Home loans bring you a step closer to fulfilling your dream of owning your own house. In addition to having a place that you can call your own, owning a house is a great investment. With property rates hitting the ceiling, purchasing property can be quite profitable in the long run.
With increased access to Home Loans, you don’t have to save for years to finally get your own home. However, the nomenclature involved can turn the entire process into a daunting task. Before you get your hands on the perfect loan for you, it’s wise to be well-versed with the associated terms. Without further ado, let’s get started.
Margin
This is the difference between the value of the property and the loan amount provided by the bank. In essence, the margin is the down payment you must make while purchasing the property.
In 2010, the Reserve Bank of India (RBI) set a limit on housing mortgages. As per the RBI mandate, a bank cannot offer a loan of more than 80% of the property’s total value.
Let’s assume that you wish to purchase a property worth Rs. 1 crore. The bank will be able to sanction only 80% of the value. Which means you’ll have to pay the remaining sum as a down payment of 20%. Therefore, the bank will loan you Rs. 80 lakhs, and you will have to arrange for and make a down payment of the remaining Rs. 20 lakhs. The margin, in this case, is the amount of Rs.20 lakhs.
Offer letter
Also known as the ‘sanction letter’, this is a formal confirmation letter sent by the bank to acknowledge your eligibility as a prospective borrower. The offer letter remains valid for 6 months. In case you do not receive a loan in these 6 months, the whole procedure must be started from scratch.
The sanction letter usually states the following:
- Value of the loan sanctioned
- Tenure of the loan
- Interest rate
- Monthly repayment amount
- Validity of the sanction letter
- Other terms and conditions of the loan agreement
Equated monthly instalments (EMI)
This is a term that most of us are already familiar with. EMI is the monthly amount that a borrower pays in order to repay the loan. EMI starts once the loan has been fully disbursed.
The EMI to be paid each month is calculated based on the sum borrowed, the rate of interest applicable, tenure of the loan, and the processing fee involved.
You’ll find the breakup of your EMIs over the tenure of the loan in your amortization schedule, which is a table that records the periodic loan payments. It’s important that you examine your amortization schedule regularly to stay up-to-date with any changes in the interest rate or loan tenure made by the bank.
Post-dated cheque
As the name indicates, this is a cheque written out for a future date. Taking post-dated cheques is a common practice in banks for loan repayment through EMIs.
These cheques have to be addressed to the bank, clearly stating the EMI to be paid, and duly signed by you. Banks cannot process these cheques ahead of the time specified.
Disbursement
Disbursement stands for the loan payment made by the lender to the borrower. It refers to the release of the loan amount from the bank to the borrower. The loan is disbursed only after the necessary documents have been submitted to the bank, appropriately verified, and loan has been approved.
If the entire loan amount is disbursed by the bank at one go, it is called a ‘full disbursement’. In this scenario, the bank usually hands over the entire sum to the seller of the property on your behalf.
Similarly, when the bank releases the loan amount to the borrower in several stages, it is called a ‘partial disbursement’. For instance, the bank you’re borrowing from may decide to offer you 30% of the loan amount only after completion of the first floor of the building.
‘Advanced disbursement’ is when the entire payment is done even before the completion of the project. This is carried out only if the buyer/borrower requests the bank to do so because he/she is convinced that the builder will finish construction on time. This, however, is not too common a practice.
Credit appraisal
This is one of the standard processes associated with Home Loans, or any other loans for that matter. Credit appraisal is the evaluation of the borrower’s financial status to determine his/her eligibility for the loan. Conducted by the lender/bank, the assessment of the borrower’s repayment capacity involves certain parameters listed below:
- Incomes of the applicant and co-applicant
- Age of applicant
- Qualification and nature of his/her profession
- Employer details
- Tax history and credit behaviour
- Assets and investments
- Liabilities
Resale property
If you purchase a property from someone who already owns it, it is called a resale. In this case, you aren’t buying a new home directly from the builder and will not be the first owner.
While buying resale property, remember to obtain a record of the previous owners, besides making sure that the reseller has uncontested ownership of the property.
Security/collateral
Collateral is a property or other asset that a borrower offers to the lender as a way to secure the loan, or in other words, to ensure his/her repayment ability.
In the event that the borrower is unable to make the loan payments as promised, the bank can confiscate the collateral to retrieve the losses suffered. To make it even more simple, if the borrower defaults the loan, the bank seizes the asset as a compensation for the outstanding amount.
Pre-approved property
Sometimes, banks may verify certain properties as entitled to a Home Loan. Builders often get their property pre-approved by banks to promote it for sale. Now, it’s important to remember that a pre-approved property does not always mean a completely safe one.
Here are certain facts that you must bear in mind before investing in a pre-approved property:
- There is no guarantee that a Home Loan on such a property will always be approved.
- The builder may choose to share important documents directly with the bank. Ensure that you have access to all the legal documents involved.
- Even though the property is pre-approved, you are free to choose a different lender if you think fit.
This article was originally published on bankbazaar.com and re-published on www.squarerooms.com.sg with permission.
