It usually becomes hectic while taking home loans especially with all the paperwork and cumbersome legal formalities involved. People who take a home loan for the first time are unfamiliar with several loans and find themselves at a loss while dealing with bank officials and builders.

Taking a loan for your dream house is a very big step and you need to be more careful regarding all the formalities related to the loan. People can apply for a home loan online.

Therefore, before you leap, you must familiarize yourself with related terms and common practices.

Terms of Home Loan

Margin

  • In 2010, the Reserve Bank of India (RBI) sets a ceiling limit on home loans against the property up to 80% of the property value.
  • This clearly refers that the bank pays 80% of the total cost of your property. And the remaining 20% needs to be paid by you.
  • The remaining amount is referred to as a margin or down payment.

Offer or sanction Letter

  • It is a formal confirmation from the bank stating that it has agreed to consider you as one of its loan customers but it doesn’t confirm the sanction of home loan.
  • After verification of all legal documents and eligibility of an applicant, your loan will be disbursed.
  • The entire process needs to rework if the loan is not availed during the period of 6 months.
  • The sanction lapses and the entire process needs to be reworked if the applicant approaches the bank again.

A sanction letter usually states the following

  1. Amount of loan sanctioned
  2. Loan tenure
  3. Interest rate applicable
  4. EMI and pre-EMI amounts applicable
  5. The validity of the sanction letter
  6. Terms and condition of a loan agreement

Post-dated cheques

  • It is a common practice of taking postdates cheques for a home loan.
  • It states the exact EMI amount that is signed by you.
  • These cheques cannot be processed ahead of the date mentioned on them.

Disbursement

  • Disbursement simply means payment.
  • It simply refers to the release of the loan amount to the borrower by the lender.
  • Once all the submitted documents have been verified, banks disburse the loan amount and the down payments have been paid.
  • A loan is always disbursed by cheque, which can be credited into a loan account with the bank, it is never given by cash.
  • Most banks charge a loan disbursement fee. It is the additional amount when your loan is granted.
  • This fee covers all expenses involved in giving the loan to you.

Equated Monthly Instalments (EMIs)

  • EMI refers to repayments that you make every month to pay off your loan.
  • It is an unequal combination of your principal repayment and interest payments.
  • If we consider other liabilities, EMI should not exceed more than 30% of your total income.

Parameters a bank consider for EMI like

  • Principal amount
  • Repayment period
  • Rate of interest

Pre-EMI

  • A property which is under construction and you buy it then the loan amount is partially disbursement to the builder.
  • Only interest payments are made on that amount when a loan is partially disbursed.
  • These interest payments are known as pre-EMI.
  • The longer your builder takes time to complete the whole construction, the more interest you pay to the bank, adding on to the cost of your property.
  • Pre-EMIs also come with tax benefits. You can claim the tax deduction in five equal annual installments after the construction is completed.

Resale property

  • If you buy a property from someone who owns it before, it is termed as resale.
  • It actually shows that you are buying a new home straight from the builder and are not the first owner of that property.
  • Make sure you have a record of all the previous owners of the property while buying a resale property.
  • The re-seller has undisputed ownership.
  • This will ensure the smooth processing of loan applications.

Pre-approved property

  • Nowadays, several builders get their projects pre-approved by lending institutions.
  • A pre-approved property means that the concerned financial institute has verified all legal and technical documents for the project and has found them in order.
  • Any of the buyers who apply for a home loan for this property, need not get the legal verification done again.

Misconceptions held by borrowers related to pre-approved properties

  • Getting a home loan is assured
  • The project will complete on time
  • The project is legally safe
  • Less documentation is good
  • You cannot take a home loan from other lenders

Credit appraisal

  • It is a check on the applicant’s financial situation to determine eligibility for a home loan and the maximum loan amount.
  • The creditworthiness of an applicant assures his repayment capacity.
  • Several parameters are considered to confirm the creditworthiness of a loan applicant;
  • Incomes of the applicant and co-applicant
  • Age of applicants
  • Qualifications
  • Nature of profession
  • Employer
  • Security of tenure
  • Tax history
  • Assets owned and investments
  • Additional sources of income

How is the Pre-Payment of loan beneficial?

Prepayment is when a borrower chooses to make a lump sum repayment of the loan. Pre-payments are beneficial as they help get rid of debt faster by reducing loan tenure.

Security

  • When a borrower takes a loan, security is the priority which he/she wants.
  • Due to some circumstances if a person fails to repay the loan then the bank can sell his property or convert it into an asset to recover the loan amount.
  • The borrower must analyze the terms and conditions of various banks, and choose the one with favorable terms before finalizing a loan.

Processing & Administrative Fees

  • Every bank charges processing and administrative fees for processing the documentation of your home loan.
  • On average, the fee ranges from 0.5% to 2% of the loan amount.
  • Though it seems like a small percentage, it can add considerable weight to your home loan costs.
  • Several banks offer schemes wherein they waive off processing fees, to attract more customers.
  • So while choosing a bank, it is advisable to opt for one which offers the lowest or no processing and administrative fees.