Home Loan

A home is a dream possession for any one in this world. Due to the rising property prices, it has turned out to be nearly an unfeasible task for an average earning individual. The conception of home loan comes as a helping hand in circumstances, when one cannot afford to make a bigger payment. There are several home finance companies and banks to offer loans these days. The process of selecting a loan service in the market has become a mind-numbing and complex task due to the rapidly increasing finance market in the country. Adding to this, there are obscure industry terminologies, which make the mission a lot more complex. We present to you some fundamentals of home loan techniques, which will help you understand the process of applying and getting a home in a more robust way.

Home Loan Basics

When to apply for home loans

The home loan needs to be applied only after thorough planning however, even before one decides to purchase or build a property. The amount is approved in parts and given only after adequate confirmation of eligibility of the candidate and after thorough processing of required documents and other procedures is done.

Eligibility conditions for a home loan

To decide upon the eligibility of the customer, home loan organizations primarily focus on whether if the applicant is capable of paying back the loan. This is gauged by taking into account, factors such as salary, age, educational qualification, number of dependents in the family, income of applicant’s spouse, other properties, legal responsibility, constancy in income and history of savings of the applicant.

Maximum loan amount

Home loan companies generally account for 75-80% of the property value. However, depending upon the other factors mentioned above the amount can vary drastically depending on the decision of the institution granting the loan.

Repayment period options

Repayment period normally ranges from 5 to 15 years; however it may even be extended up to 20 years although at higher rates of interest. 

Payable fees and charges

The applicant may incur some additional charges which account for the following:

Processing Fee: It is paid to the home loan age as a fee, which can be a percentage of the loan or a fixed amount.

Down payment Fee: If the loan is re-paid before its term, then a fine has to be paid by the individual, which is charged by the banks and range from 1-2% of the total loan amount being paid.

Assurance Fee

If the loan is not availed within the predetermined time, then few banks impose some tariff at the time of sanctioning and processing the loan amount.

Assorted Expenses

Some loan providers also charge as a fee for processing documentation work and consultancy charges.

Security for the loan

In most cases, the property regarding which the loan is applied is considered as a security. The bank that offers the loan has the control over the property till the loan amount is completely paid off. However, certain companies demand custody of more items while conceding a loan which can be life insurance policies, assurance of shares, mutual funds documentation, deposits in a bank and other investments.

Documents required at the time of application

Pre-approval state

• Age Proof
• Bank a/c statement of the last 6 months
• A copy of latest credit card statement.
• Photographs (passport size)

For salaried Employees

• Salary and TDS certificate
• Most recent pay slip
• Letter from the employer

For self-employed/ businessmen

• Review financial statement of the previous 2 years
• Registration certificate of the enterprise under the Shops & Companies Act/ Factories Act

 Tax Benefits

Tax concession can be gained on both principle and interest paid towards home loans. With effect since 1^st April 2005 (assessment year 2005-07) under Section 80C of the Income Tax Act 1965: Reimbursement of principle amount of loan, beside other savings like PF, PPF, Life Insurance Premium etc up to a maximum amount of Rs.1,00,000/- is entitled to be deducted from gross income.

Time required for loan disbursement

Once an individual applies for a loan, the payment is disbursed within 3-15 days from the day of application. However, the payment is done only once the process of documentation, approval and other formalities are completed.

Types of Home Loans in India

The home loan business in India has flourished beyond imagination due to the economic progress of the country. This led to a stiff competition amongst the loan providers. The housing companies are coming with attractive offers to allure the customers. This led to the emergence of several schemes and kinds of home loans in the market.There is a loan to purchase a new home, which comes under the Home Procurement Loan.One can also avail the Home Construction Loan by mortgaging the existing property.There is also a Home Improvement Loan, which caters finance to repair the house internally or externally. This includes loan for renovating the home, adding tiles or taking up repair works like plumbing, tiling and making the home water-resistant.Home Extension Loan takes care of the cost involved in the expansion or alteration of home. This type of loan is granted after the applicant meets certain pre-requisites based on the current property value, salary of the applicant and also the financial background.Home Conversion Loan provides adequate funds to relocate from the current premises, which has been funded by a home loan to move to a new home. The existing loan can be transferred to the new one, including any additional approval of funds.A type of loan known as Land Purchase Loan can be availed to purchase land for construction or rather investment purposes.Any existing home loan with higher rates of interest can be transferred to a new loan with lower interest rate by availing the facility of Balance Transfer Loan.Any private loan taken from acquaintances can be paid off with the help of Re-Financing Loan to avoid higher rates of interest.If you wish to sell your current property and go for a new home, then you can avail Bridge Home Loan. This way one can avoid extra burden in case if they do not find someone to purchase the old home.There are also NRI Home Loans, for Non-Residential Indians to buy property for residential or investment purposes.The stamp duty sum can be paid off on the purchase of a property by availing the Stamp Duty Loan.

Home Loan Process

The percentage of people who have the potential to bear the entire expenses of a home is nominal. Hence, it has become vital for an average-income individual to go for a home loan. Due to the boost in demand for home loans, the entire process has been reorganized. However, still there are few compulsory procedures that need to be followed while applying for a home loan.

Step1

An official application needs to be sent to the finance company from whom you wish to avail the loan. Documents supporting the proof of age, address proof, identity proof, specifics of educational qualification, particulars of employment, details of the property about to be purchased, bank statements, financial history of the applicant and also the health records are taken into consideration when applying for a home loan.

Step2

Once the application is sent for verification, certain amount in the form of procession fee needs to be paid. This is usually charged on percentage basis (usually 1% of the total loan amount) depending on the total amount of loan that has been requested.

Step3

The processing of the application gets momentum, once the application is approved by the verification department of the agency. Once the paperwork is done and processing fee has been paid, the financial institution may also organize a personal meeting to discuss further proceedings.

Step4

The home finance company may send a field officer to survey the repayment capacity and the employment stability of the candidate. The also verify the residential information of the applicant thoroughly. This constitutes the most important phase in the entire process, since any fault in any one of them may result in the denial of the loan. However, the bank will disburse the payment if it is convinced of the above parameters.

Step5

After the loan is approved, a statement is sent containing the details of the total amount of loan approved, rate of interest, the type of interest being charged (whether floating or fixed), number of years by when the loan needs to be paid off, and other terms and conditions.

Step6

Often, the property regarding which the loan was taken, acts as security. Therefore, all the originals of the document copies have to be submitted. The home loan company may also carry out a thorough examination of the property and also conduct an authorized check.

Step7

After getting pleased with the technical, financial and legal assessment of the property, the legal documents are prepared and a home loan accord is signed on stamp papers after submitting post-dated checks for fixed term.

How to choose a Housing Finance Company

The most important challenge of a home loan, is selecting the right finance provider. There are several loan providers in market today, and hence selecting the right one can be really tiresome. The interest rates may not differ much amongst many companies, however more prominence should be given to the company providing better services. Any loan provider should wrap up the task with proper attention meeting the needs of the customer, ensuring minimum documentation required and also being receptive to their questions/doubts.

Factors to be taken into account while selecting a home loan provider

Amount of Loan

The amount of loan granted is gauged based on the repayment capacity of the application and also takes into account, the rate of interest, the duration of loan etc. The EMI’s calculation is based on the salary of the individual applying for a loan which is about 50% of his monthly income. Sometimes, there is also a provision to go for higher EMI’s adding to the income of parents/spouse.

Hidden Costs

It is mandatory that the applicant scrutinizes the entire deed of the loan thoroughly, to understand the intricacies within and to avoid confusion. Some loan providers do not take into account, the technical assessment of the property, while the others may perhaps be adamant on a registered credit that will sky rocket the loan amount. Down payment penalty could be a very pricey amount, one may incur in the form of hidden costs. One should plan to pay off the loan amount well before time, however should be cautious regarding the fine, which may be charged for forestallment.

Fixed and Floating Interest Rate:

The loan agreement should be read properly to ensure that the details regarding the rate of interest are mentioned clearly. While, some providers may offer a fixed rate of interest, the rest may charge a floating rate subjected to depend on the market standards.

Value-addition

The Home Financing Corporations these days offer various services in their effort to attract or retain their customers. The counsel offers guidance to the customers in selecting the right property, legal obligations involved, having a dialogue with the builder, quick processing and payout of the loan amount. These factors play a vital role in selecting the right service provider to meet our requirements and standards while applying for a home loan.

Tips for buying a property

Buying a property is a tedious and risky affair, if taken up without proper forecast and investigation. Some of the tips stated below can come as a helping hand while buying a property.catalog of all the prerequisites has to be prepared when going for a property purchase to avoid any sort of ambiguity. Internet, real estate agents, friends and relatives are one good source of information from whom we can take guidance regarding the property value and market conditions.

Title Deed:

To verify and confirm if the property has already been encumbered. Any bank or financial institure can be approached to verify if the property information is comprehensible. Depending on the title deed, the financial institute approves for any loan.

Project under construction:

An allotment letter and a development agreement can to be demanded from the builder if the property is still under construction. The allotment letter is issued only after an initial payment is made and contains the information regarding the total value of the asset, construction and payment schedule, blue-print and architecture plan of the property and deliery date of the property and builder’s liabilities in case of any issues.

The development agreement is nothing but the document containing terms and conditions as per which the landlord permitted the development of the property. This deal is between the owner of the land being developed and the builder who has taken up the development project.

Completed Property:

Before purchasing any property, one has to ensure that the seller has the identity of the property, the title and its possession before signing up any agreement. One need to ensure whether the building meets the standards and requirements pretensed by the local authorities and that all dues like property tax, society tax, electricity bill, municipal bills etc have been paid. Also documents like allotment letter, completion certificate and occupational certificate need to be collected from the builder.

Stamp duty and Sales Deed:

Stamp Duty can be seen as the amount charged on the transaction value of every registered sale, that goes to the government. The sum that needs to be paid by the buyer to register the property is contained in the Sale Agreement.

As per the law, it is mandatory that the sale deed has to be stamped and registered in the presence of both the buyer and seller at the nearby sub-registrar office.

Tips For Selling Property

 It is neither a child’s play nor rocket science, when it comes to selling a property. One can really get tempted to sell his property, owing to the boom the real estate market is going through. However, certain precautions and steps ensure that you get the best deal at the disposal of your property.

Some of the property selling tips that can be very helpful are:

Right Pricing:

One can assess the value of his property by himself through researh or approach any valuator who knows the market trend, even if it means, spending few bucks. One should also probe regarding the market conditions, financial help, procedure and other formalities.

Right Marketing:

Today, potential buyers include retired government employees, young couples working in MNC’s, entrepreneuers etc. Hence we need to promote the value of the property accordingly, neither under estimate it nor over quote. We can get help from various agents in this regard to analyse the situation and the time to sell the property.

Right Cosmetic Work:

Sometimes, we may incur repair costs to re-model our property. It is very important to ensure the returns are at least the 3 times the investment involved in the repair of the property. However, investing exaggeratedly for a meager profit is not an advisable decision.

Screening buyers:

A potential buyer can be recognized by the virtue of his credit value, income and overall reputation.

Negotiations:

The initial offer of the buyer needs to be evaluated within taking into consideration the market value. Once the initial agreement has been reviewed and analysis has been done, financial processing can be taken up after consulting a legal advisor to ensure the smooth processing of the deal.

Documentation:

Before proceeding with the registration of the property, it is recommended to obtain a no-objection certificate from the society of the building to avoid any discrepancies.

Important Terms

Acceptance Letter:

This is the letter though which the loan applicant conveys his willingness to acknowledge the loan. This letter has to be sent to the bank within about 3 months from the time the loan has been sanctioned.

Advanced EMI:

This is seen as the number of EMI’s in the form of post dated cheques, which is signed at the time of the disbursement of the loan.

Allotment Letter:

This contains information regarding the decided value, disbursement and the schedule of construction, blue print of the property, date of delivery of the property and the liability of the builder in case of any delay in the completion of the project or issues post the custody of the property.

Annual reducing balance of the principal:

For any loan, the EMI’s are calculated on annual basis, based on the outstanding principle at the beginning of every annual term. The amount is deducted from the principle every year based on the interest being charged to the customer, which is calculated for the entire year. The principal repaid during the year is seen as the balance EMI and is subtracted from the opening principle balance for the current year to obtain the opening balance on the principle for the next year and so-on. Hence, the calculation of the interest may be initially high for the first few years, however, gradually as the component of the principle increases, the interest shrinks down.

Approved Plans:

This pertains to the plan of the building that has been approved by the local authorities or the municipality. This is actually a sketch or the layout of the entire project in brief and is considered to be very vital, as it can be used to verify if any illegal construction has been made. 

Built-up Area (BuA)

This includes the area over and above the carpet space, which also take account of the inner and outer walls of the flat. This is usually more than 15-20% of the entire area of the flat.

Carpet Area:

This is the net exploitable area within the walls of the flat. This used to be a trend in the past as it was seen as the area within the inner sides of wall to wall. However, this is no longer seen as criteria and flats are sold on the basis of built-up area.

Completion Certificate/ Occupational certificate:

This crucial document is the certificate given by the municipal authority to the developer once the formalities like water and electricity connection have been taken care. This also requires the project to be accomplished as per the statements given in the approval certificate and the commencement plan.

Down Payment/Margin Money:

Any bank/ financial institution usually grants loan up to 85% of the total value of the property that is being bought. However, the rest of the amount needs to be paid by the buyer before the loan amount is paid. This is nothing but the down payment or margin money.

EMI:

It is the Equated monthly Installment. Any loan can be paid off through EMI’s during the entire tenure of the loan.

Fixed Rate of Interest:

The interest remains fixed throughout the tenure of the loan. This is an ultimate option when there may be a speculation of any rise in the interest rates.

Floating Rate of Interest:

In this type, the interest rate may vary depending on the Prime Lending Rate (PLR) predetermined by the reserve bank of India. This can happen only once in every 6 months. A drop in the PLR may benefit the customer, but a rise may result in despair. Whenever, there is a fall in the EMI, some amount of the EMI is refunded to compensate the customer due to a decline in the rate. 

Monthly Reducing Balance of the Principle:

This is same as the yearly reducing balance with the exception of the balance being calculated on a monthly basis and the EMI is divided into 12 installments to calculate the opening balance of principal for the next month.

Mortgage:

An agreement based on which the borrower gives the authority to the financial institution to take the custody of the property as security if the loan is not repaid within the time period. Normally, documents of the property are in the possession of the bank that finances for the property, until the complete amount is paid off.

Possession Letter:

The letter issued by the developer to the customer informing the completion of the construction and that it is ready to be occupied. This also mentions the final dues to be payable by the buyer before taking the custody of the property.

Prepayment:

This means, repaying the complete loan amount before the tenure of the loan is over, which is normally 1-3 % of the total pre-paid amount.

Re-finance:

This can be paying off the existing loan which is on a higher interest rate by applying a loan on a lower rate. This can be from the same bank or from a different one.

However, if the re-financing is done through another bank, then a penalty of about 1% is charged calculated on the outstanding amount.

Registration of an Agreement:

It is always recommended to register the documents immediately after purchasing any property. The registration can be done with the sub-registrar as per the provision of Indian Registration Act. Also, the stamp duty needs to be paid before the registration.

Sale deed:

This is the document supporting the transfer of the ownership of the property for a price to be paid or proposed. This document needs to be registered mandatorily.

Stamp Duty: