Do You Know Top-Nine Home Loan Terms?
Availing of the home loan is a colossal task, given the voluminous paper work and cumbersome legal formalities. Being first-time home-loan buyers, many of us are unfamiliar with several banking jargons.
MakaanIQ collates top nine terms that you must know before reaching out to the lender for a home loan.
Margin money is the home-loan buyer's contribution to the cost of the property. The Reserve Bank of India (RBI) had set a ceiling on home loans in 2010, which caps the amount of loan one can take against property to 80 per cent of the property value. In simple terms, while the bank pays 80 per cent of the total cost of your property, the remaining 20 per cent must be subscribed from your equity.
Higher the margin money, lesser will be your loan amount.
For instance, if you purchase an asset worth Rs 1 crore. The bank will fund up to 80 per cent of the value of an asset, which in this case translates into Rs 80 lakh. The remaining Rs 20 lakh must be arranged by you, which is called the margin money.
A credit appraisal is carried out by a loan officer to determine if you meet the loan eligibility. The assessment of various risks that can affect the repayment of your loan is credit appraisal. Each bank or financial institution has its own set of norms, policies and criteria to evaluate the credit worthiness of a customer. The parameters on which an applicant is evaluated are his repaying capacity, age, qualification, experience, credit score, tax history, cash flows in account, financial history, assets owned, running loans, additional sources of income among other things.
Collateral or security
Collateral is an asset that is used to secure a loan. In case of a home loan, the property being purchased serves as a security against the loan. If you fail to repay the loan for any reason, the bank can sell this property (or collateral) to recover the unpaid loan amount.
The fee charged to process a loan application is the processing fee. It is a charge that adds to the costs of the home loan. It covers home loan documents, appraisals, employment and credit history and various other processes and procedures for the underwriting of the loan. Every bank or financial institution charges the processing fee, which is non-refundable. On average, the fee ranges from 0.5-2.00 per cent of the loan amount.
The lenders, at times, offer loans with zero processing fee to attract customers.
Pre-Equal Monthly Instalment
An Equated Monthly Instalment (EMI) includes both the principal and interest. But a pre-EMI is only the interest part being paid on the amount of loan disbursed, until the full disbursement is done.
When you buy a property which is under construction, the loan gets partially disbursed to the developer and only the interest payment is made on the amount disbursed.
Pre-EMIs come with tax benefits. Once the construction of the property is complete, you can claim tax deduction in five equal monthly instalments, for the interest on loan being paid. However, the principal payment made during this period is not liable for tax deduction.
Sanction letter and sanction conditions
A home loan sanction letter is issued by a bank or financial institution to an applicant who has applied for a loan. A sanction letter is a proof that the applicant is eligible to avail of a certain amount of home loan, subject to the fulfilment of certain terms known as sanction conditions.
The validity of sanction letter ranges from 3-6 months. A sanction letter majorly states the amount of loan sanctioned, loan tenure, interest rate applicable, terms and conditions of the loan agreement, EMI and Pre-EMI clauses, and validity of the letter.
When a borrower chooses to make a lump-sum repayment of the loan, it is termed as the pre-payment of loan. Pre-payment reduces the tenure of the loan and helps the borrower get rid of the loan liability faster.
Technical valuation and legal verification
Bank conducts an independent legal verification of the property through an empanelled lawyer. The lawyer issues a legal verification report to the bank, thus, verifying that the property is free from encumbrances. The verification is done to ensure the authenticity of the documents presented.
For technical assessment, the banks hire an outsourced valuator who fixes the market value of the property on certain parameters. The objective is to ensure that appropriate loan amount is approved on the basis of the market value of the property (i.e. 80-90 per cent of the market value of the property is being funded).
Standing instruction and electronic clearing system
The standing instruction is a way of making the fixed amount of home loan payment at the same time every month. Both savings and current accounts can be registered for the payment through standing instructions. You get an SMS when a standing instruction is executed and your account is debited.
On the other hand, the electronic clearing system is a service that your bank provides when you need to transfer funds from one bank account to another electronically. It comes handy when you want to make periodic transactions electronically, like in case of monthly home loan payments. You get the option to fix the amount of periodic ECS.