Roti, Kapda aur Makaan is the basic need of every individual and we all dream of having a home. But homes are expensive and Home Loans can make dream of owning a house a reality. Home Loan is offered to individuals who wish to purchase or construct a house. The property is mortgaged to the lender as a security till the repayment of the loan. The bank or financial institution will hold the title or deed to the property till the loan has been paid back with the interest due for it. This article covers the term associated with home loans. We suggest our readers to read the lending institutions website to familiarize with the Home Loan Terminology and get Overview of Home Loan.
Down payment or Margin
Because houses are expensive, home buyers typically pay a percentage % of the total value of a home. The remaining price is covered by a bank or other financial institutions through a mortgage or home loan. The amount that a home buyer pays is called as down payment or Margin. For example if you plan to purchase a property worth 80 lakhs, and the bank can fund up to 80% of total amount, which is 64 lakhs. You will have to pay remaining 16 lakhs. In Jul 2010, RBI set a ceiling limit on home loans to 80% of the property value. But in case of small value housing loans, up to Rs 20 lakh, home loan lending institutions can provide loans up to 90% of the property value, as such loans are part of priority sector advances. Please note Down payments usually do not include costs such as registration charges, stamp duty costs etc.
Loan to Value Ratio
LTV (Loan to Value) ratio is loan amount divided by the agreement value of the property for example, if the value of the property is Rs 40,00,000 and the lender is giving you a loan of Rs 28,00,000, the LTV is 70%.
What is Resale Property
Resale means you are not buying an apartment in a building under construction, or a ready flat, directly from the builder. Instead, you are buying a flat from the owner. While buying resale property, one should make sure that it has clear marketable property title , it has record of all previous owners of property and the reseller has undisputed ownership. One should also check for the existing loan on the property and be aware of the amount that is to be paid to the society at the time of transfer of ownership
What is Freehold Property? What is Leasehold property?
A freehold property means that you own the land it is built on and also the house. For apartments, ownership of the plot is shared jointly with the other owners of the respective flats within the building in proportion with the ratio of the area owned of the consolidated built-up area. In a freehold property. You can live there for as long as you desire. You have the right to make alterations to the house or redo some parts of the house though You might have to take permission from authorities if you have to make structural changes.
If you purchase a leasehold property, then you have the right to live in a property for a predefined period of time. One is not the owner of the property or the land it is situated upon and has to pay ground rent to the owner or the leaseholder. Once the defined period in the lease expires, the ownership of the property is given back to the land owner. Mostly leases are roughly given for period of 99 years, It is possible to extend the leasehold to up to 999 years and one can also purchase the leasehold property by paying a price for it.. Before buying a leasehold property, find out how long the lease is.
What is Pre-Approved Property?
A pre-approved property means that the banks or financial institutions like DHFL, ICICI Bank, PNB Housing have verified all legal and technical documents of the project.So a buyer, does not need to get the legal verification done again,. Just because the project has been pre approved does not mean you will get assured loan from that bank which has approved the project, each home loan request is assessed individually. It is also not necessary to take home loan from the banks which has pre approved the project.
What is Disbursement of Home Loan?
Disbursement means payment or release of the loan amount by lender to borrower. Usually, banks disburse the loan amount once all the submitted documents have been verified and the down payments have been paid. Most banks charge a loan disbursement fee which is added the principal amount when loan is granted.
- Full disbursement: means bank pays the full loan amount to seller in one go.
- Partial disbursement: means that the payment is done in stages. Usually when one buys an under construction property, then the bank will disburse payments as the construction progresses. For example, payment will be made after completion of every floor ex: of completion of first floor, 15% of the payment will be made.
Interest: What is EMI, Fixed and Floating Rate
When you take the loan you have to pay interest on it. Equated Monthly Instalment (EMI) is the amount payable to the Lending institution every month till the Loan is paid back in full. The EMI consists of Principal and Interest. During the early part of loan tenure the most of EMIs are used to service the interest and principal is served in the later parts of loan tenure. Our article Understanding Loans explains EMI in detail.
Amortization schedule is a table that gives details of the periodic principal and interest payments on a loan and the amount outstanding at any point of time.
Interest can be Fixed or Floating.
- In Fixed Rate Loan rate of interest is fixed either for the entire tenure of the loan(called as pure fixed loan ) or a part of the tenure of the loan. In pure fixed loan, the EMI remains same irrespective of the conditions prevailing in the market Mostly banks offer Fixed rate for a fixed period and then review the rate at end of the specified period. So banks introduce reset clause in their fixed home loan to effect a change in the interest rate at a future date. The banks have the discretion to increase or decrease the interest rates in case the market rates of interest increases or decreases. So such fixed rate loan are not fixed in the strict sense of the word.
- Floating rate means interest rate on loan is not fixed, it varies with the market conditions over the period of loan. Floating interest rate home loans are tied up to a base rate plus a spread or margin. Banks are not permitted to lend below base rate, if the base rate varies the floating interest rate also varies. Banks usually keep the EMI constant adjusting the tenure of the loan. For each bank there is only base rate but Base rate differs from bank to bank, as bank arrives at the calculation after considering factors such as cost of funds etc. The Base Rate system replaced the BPLR system from July 1, 2010.
What is Pre-EMI?
When you purchase an under-construction property, the lending institution may link the disbursal of home loan to the construction stages of the property. In such cases, you will either be asked to pay pre-EMI OR given an option to choose between pre-EMI and full EMI payments. Pre-EMI is just the interest portion on the disbursed loan amount that you pay until the full disbursal is done. The EMI payments start after the pre-EMI phase. Some banks allow you to pay full EMI even when the disbursal is being done in stages, called as EMI under construction option, you will start paying EMI from the beginning of construction, but your interest amount will be calculated based on the amount disbursed to the builder and the rest of the amount will be counted towards principal. i.e., EMI remains the same.
Once the loan is sanctioned, you will get an offer letter stating a number of details ex: Loan amount, Rate of interest, Fixed/ flexible rate of interest, Tenure of the loan,EMI amount and Any other conditions of the loan.
Home Loan Eligibility Criteria
Home loan eligibility depends up on various factors some of which are given below. The lender will consider all these factors along with your credit history to determine how much loan you will be eligible for.
- Income : Your income determines the amount of home loan you are eligible for. Banks generally keep the EMI to income ratio at 0.45 to 0.50.
- Tenure of the loan : The longer tenure you opt for, the more is your home loan eligibility.
- Interest rate offered : If your interest rates are on a lower side, then the loan eligibility will be higher and vice versa.
- Existing loans: In case you have any existing loans, then the loan eligibility amount will come down to keep the EMI to income ratio around 0.50.
What is the process of applying for a Home Loan?
Step 1: Submit your filled in loan application-form along with the required set of documents.
Step 2: Your loan application would be assessed on the basis of various eligibility and funding norms.
Step 3: Credit appraisal of your income and property valuation and property title check will be carried out by the lending institution to determine the loan amount.
Step 4: On Basis the internal and regulatory guidelines, lending institution may approve or reject the loan application.
Step 5: If approved, Post loan sanction, you have to submit, prescribed original property documents along with signing of agreements, and submission of post-dated cheques or ECS.
Step 6: Upon finding all the documents in order, lending institution will disburse the loan amount basis the progress of construction to the developer or contractor. Pre- EMI interest or EMI will commence from the day of disbursement.
We suggest you read about Home Loans at the lending institute websites.
- Understanding Loans
- Joint Home Loan and Tax
- Tax and Income From One Self Occupied property
- Tax and Income from Let out House Property
- On Selling a house
Are there some more terms which should be included in Home Loan or if more explanation needs to provided please let us know.