Information on Loans
How to fund the down payment?
You need to put some part of the
money from your side before you become the proud owner of your 'home'. Here are
a few tips to generate your initial down payment. If you are not able to fully finance
the margin amount, you can also take a personal loan along with your home loan.
This can happen if your monthly income is above Rs.10,000, or if you are a practicing
professional. But personal loans being expensive and for a short tenure, are likely
to drain your monthly resources. Take this option only when you have resources to
pay off the personal loan from sources other than those taken into account for your
home loan. You can provide adequate additional security by pledging liquid financial
assets such as shares, securities, fixed deposits, insurance policies with existing
high surrender values, etc. in lieu of the 10-15% margin money expected from you.
You can obtain a loan against the surrender value of your life insurance policy
from the life insurance company or from a bank. Some Banks tie up with specific
reputed builders who provide ready to move in flats that include furniture, which
would otherwise not be considered as part of the "cost of the house". In such cases,
subject to your income, you will be eligible for a bigger loan. Besides, this will
also reduce your spending on these things when you move in. You could also take
a loan from your Employees Provident Fund account if you have had an employee provident
fund account for more than 5 years.
Loan eligibility based on the property cost
The property that you purchase has a significant impact on your home loan eligibility.
Cost of the property: The Bank naturally wants you to put in a contribution towards
the cost of the house so that you have a stake in its continued maintenance. This
also ensures that if the value of the house goes down in future, the Bank's outstanding
loan amount is lower than the market value of the property. Hence, if a house costs
Rs.5 lakh, the Bank may require you to fund at least Rs.50,000 to Rs.75,000 from
your own sources while the remaining Rs.4,25,000 - Rs.4,50,000 is provided as loan
subject to your income based eligibility. The amount you are expected to put in
is called margin money or down payment. Even if your income is enough to justify
a higher loan, the Bank will give a maximum loan based on its margin requirements.
For instance, if your income justifies a loan amount of Rs.6 lakh, and you are buying
a house that costs Rs.5 lakh, the Bank may restrict the loan between Rs.4.25 and
Rs.4.50 lakh depending on its down payment policy. The down payment can also vary
depending on the age of the property. If the property is older, the down payment
requirement may be higher.
Age of the building: Most Banks have a cap on the maximum age of
the building at the end of the loan tenure. This would normally be 50 years. So,
if you are buying a property on resale and the current age of the building is 38
years, the probability of getting a tenure higher than 12 years is very low despite
the fact that you may otherwise be eligible for a 20 year loan. This reduction of
tenure would reduce the loan eligibility.
Unaccounted component: In some real estate transactions a portion
of the cost is not accounted for in any of the documents related to the purchase.
Thankfully this practise is in the decline especially where the property is bought
from reputed builders. No Bank takes this unaccounted amount in calculating the
cost of the property while determining the loan amount eligibility.
Amenities agreement: Some consumers enter into a lower agreement
value for minimising the payment of stamp duty that is applicable on transfer of
property. They sign an amenities agreement or a furnishing agreement to account
for the balance purchase price. However, such transactions have a direct bearing
on the loan amount that a Bank will be willing to provide. Most Banks calculate
the cost of the property after restricting the value of such an amenities agreement
to 20% of the original agreement value of the property. However, if the amenities
agreement is also stamped and registered, most Banks will take into account the
full amount of the amenities agreement. Amenities agreements are normally not taken
into account at all if the property is purchased on resale.
Power of Attorney: In some northern states like the national capital
region, property transactions are done on the basis of a power of attorney. The
seller of the property gives the buyer the possession of the property and the power
to deal with the property as he (the buyer) may deem fit. This power of attorney
would also give the power to the buyer to further provide such power of attorneys
to other people (for other buyers in the future). Most Banks do not encourage such
transactions since the ownership is itself suspect in such a transaction. Such transactions
are normally entered into to save on charges payable to the development authorities
as well as stamp duty and registration charges. Home loans to buy such properties
may be available from a restricted list of lenders who may also lend at higher interest
rates.
How Does The Loan Process Work?
Here's a step-by-step guide to equip you with the right info so you know what to
expect. From applying for a home loan to getting it involves various stages. These
are:
- Application form
- Personal Discussion
- Bank's Field Investigation
- Credit appraisal by the Bank and loan sanction
- Offer Letter
- Submission of legal documents & legal check
- Technical / Valuation check
- Valuation
- Registration of the Property Documents
- Signing of Agreements and submitting post dated cheques
- Disbursement
Applying for a loan
Filling up the application form is the first step towards the home loan cheque.
The look of an application form may differ from Bank to Bank, but nearly 80 per
cent of the information they need is similar. Most of this is basically your personal
and professional information, details of your financial assets and liabilities and
the details of the property (if finalised) including the estimated cost and the
means of financing the same.
Documents to submit
While submitting the application form, each Bank asks for several documents. And
most Banks these days provide doorstep service so that you don't have to spend time
to go to their office to submit all the documents. However, some Banks still insist
on the customer visiting their offices at least once.
Proof of income:
These will need to be backed up by proof such as copies of last three years' Income
Tax returns (along with copies of Computation of Income/Annual accounts, if any),
Form 16/Form 16A, last three months salary slips, copies of the last 6 months' statements
of all your active Bank accounts in which your salary/business income details are
reflected, etc. Other documents that you need to provide with your application form
include age proof, address proof and identification proof. You may also be asked
to give your employment details.
Your age proof
Copy of your school leaving certificate/Driving license/Passport/ration card/PAN
card/Election Commission's card/etc.
Address proof
Similar documents need to be provided to prove that you are actually staying at
your current address.
Identification proof
Same as above but with photograph. Sometimes the same document if it contains a
photograph, the current residential address and the correct age can be the proof
for all 3 things.
Your employment details
If your company is not well known, then a short summary about the nature of the
company, its business lines, its main customers, its competitors, no. of offices,
no. of employees, turnover, profits, etc may be needed. Usually the company profile
that is available on the standard website of the company is enough
Financial check
All the income related documents you submit serve a specific purpose. The lending
institution uses them to study your financial status. The Bank statements you submit
are scrutinised for:
- Level of activity - in the case of self employed
persons, this gives a very good clue about the extent of business activities
- Average Bank balance - a cursory glance at the
average Bank balances maintained in a savings Bank account speaks volumes about
the spending/saving habits of any individual
- Cheque returns - a small charge debited by your
Bank in the statement indicates that a cheque issued by you was returned by your
Bank. Many such returns can have a negative impact on your loan sanction
- Cheque bounces - if cheques deposited by you are
returned by the issuer's Bank they will be visible in your Bank statement and again
Banks have specific norms as to how many such returns are acceptable in a period
of 1 year
- Regular periodic payments - the existence of periodic
payments to other finance companies/Banks etc. indicate an existing liability and
you will need to prove full details to the lender
- Your investment - : also come under the scanner.
This helps the Bank to estimate your ability to pay for the down payment as well
as your savings habit.
Processing Fee
Along with the application form and the credit documents, Banks ask for a processing
fee. This fee varies from Bank to Bank, but is usually around 0.25% to 0.50% of
the total loan amount. For instance, if you take a loan of Rs 10 lakh, you will
have to pay around Rs 2,500 to Rs 5,000 as processing fee. The agent dealing with
you earns a commission from the Bank, which to some extent is also affected by the
amount of fees paid by you. Most Banks have flexible fee structures, and it is advisable
that you negotiate hard to find out the Bank's minimum possible fees though it is
unlikely that a Bank will agree to provide a loan without any upfront fee at all.
Some Banks have zero upfront fee loans but that advantage may be negated as their
other charges such as "legal charges" and "stamp duty" are normally higher. This
fee is collected to maintain your loan account, and includes work like sending Income
Tax certificates every year, maintaining the post-dated cheques, etc.
Quick tips:
1. When applying for a loan it will help to keep copies of your income proof handy.
2. For self employed persons, if the Income has increased dramatically in the past
year, have your explanation ready as to why you think this is a permanent increase
in your income rather than just a one time aberration which might be reversed in
later years. If the Bank is convinced with your explanation then the loan eligibility
can be considered in relation to the latest income rather than considering the much
lower average income.
Personal discussion: Face to face
After you've formally and successfully completed the application process, all you
have to do, is wait till the lending institute evaluates your papers. The wait normally
lasts only a day or two or sometimes even less. However, some Banks insist on meeting
you after receiving the application form, and before the loan sanction. This is
to gather more details about you that may not be mentioned in the application form
and to reassure them of your repayment capacity. Again, this stage is insisted upon
only in very few cases these days.
Quick tips:
1. When going for the personal discussion, carry all the original documents pertaining
to the information provided on the application form for the personal discussion.
2. Avoid submitting any fake documents or lie about financial details asked; banks
process loans only after they are convinced favourably about you.
Field Investigation:
Checking you out Thousands of people apply for loans everyday. And however, eager
a bank is to complete its targets, every loan is a risk. So it is only natural that
it confirms or validates the details you provide. The bank checks all your information
including your existing residential address, your place of employment, employer
credentials (if you work for a small organisation), residence and work telephone
numbers. Representatives are sent to your workplace or residence to verify the details.
Even the references you have provided in the application form are checked out. While
this may sound irritating and an invasion of your privacy, Banks have to perforce
undertake validation in the absence of any credit bureau. Once your credentials
are validated, it helps establish a trust between you and the Bank.
Quick tips:
The address and telephone number verification work is usually outsourced to small
firms and the ability of the representatives is often uneven. Hence, interaction
with them may not always be smooth. When the validation process starts, expect to
reschedule some of your other work for being available to furnish details required.
Credit appraisal and loan sanction:
Getting the nod Hold your breath! This is the make or break stage. If the bank is
not convinced about you, your application may get rejected. If it is satisfied,
it sanctions your loan. It establishes your repayment capacity based on your income,
age, qualifications, experience, employer, nature of business (if self employed),
etc, and based on these, works out your maximum loan eligibility, and the final
loan amount is communicated to you. The Bank then issues a sanction letter. This
letter may either be an unconditional letter, or may have certain terms and conditions
mentioned, which you have to fulfil before the loan disbursal.
Quick tips:
Final loan amount and your loan eligibility are two different things. Once you know
what you are eligible to get, you can then decide on the loan amount. Just because
you are eligible for a huge sum, does not mean you should borrow heavily. The sanction
letter is an important piece of document and you should keep it safely.
Once the loan is sanctioned, an offer letter is sent mentioning the following details:
- Loan amount
- Rate of Interest
- Whether fixed or variable rate of interest linked to a reference rate
- Tenure of the loan
- Mode of repayment If the loan is under some special scheme, then the details of
the scheme
- General terms and conditions of the loan
- Special conditions, if any
Acceptance copy
you agree with what is mentioned in the offer letter, you will have to sign a duplicate
letter of the same for the Bank's records. Earlier, Banks used to charge 'Administrative
Fees' along with the Offer Letter. However, with the intensifying competition, administrative
fees have virtually disappeared from the home loans market.
Quick tips:
Check if the rate of interest mentioned and the loan amount on the letter is the
same that was discussed and agreed upon. Home loan rate of interests can be negotiated,
use the fact to your advantage.
The Legal Angle
Property and papers Now the focus of the banks activities shifts from you to the
property you intend to buy. Once you select your property, you need to hand over
the entire set of original documents pertaining to your property to the bank so
that it can keep them as security for the loan amount given to you.
These normally include:
- The title documents of your seller which prove the seller's title including the
chain of title documents if he is not the first owner
- NOCs from the legal owners such as Cooperative housing Societies, statutory development
authorities, the lessor of the land -in the case of leasehold land, etc. NOCs are
not required where the property is situated on freehold land and the entire land
is being transferred along with the structure.
Legal check
Every Bank conducts a legal check on your documents to validate their authenticity.
Even the draft sale documents that you will be entering into with your seller will
be scrutinized. The documents are sent to a lawyer in their panel (either in-house
or outsourced) for a thorough scrutiny. The lawyer's report either gives a go-ahead
if documents are clear, or it may ask for a further set of documents. In the latter
case, you are expected to hand over the additional documents to the Bank for a clear
title. So, if a Bank decides to disburse your loan, you have every right to smile,
since you can safely assume that your property documents are clear and the transaction
is safe.
Quick tips:
- Sometimes the bank may ask you to pay for the legal verification. However, most
Banks cover the costs in the upfront (processing) fee that you pay.
- Property documentation in India is non-standard and non-transparent. Hence, it helps
to buy property from a reputed developer since they know the process inside out,
and keep all the documents ready.
- Due to the heavy transfer charges on sale of property and/or very heavy stamp duties,
some people conduct sale of property by showing "Lower consideration" than agreed
for, with the balance being paid either on an amenities agreement or in cash. Also
the concept of sale by executing "Irrevocable power of attorney" has gained ground
especially in the National Capital Region. All this could restrict the choice of
your lenders and may therefore increase the cost of the loan which you might want
to keep in mind while finalizing such properties.
Technical/Valuation check:
Making doubly sure Banks are extremely careful about the property they plan to finance.
They send an expert to visit the premises you intend to purchase. This expert could
either be a Bank employee or he could belong to a firm of architects or civil engineers.
Site visit The site visits to your property are to verify the following:
In case of under construction property:
- Stage of construction is the same as that mentioned in the payment notice given
to you by the builder.
- Quality of construction
- Satisfactory progress of work.
- Layout of flats and area of property is within permissions granted by the governing
authority.
- The builder has the requisite certificates to start construction at the site.
- Valuation of the property in relation to other deals in the surrounding areas.
In case of ready / resale construction:
- External / internal maintenance of the property.
- The age of the building.
- Will the building last the loan tenure? This has a direct bearing on your loan eligibility
since the loan tenure will be restricted to the maximum age of the property as decided
by the Bank's engineer and this will impact your loan eligibility.
- Quality of construction.
- Surrounding area (development).
- Whether the builder has received the requisite certificates for handing over possession
of the flat.
- There is no existing lien or mortgage on the property.
- Valuation of the property in relation to other deals in the surrounding areas.
These inspections are carried out to protect consumer interests in terms of construction
quality, adherence to local laws, approved building plans, etc. A technical inspection
also lets the Bank understand the progress of construction so as to release staggered
disbursements.
Quick tip:
Do not circumvent or skip the stage and ensure that it is completed as soon as possible.
As a buyer, it gives you confidence that experts have inspected your property and
that you are buying an asset that is legally clear and technically sound. The fee
for this service, like the legal check, may either be built into your upfront fee
or be charged separately by the Bank.