- Terms of Home Loan
- Offer or sanction Letter
- A sanction letter usually states the following
- Equated Monthly Instalments (EMIs)
- Parameters a bank consider for EMI like
- Resale property
- Pre-approved property
- Misconceptions held by borrowers related to pre-approved properties
- Credit appraisal
- How is the Pre-Payment of loan beneficial?
- Processing & Administrative Fees
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
- 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
- Amount of loan sanctioned
- Loan tenure
- Interest rate applicable
- EMI and pre-EMI amounts applicable
- The validity of the sanction letter
- Terms and condition of a loan agreement
- 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 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
- 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.
- 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.
- 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.
- 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
- 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
- Nature of profession
- 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.
- 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.