In this concluding part, of the home buying series, I clarify all that you need to know about home loans from application till final disbursement. While choosing your lender, keeping in mind the basics such as interest rates and effective cost of the loan is essential. Let us now have a look at the steps involved in getting your loan sanctioned with tips for completing them smoothly.
- Loan Application and Evaluation
The loan application is a very important document and its format varies according to the lender. It collects information about your personal and professional details, financial assets, liabilities and existing property details with the estimated cost. Stringent evaluation of the application is done and documents indicated in the table below are validated for authenticity.
- Credit Appraisal and Sanction Letter
On the basis of your age, qualifications, income, employer and nature of business (if self employed), lenders ascertain your maximum loan eligibility. Remember that your home loan eligibility is nothing but your repayment capacity. It is hence vital to have a realistic view. Even if you are eligible for a large sum, borrow only as much as you are comfortable repaying monthly. Keep in mind, banks finance only up to 85% of the total cost of the home, so you would need to cater to the balance amount from your resources.
The sanction letter is issued once eligibility is determined; detailing the loan interest rate, whether fixed or floating, loan tenure, mode of repayment, etc.
- Know How on Interest Rates
A fixed interest rate, maintains the same rate throughout the loan tenure, thus protecting the borrower from market fluctuations. However, during this period, if there is a decrease in interest rates, the borrower doesn’t get the benefit. In a floating rate, the interest rate varies with fluctuations in the market rates. Of late, banks have been offering schemes, with the initial years of the loan at a fixed rate, which later switch to floating. Whatever type of interest rate you choose, do understand the following clauses, mentioned in your home loan agreement.
Reset Clause on Fixed Rates– Banks could increase interest rates, with an increase in market rates, in the future. The period for such a reset varies from two to five years depending on the lender. So, this effectively makes a fixed rate loan equivalent to a floating rate loan.
Force Majeure Clause– Banks may alter the rate of interest suitably due to change in the internal policies, or if extraordinary changes in the money market conditions take place during the period of the agreement. Defining such circumstances are ambiguous in nature and are at the banks sole discretion
- Property Papers and Technical Evaluation
All your property documents, in original, need to be submitted to the lender as loan security. The lender would then carry out a technical evaluation of the property, its progress, quality of construction and a legal check on the authenticity of the documents. Most big developers have tie-ups with various banks for loans, and constantly send them updates on the progress directly.
- Signing the Home Loan Agreement
Once the loan has been sanctioned, a home loan agreement is signed between the lender and you. The agreement attracts a stamp duty depending on the loan amount. Before signing, read the following fine print of the agreement.
Borrower’s Fault– Every bank has a list of borrower’s defaults that must be studied carefully. Apart from EMI default, death of borrower, divorce (for joint borrowers) or a civil litigation case may also be considered as a borrower’s fault.
Security cover– Banks could demand additional security if property prices fall. If a borrower fails to provide such a security then he may be declared a defaulter.
- Loan Disbursement
Loans are disbursed as full payment (for ready possession property) or on the basis of the stage of construction of the property, known as part-disbursement (for under construction property). The disbursement cheque will be in the name of the reseller or builder. The interest on the loan is charged from the day on which the cheque has been made, irrespective of when it has been handed over to you or the seller.
Note, for under construction properties, the EMI’s do not start until the complete loan amount is given to the builder by the bank. The borrower has to pay a simple interest called the Pre EMI till the date from when the payment of EMI actually commences.
- Charges Associated
Here are a few of the charges which would be borne by you for a home loan.
Home loans are ideal to finance your home purchase. With more and more competition among lenders in the market today, with a bit of negotiation, you could strike an ideal deal.