NRIs have always loved buying housing properties. Most NRIs buy residential property for their families, while others do so for pure investment. Also, the regulations in our country encourage them to acquire home loans and build their dream home.
Who is an NRI, as per the FEMA and the Income Tax Act?
An NRI is an Indian who has lived in the country for less than 182 days or more and resides in another country. According to experts, the FEMA (Foreign Exchange Management Act) determines whether you are eligible to invest as an ordinary citizen or an NRI, whereas the Income Tax Act determines the tax obligation related to such investment.
Here are some important factors that NRIs should consider while applying for a home loan:
Home Loan eligibility for NRIs
For NRIs, home loan eligibility depends largely on their credit score, job profile, employer profile, disposable income, etc. For NRIs working in countries with restrictive repatriation policies, lenders will only consider their repatriable income when evaluating their loan eligibility. Some lenders may also take into account an applicant's educational qualification and time spent abroad when approving their loan applications.
Get your credit report at least six months before applying for a home loan. Credit scores of 750 and above are generally considered good and have a higher chance of loan approval. Some banks also offer lower-interest loans to those with a higher credit score.
Home Loan tenure for NRIs
Usually, lenders offer home loan tenures of up to 30 years depending on your age, profession, repayment capacity, etc. Some lenders also offer shorter loan tenures to NRIs, ranging from 10 to 20 years, depending on their educational qualification, country of residence, etc.
When deciding on a home loan tenure, consider your financial goals too. Don't settle for an aggressive repayment schedule just to reduce your interest cost. You can always make future prepayments with surplus liquidity without incurring any prepayment penalties.
Home loan repayment options for NRIs
To repay the home loan, an NRI can use regular banking channels to transfer funds from an overseas bank account, post-dated cheques or an Electronic Clearance Service (ECS), or cheques from a local relative's bank account.
Loan-to-Value (LTV) Ratio
The LTV ratio is the total proportion of a property's value that banks can finance through the loan. It can't exceed the regulatory cap on Home Loan LTV ratios set by the RBI. The loan amount for an NRI Home Loan is divided as follows, with the corresponding LTV ratio:
Loan Amount: Up to Rs. 30 lakhs - Above Rs. 30 lakhs to Rs. 75 lakhs - Above Rs. 75 lakhs
LTV Ratio: Up to 90% of the property’s value - Up to 80% of the property’s value - Up to 75% of the property’s value
Lenders carry out a credit risk assessment to determine the final LTV ratio for an NRI Home Loan applicant. Some of the factors considered during the credit risk assessment process include the market value of the property, the applicant's credit profile, repayment capacity, etc.
Interest rate type
While lenders mainly offer home loans to NRIs on floating interest rates, many also offer mixed-interest rates. Loans with a mixed interest rate are fixed for a set period and then charged on a floating rate basis. A few lenders also offer fixed-rate home loans. However, such loans have higher interest rates compared to the other options. Also, many lenders allow home loan borrowers to switch from floating to fixed rates and vice versa after paying a fee to switch from one to the other. Although it's best to opt for floating-rate home loans as they do not penalise prepayments.
Loan reset frequency
Since April 2016, bank home loans have been subjected to an MCLR-based interest rate regime. This regime requires banks to compulsorily reset each borrower's floating rates on pre-specified reset date(s) at least once a year. The reset interest rate will remain in effect until the next reset date. In this current rising interest rate scenario, try to find a home loan with an annual reset date.
Power of Attorney (PoA)
Most lenders require a Power of Attorney (POA) when lending home loans to the NRIs. Since the borrower will be residing away from India, a POA will provide the lender with someone on behalf of the borrower to deal with if a property or loan-related issue arises. Lenders typically prefer NRI borrowers to appoint their parents, spouse, or children as the POA-holder.
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