Should You Apply For A Home Loan From A Bank That Has Tie-Up With Your Developer?

Mrs Sharma and her husband were very content after finding their dream home in one of the best colonies of West Delhi. But they were not very keen on approaching the lender their developer's agent suggested. Mrs Sharma found it hard to trust the developer. She did not like being forced to apply for a home loan from the bank the developer has a tie-up with.

MakaanIQ explains why banks collaborate with real estate developers.

If you are a potential homebuyer, the moment you step into a bank, bank personnel will tell you how to go about the whole process. Banks are undergoing a transformation. Banks are increasingly offering one-stop-shop solutions for homebuyers. Homebuyers approach banks because most questions pertain to the approval of the project for home loans.

What does this mean?

Banks scrutinise titles and documents related to the project/property at the request of the developer. If you apply for a home loan through the same bank, you need not go through the legal and technical verification process yourself.

Banks are extremely cautious while scrutinizing projects of real estate developers. In construction, risk is very high. If a bank approves a residential real estate project, it is safe to assume that the developer is scrupulous, and that the project is technically feasible. You can also be sure of the legal status of the project.  

Do banks have a vested interest in such project?

The answer is yes.

Let us suppose that you have invested in an under-construction property that is approved by a bank. Any delay in construction of property will have a financial impact on the bank. Loan applicants will pay their Equated Monthly Instalments (EMIs) only after they get possession of their flats. 

Home loan borrows pay the pre-EMI when the property remains under construction. They pays only the interest component on portion of the loan extended to them, until the whole amount is disbursed.

Banks also lend to developers for constructing projects. So, if the project is interrupted, this can have a huge impact on the return of investment of the bank.

Can you hold the bank responsible for delays in construction?

The answer is no.

Banks will not be responsible if the developer delays construction. You cannot expect the bank to take any action against the developer for his failings. Under such circumstances, banks will not forego penalty if you delay your EMI payments either.

If a bank approves a project, all it means is that the project is legally, technically and financially sound. It means that the developer is trustworthy.

How do you benefit from this deal?

• If you invest in a project approved by a bank, the bank must have already checked the legal status and technical feasibility of your Banks do legal and technical examinations twice or thrice, depending on the loan amount, if there is a huge difference in the market value of the properties given by two valuators. 

• The biggest advantage of investing in a project approved by your bank is that it saves you a lot of time. The credit appraisal process will be faster because legal and technical examinations are already done.

• The approval of a bank is a yardstick used to assess the credibility of a project. The approval process real estate developers go through is time consuming. Banks are careful and attentive while scrutinizing such projects. Banks make sure that everything is in order before deciding to stand behind a project.

Quick tip

Every bank releases the list of projects they have approved. The data are available on their websites too. It is always good to pre-check with the lender if the project you plan to invest in is approved or not, to avoid unpleasant surprises.