Buying a home is always a long term investment for many for us. Thus it is very crucial to get yourself well aware of all the know-how of buying a home through home loan. In simple term, home loan will help you in financing for your house purchase. This financing can be repaid to the bank or financial institution through monthly payments called as EMI, this EMI includes principal plus interest on the loan amount. There are many jargon involved in home loan transactions, thus the below terms will help you to have a better understanding of the concept and increases transparency between the lender and the borrower. The 10 most commonly used jargon in home loan process at banks and financial institutions are:
Banks and non-banking financial companies are ready to offer loan to borrower once the contract is signed to repay the loan amount in monthly installments along with interest on the loan amount. This amount will be pre-calculated and determined by the lender. Borrower will have to start paying this amount (EMI- Equated Monthly Installments) until the outstanding balance of the loan amount is cleared.
Though the EMIs option can be given up to 15-20 years based on the lender’s decision, borrower has the option to pre-close the loan by making bulk payment of the outstanding loan amount. It is very important that you should check what amount of EMI is affordable and accordingly loan should be applied. As a good practice, just use 20%-25% of your savings from income for EMIs and maintain rest of the income for emergencies and future requirements.
- Down Payment or Margin:
It is important to be aware that none of the banks or financial institution will offer 100% financing for home loan. Close to 80% of property value will be financed by the lender and the rest of the property value should be arranged by the borrower. Say for example, you have planned to purchase a property of 1 Crore. Bank will lend loan only up to INR 8 million, the rest INR 2 million will have to be arranged by the house buyer and this amount is called as margin or down payment for the property loan.
This measure is taken by the banks and financial institutions to share their risk and also to reduce the chances of default. It is advisable to check with the lender what percentage should be the down payment percentage as this could vary from bank to bank and according to applicant’s credentials.
- Credit Appraisal:
Banks will check your ability to repay the loan amount. Based on this credibility the loan amount, interest rate and tenure will be decided by the banks. According to the age, income, employer and other information banks have all the right to decide whether to sanction a loan and what should be the loan amount and interest rates.
Each bank will check the applicant’s payment history, age, income, work experience, employer creditworthiness, and qualification and existing debts before sanctioning the loan amount. All these are conducted by the bank to avoid risk of default and these investigations are part of credit appraisal.
Some home loans will be sanctioned and disbursed in parts- this is called as partial disbursement of loan amount. When the property is still under construction, such partial loans are disbursed. Borrower has the obligation to just pay the interest on the loan amount disbursed and not the principal until full disbursement of the home loan. This period of interest payment on the partial disbursed amount is called as Pre-EMI. Pre-Emi will have to be paid until the completion of the home project. The disadvantage of this is, if your property completion gets delayed, you will end up paying more interest to the banks.
- Pre-approved Property:
Banks will do their sanity check before approving home loan. Their due diligence checks will be conducted on the project or property based on information readily available about the project.
Irrespective of whether the property is pre-approved by the lender or not, buyer should be aware of – “Caveat Emptor – Buyer Beware”. Thus do not consider pre-approved properties are 100% safe for investment.
It is advisable to get assistance of a legal adviser before investing in any property. They will try to give a clear picture of whether the property documents have clear titles. Home investments are huge thus take sufficient time to do complete investigation before investing.
In order to offer huge amounts as loan banks or lenders will request the borrower to keep some asset as security. This is also called as collateral. Banks use these assets as security against default of the loan amount by the borrower. Loans lent on the basis of such security will have low rate of interest and the collateral serves as a protection for banks. For home loans, usually the property for which the loan is rendered will be used as security. In case if the borrower fails to clear the outstanding loan amount, bank reserves the right to have ownership of the house.
Bank will sell the house to recover the outstanding amount on home loan. This is the very reason lenders will lend loan only up to 80% of the value of the property. Additionally, another point to be noted is that, home value is expected to appreciate and thus lending up to 80% of the property value will ensure 100% return of the loan amount in case of default by the borrower.
- Post-dated Cheque:
As part of the loan application processing, borrower will have to issue the lending bank post-dated cheques for up to 1 to 2 years, these will be used by banks to withdraw monthly EMI in the form of ECS. The post-dated cheques will be the cheques issued with future date. Thus these cheques can be cleared only after the date mentioned in the cheque.
- Sanction Letter:
The confirmation letter stating that you are eligible for a home loan is called as sanction letter. It is important to note that this letter is just confirming the eligibility and it does not promise amount will be disbursed to the applicant. Bank has all rights to cancel the loan disbursement in case if there are any issues with the property titles or other issues. Sanction letter will include the loan amount the applicant is eligible for, the rate of interest, tenure of the loan and how much would be the Equated Monthly Installments (EMIs).
- Types of Rate of Interest:
While taking home loans you must consider the options of fixed rate and floating rate of interest. By choosing fixed rate of interest on the home loan, the lender will have to pay fixed EMI amount until the tenure of the loan. On the other hand, with floating rate of interest, the interest rate various accordingly to the market conditions. If the current market rate is high, then the EMI amount will be higher and vice versa.
With fixed rate of interest, the EMI will remain unchanged and the rate of interest will be fixed at a higher side. However, with floating rate of interest, the borrower can enjoy low interest and low EMI amount when the market rates are low. Floating rates are totally dependent on market volatility.
- Disbursement mode:
Post verification of all legal documents related to the property and applicant, banks will agree to disburse the loan amount. Loan disbursement can be in three different ways: advance, partial and full disbursement. When full loan amount is disbursed to the borrower by the bank prior to construction completion, it is called as advance disbursement. Banks will hold some amount and will disburse a part of the loan amount during construction and the rest will be released after completion of the construction- such loans are partial disbursement. For partial disbursement, the borrower will have to pay interest on the disbursed amount to the bank until completion of the project.
Apart from these, the other type of disbursement is full disbursement of the loan amount. In such cases the owner or builder will receive the full loan amount after the completion of construction and should starting paying EMI (principal + interest on the loan amount) from the very next month of receiving the loan amount.
Make yourself aware of these key terms in home loan while communicating to various associated individuals. Many banks are now taking initiative to educate borrowers about the home loan terms and conditions before making them part of such huge commitments. Make use of such opportunities to understand more about home loan terms specific to the bank you are planning to take loan from. Whether it is for buying a new house or constructing a dream home, knowing these jargon will be beneficial to handle the situations smartly and also to save some money. When you are aware of the essentials of home loan, it will be difficult for people to trick you with additional charges and fees.