rate. If RBI increases the repo rate, your rate of interest automatically goes up and vice versa. 

1. Spread: The extra percentage charged by the bank, over the repo rate in order to cover their risk and make a profit is the spread or the bank margin. Spread is decided on your CIBIL score, amount of the loan, type of employment, your loan to value ratio and your gender as well. 

Types of Interest Rates for a Home Loan in India

Given below are the types of home loan rates available in India.

1. Fixed Interest Rate Home Loan: A fixed interest rate home loan is a type of home loan rate, wherein the interest rate is fixed for the entire tenure of the loan. This means that the interest rates aren't likely to change even if there are significant changes in the economic market. Under this type of loan, a major component of EMIs in the beginning go into servicing the interest while the principal repayment only comes in the latter half.
   

Advantages 

• Interest rate of the loan will remain the same throughout the entire loan tenure. 
• This type of interest rate is helpful for planning finances due to the fixed and predictable repayment schedule. 

Disadvantages 

• Interest rates on these loans are 1% to 2.5% more expensive. 
• This type of interest rate doesn't provide any advantage if the market interest rates lower.  

1. Floating Interest Rate Home Loan: A floating interest rate home loan is a home loan where in the rate of interest varies according to the market conditions. This means that interest can either go up or down depending on how the market is performing.

Advantages  

• These interest rates are less expensive compared to fixed-interest rate loans.  
• As the interest rates vary continuously, borrowers can save huge amounts on the total interest paid over the loan tenure compared to a fixed rate. 
• These rates have not gone above 10% and hence it is affordable for most people. 

Disadvantages  

• The biggest disadvantage of this type of interest rate is its unpredictable nature. As the interest rate is dependent on the market it is very volatile. 
• In case of an unexpected market movement, the interest rates can increase significantly, leading to an increased EMI. 

In 2025, fixed-rate home loans are usually 0.30%–1% higher than floating-rate home loans. Floating rates offered by major banks range between 8.30%–9.60% depending on the borrower’s credit score.  

Things That Affect Your Home Loan Application and Approval Process

There are plenty of factors that will have a bearing on how your loan application fares with a a lender you have chosen to apply with. They are:

• Age
• Income bracket
• Property type and its location
• Market value of the property

After you submit the required documentation to the lender, they will thoroughly vet the details you've provided to ensure that they check out. Depending on their findings, you will be offered a loan deal. One important thing you should understand here is that their findings will be directly proportional to the term and conditions you get.

What are the Home Loan Deals Offered by Some of The Leading Banks?

Here are some of the best home loan deals offered by some of the leading banks in the country.

1. State Bank of India:  SBI currently offers repo-linked home loans with rates starting around 7.50% p.a. up to 8.35% p.a., depending on credit score, employment profile, and loan amount. Maximum tenure remains at 30 years
2. HDFC Bank:  HDFC bank currently offers a home loan at an interest rate 7.90% p.a. to 13.20% p.a.
   

What are the Things You Should Keep in Mind Before Applying For a Home Loan?

A home loan can be a massive burden if you don't consider all the details that go into it. Here are a few things you should keep in mind before applying for one.

• Your Borrowing Capacity: It is advisable that you should not choose a higher loan amount just because you earn more. Before applying for a home loan, it is important to understand how much you can comfortably afford to repay. Start by listing all your monthly expenses, such as household costs, travel, children’s school fees, utility bills, existing loan EMIs, and other regular expenses. The money left after covering these expenses is the amount you can safely use to pay your home loan EMIs.
• Credit Score:You may not feel the importance of credit scores all that much, but it is the most crucial determinant of the interest rate you are likely to get. For a good home loan rate, you will need to maintain a credit score of 750 or above. Having a score such as this would endear a lender to you as they are less likely to be a liability for them. This will also help you get an interest rate which is a which basis points lower that what they officially claim.
• Loan Tenure:Home loans can often go on for over 20 years, and up to 30 years, in the case of SBI. Analyse the loan tenure you've been offered and see if the tenure works out for you. If you think you need more room, negotiate a better term with the bank or reduce the total loan amount you have applied for instead.
• The Terms and Conditions of The Loan:The terms and conditions you sign when borrowing a home loan is legally binding, which suggest that you have read all the terms and conditions laid out by the bank and comply with the offer. What you may not know, however, is that this is also one of the places where lenders tend to add draconian clauses and enforce them. So, avoid falling into such rabbit holes and make sure to go through all the clauses and sub clauses mentioned in the loan agreement before signing on the dotted lines.In the current market, purchasing a home is nothing short of an achievement. To make the best out of the situation always make sure to take a well-informed decision.