It usually becomes hectic while taking home loan especially with all the paperwork and cumbersome legal formalities involved. People who take home loan for the first time are unfamiliar with several loan and find themselves at a loss while dealing with bank officials and builders.
As 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 home loan online.
Therefore, before you take the leap, you must familiarize yourself with related terms and common practices.
Terms of Home Loan
- In 2010, Reserve Bank of India (RBI) sets a ceiling limit on home loans against the property upto 80% of the property value.
- This clearly refers that 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 margin or down payment.
Offer or sanction Letter
- It is a formal confirmation form the bank stating that it has agreed to consider you as one of its loan customers but it doesn’t confirm sanction of home loan.
- After a 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 applicant approaches bank again.
A sanction letter usually states the following
- Amount of loan sanctioned
- Loan tenure
- Interest rate applicable
- EMI and pre-EMI amounts applicable
- Validity of sanction letter
- Terms and condition of loan agreement
- It is a common practice of taking postdates cheques for home loan.
- It state 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 in order 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 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 resale property.
- The re-seller has undisputed ownership.
- This will ensure smooth processing of loan application.
- Now days, 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 home loan from other lenders
- It is a check on the applicant’s financial situation to determine eligibility for 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 Pre-Payment of loan beneficial?
Prepayment is when a borrower chooses to make 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 first 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 loan amount.
- 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 an average, the fee ranges from 0.5% to 2% of 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 fee, 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.