Home Loan – Frequently Asked Questions (FAQs)

This Section will Address almost all of your queries besides enlightning you on all possible queries raised by others.

Home Loan Related FAQs

Contrary to popular belief, investing using a home loan is the smarter and more profitable way of creating substantial wealth in real estate investments.

This section on home loans will :

  1. Help you understand how you can benefit from using home loans.
  2. Help you calculate your loan eligibility free of cost.
  3. Give you an overview of the home loan application process.
  4. Help you see how affordable it is to invest via home loans using the EMI calculator.
  5. Give you a comprehensive knowledge base of all home loan related FAQs.
  6. Give you additional resources on important topics such as comparison of fixed v/s floating rate loans, single v/s joint home loans, difference between Pre-EMI and EMI, tax benefits of home loans and much more.

3 BIG BENEFITS OF INVESTING WITH A HOME LOAN

  1. Substantially Higher Returns : When compared to investing using your own funds, investing using a home loan gives you almost 100% greater ROI. Click here to know more on how this is possible.
  1. Lower Investment Required from your Pocket : You can fund upto 80% of the property cost through a loan, which means you pay just 20% from your pocket.
  1. Tax Benefits of Home Loans : In certain cases, you can get tax benefits on your home loan, which add to your overall profits.

EARN 100% GREATER RETURNS BY INVESTING USING A HOME LOAN

Show how home loan is beneficial via below article which can be embedded in a drop down section or as n infographic.

https://docs.google.com/a/gcglobal.in/document/d/1qwyVMt7XcJDODKzBLjTqw3DfsOD8aU98fzVg3lwBYKo/edit?usp=sharing

ADDITIONAL RESOURCES TO HELP YOU UNDERSTAND HOME LOANS & THEIR BENEFITS

  1. Benefits of Investing Using a Home Loan – https://gcglobalindia.wordpress.com/2012/06/01/common-mistakes-real-estate-investors-make-part-2/
  1. Leveraging The Power of Debt – http://gcglobalindia.wordpress.com/2011/09/05/leveraging-the-power-of-debt/
  1. Confusing Pre-EMI with EMI and Vice Versa – http://gcglobalindia.wordpress.com/2013/01/04/common-mistakes-real-estate-investors-make-series-part-3-confusing-pre-emi-with-emi-and-vice-versa/

CALCULATE YOUR LOAN ELIGIBILITY – FREE OF COST & WITHOUT OBLIGATIONS

To get an instant estimate of your loan eligibility, fill out the form below.

~ FORM THAT WILL CAPTURE DETAILS REQUIRED TO CALCULATE ELIGIBILITY AND DATA CAPTURED WILL BE PROCESSED THROUGH A FIXED EXCEL TEMPLATE AND RESULTS CAN BE SHOWN IMMEDIATELY ON THE PAGE ~

To know a more accurate figure or any other query on home loans, feel free to consult with our in-house loan expert Sridhar Kumar on +91 9686627071 or sridhar.kumar@gcglobal.in who will be happy to assist you without any obligation.

In the meantime for your quick reference, below are some ballpark eligibility figures for you to have an idea :

Salary  (Rs)Obligation / Existing loanEligibility (15 Yrs Tenure)Eligibility (20 Yrs Tenure)
1,00,00020,00027 Lakhs30 Lakhs
1,00,000NIL45.5 Lakhs51 Lakhs
1,50,00030,00041 Lakhs46 Lakhs

HOME LOAN APPLICATION PROCESS

Applying for a home loan is a fairly simple, predictable, hassle-free and straightforward process today.

The entire process from application to sanction and disbursal takes between 10 to 15 working days for an Indian and between 30 to 45 working days incase of an NRI.

The entire process can be understood in 3 simple steps :

  • Step 1 – Submit your loan application along with the processing fee cheque and all supporting documents (click here for an indicative list of documents that you need to submit).
  • Step 2 – Once banks study your documents, verify your employment and calculate your eligibility, you will be issued a sanction letter which states the amount of loan and interest rate you are being offered and all other terms and conditions of the loan.
  • Step 3 – You have to submit your original property documents with a few other supporting papers and pay any other applicable loan related charges to get the loan disbursed.

At G&C, we work with India’s top 5 banks (including HDFC, AXIS, SBI, LIC and more) to give you a door-to-door and truly one-stop-shop home loan application service. During the entire process, you or your GPA holder have to visit the bank just ONCE at the time of loan disbursal and the rest is taken care of by our team, so you can get everything done from the comfort of your home or office.

Contact Sridhar Kumar on +91 9686627071 or sridhar.kumar@gcglobal.in to know more.

EMI CALCULATOR – HOW MUCH DO YOU PAY AS EMI?

Use this calculator to know how much you would have to pay as EMI on a home loan. Enter the 3 basic details and hit calculate to see how much you would pay as EMI for loans of different duration.

However, before you come to a conclusion on the affordability of home loan based on what you see below, you should know that there are 2 aspects to a home loan – Pre-EMI and EMI. Many of us do not know what a Pre-EMI and how it is different from a regular EMI. Click here to learn more before you proceed to use the calculator below.

~ EMI Calculator based on existing website. ~

Contact Sridhar Kumar on +91 9686627071 or sridhar.kumar@gcglobal.in to know more on how you should interpret above results.

You can pre-close and pre-pay a loan without any penalty or extra fee and hence, you can take a loan and then close it any point of time without having to bother about heavy damages (this is applicable for floating rate loans only, incase of fixed rate loans, penalties are still applicable depending on the banks & Financial Institutions)

Floating rate varies according to the prevailing conditions in the market. Home loans that are disbursed on the floating rate of interest, there will be an impact on your floating rate of interest.

The benefit that a Floating Rate of Interest is cheaper by 2.5% – 3% then the fixed Rate of Interest on a home loan. Even the floating rate goes over by 2.5%, it will be for some period of your loan tenure and will roll back as per the market conditions, and you still save MONEY by going for Floating Rate of Interest. Whereas, when the rate goes over there is such time that your monthly EMIs shoot up as per the prevailing rate of interest may end up repaying substantially higher.

Fixed rate is offered on a mortgage by a lender when a buyer opts to make repayments in fixed monthly installments over the entire tenure of the loan irrespective of the interest rate cycle. For those who want certainty in their repayment schedule a fixed interest rate on the home loan can be a great option.

The benefit that a interest rate remains fixed to the few years of tenure irrespective of market conditions for the customer for those who wanted their budget to be fixed (this options is for few year of tenure based on the banks/lender for 2 / 3 / 5 years, thereafter the loan will be converted to floating rate of Interest). With fixed rate of Interest is that they are usually 2.5% – 3% higher than the floating rate of interest in the market. In any case if the floating rate of interest is decreased the fixed rate home loan does not get any benefit of reducing the rate of Interest.

Who can apply for a home loan?

Any Indian Resident, Non-resident Indian or Person of Indian Origin can apply for a home loan if they are 21 years of age at the origin of the loan and 65 years or below at loan maturity. Housing Finance Companies (HFCs) usually give home loans for properties located in India to people who are employed or self-employed, with a regular source of income.

When can a home loan be applied for?

An individual can apply for a home loan even before the property has been selected. The loan amount is sanctioned based on the ability to repay. This helps in planning a budget while purchasing the house.

How does the lender calculate eligibility?

Loan eligibility is calculated based on the ability to repay. Factors such as income, age, qualifications, number of dependants, spouse’s income, assets, liabilities, stability and continuity of occupation and savings history are taken into consideration.

How do I repay the loan?

You can repay the loan in Equated Monthly Installments (EMIs) comprising principal and interest. Repayment by EMIs commences from the month following the month in which you take full disbursement. Till then, you only need to pay the interest on the amount disbursed.

What is pre-EMI interest?

Before final disbursement, you may have to pay interest on the portion of the loan disbursed. This is called pre-EMI interest. Pre-EMI interest is payable every month from the date of each disbursement up to the date of EMI commencement.

Is there a fixed interest rate for the duration of the loan?

Most HFCs offer the fixed rate as well as the variable rate options to customers.

What is a fixed rate loan?

A rate of interest that is constant throughout the duration of the loan is known as a fixed rate loan.

What is a floating rate loan?

A floating rate is when the interest rate on the loan changes according to the rates in the market during the period of the loan.

It is better to opt for a fixed or a floating interest rate?

If interest rates are falling, a floating rate loan is a better option. But when interest rates are rising, opt for a fixed rate loan, because you will then know in advance what your EMIs will be.

Is there a difference between monthly rest & annual rest?

On the basis of the principal at the start of every month, the interest is calculated in monthly rest. For annual rest, this is done at the beginning of every year.

What are the other areas of expenditure before I get a home loan?

Processing and administrative fees, delayed payment charges, legal fees, technical fees, stamp duty and registration of mortgage deed are all likely areas of expenditure.

How do I select my HFC?

Various considerations would help you zero down on the HFC most suitable for your loan requirements. Analyse the following points before taking your decision:

  • Loan amount: The minimum and maximum loan amounts vary between HFCs. Find out if the amount you require falls within this limit.
  • Duration: There is no lower and upper limit to the tenure of the loan. Find out if the time limit you want it for can be accommodated. This varies between HFCs. Normally HFCs offer loans ranging from 5-20 years, with some going up to 30 years. For NRIs the maximum tenure could be 15 years in some cases. Depending on your requirements, this would have a bearing on the loan you opt for.
  • Interest rate: This varies between HFCs. Fix a duration that you want the loan for and find out the EMI from them. Compare and identify the lowest EMI.
  • Pre-payment: Check if the HFC charges for repaying the loan before its due date.
  • Flexibility: Find out whether you can change your interest scheme from fixed to variable if so desired or if there are restrictions.
  • Guarantor: Some HFCs require this, while others don’t.
  • Documents required: These may vary between HFCs although there are a few standard documents like proof of income, proof of age and residence and a salary slip.
  • Co-owner: If there is to be a co-owner or co-applicant for the loan, the HFC has to accept the relationship between the two.

Other fees: Each HFC has different fees for administration and processing among others.

Can a loan be switched over if I have obtained it at a high rate of interest, but another HFC is offering a better interest rate?

You could do this. After discussing the reasons with the current HFC, they may even reconsider the interest rate.

What is the maximum amount of housing loan available?

The maximum of upto 75 to 80% of the cost of the property, and there is no upper limit of construction of home, purcahse of house / apartment / land either new/old.

For repair/renovation/allteraation – Max upto 25 Lakhs.

What is the amount I can borrow and what are the criteria?

Generally, the amount is as per the repayment capability and eligibility based on the 50% FOIR (Fixed Obligation to Income Ratio). But your equated monthly installments usually should not exceed 50 per cent of your gross monthly income.

What is the period in which I will have to repay the loan?

Usually in a period of between 5 to 20 years, but definitely before you retire. A few HFCs also offer a 30 year repayment period.

How do I apply for a loan?

  • Approach an HFC with the latest salary slip and TDS Form 16 of the last two financial years for yourself and your co-applicant. The loan officer will informally tell you the amount of loan you are eligible for and the terms, in areas in which they finance homes.
  • Collect a loan application form and confirm the needed documents.
  • At your chosen HFC, submit the duly filled loan application along with the required documents and an application fee. They will then interview you on the same. After conducting an appraisal of your application, the HFC will give an in-principle sanction of your loan.
  • You now have to submit your property documents, which should show a clear title. The HFC will check these and levy an administrative fee (around 1 per cent). It will then disburse the loan, either fully or in installments, directly to the builder / seller of the property.

Who can be co-applicants for the housing loan?

  • Usually a spouse can be a co-applicant. Other immediate family members are also acceptable to some companies, depending on merits. If both partners are working, it is better to have your spouse as a co-applicant since this will entitle you to a much larger loan. 3 benefits of Applying for a Joint Home Loan – https://gcglobalindia.wordpress.com/2012/04/06/3-benefits-of-joint-home-loan/

Is a guarantor required?

A guarantor is insisted on by the HFC so as to ensure that the loan is paid back in full and in time. The guarantor is responsible for the repayment of the loan if the borrower is unable to do so.

Can I repay the loan before the set date of repayment?

You could do this, but some HFCs require a pre-payment fee to be paid. Check with your HFC.

What security do I have to provide?

A first mortgage of the property to be financed. The title should be clear marketable. Some HFCs may also require collateral security like the assignment of life insurance policies, pledge of shares, NSCs, units or mutual funds, bank deposits or other investments.

Does the Agreement for Sale have to be registered?

Yes. In many Indian states, the agreement between the builder and purchaser has to be registered. This can be done at the office of the sub-registrar appointed by the State government.

Does the property have to be insured?

The property should be insured against fire and other hazards and the HFC will have to be the beneficiary of the policy.

How long does it take to get my application processed and my loan sanctioned?

It will take around 15 days for the processing of your application if your documents are in order. Make an application only if you are eligible for the loan since the HFC will not return the application-processing fee. It will take another week for the company to check out your property papers and make the disbursement.

When do I have to make my share of the contribution to the purchase price of the property?

You will have to make your payments towards the property price up-front before the HFC disburses any installment of the loan.

What do I have to do when my housing loan is sanctioned?

You must submit the property papers and pay an administrative fee (approximately 1 percent). When the HFC clears these papers, you must take the first disbursement of the loan within a stipulated period (usually three months) and avail of the entire loan within about a year’s time.

In how many installments can the loan be disbursed?

The loan can be either disbursed in full for outright-purchase / ready properties or in a few installments for under construction properties. The disbursement will be made taking into account the requirement of funds and the progress of construction.

Do I get tax benefits on the loan?

Yes. You are eligible for certain exemptions on both the principal and interest components of the loan as per the Income Tax Act, 1961. The principal repayment of the loan up to Rs 1,50,000 is eligible under Section 80C of the Income Tax Act.
Tax benefit for home loan for interest payment is allowed as a deduction under Section 24 the Income Tax Act. Incase the Income from property shall be reduced by the amount of INTEREST PAID ON HOME LOAN where the loan has been taken. The maximum Tax deduction allowed under section 24 of a self occupied property is subject to a maximum limit of Rs. 2,00,000. per annum.

Can I get a loan for extension / upgradation / renovation of my house?

Yes, these loans are available from all HFCs. However the loan terms may be different from the usual housing loans.

Can I sell the property on which I have taken the loan?

Yes. But the loan will have to be repaid before the sale is effected. Some HFCs allow the transfer of loan to the buyer of the property, depending on his eligibility for loan.

Can NRIs apply for a home loan?

NRIs can avail financing assistance in the form of housing loans, for purchasing residential properties in India. These loans are available through leading financial institutions like HDFC, LIC, Canfin Homes, Citibank, Standard Chartered, ING Vysya Bank, SBI, and ICICI.

Some of the features of these loans are:

  • The applicant must be an Indian passport holder / PIO / OCI.
  • Loan eligibility is decided by the repayment capacity of the individual. Repayment capacity takes into consideration income, age, qualification, other income, amounts and a few other items.
  • Between 5 and 15 years, rates of interest vary from 10% to 11%.
  • Repayment period ranges from 5 to 20 years or on superannuation or on completing 60 years of age.
  • The loan is repaid in the form of Equated Monthly Installments (EMIs).
  • The security for the loan would be the equitable mortgage of the property financed. This is created by the deposit of the original title deeds of the property with the HFI.
  • Local guarantors will also be required in the case of a few institutions.
  • Copies of the following documents have to be submitted along with the application for the loan to the institution.
  1. Employment contract
  2. Latest salary slip
  3. Latest work permit
  4. Visa stamped on the passport
  5. Power of Attorney to a local individual
  6. Receipt of payments made for purchase of the property
  7. Agreement of Sale
  • Interest rates and EMIs are subject to change without notice. Check with the financial institutions for prevailing interest rates.

A salaried applicant should be abroad for at least a year, and a self-employed applicant for 3 years.

What is an EMI? How is it calculated?

If you are planning to get a home loan, the EMI (Equated Monthly Installments) will be your main consideration. EMI is the sum of money that you as a borrower will pay your lender to clear your outstanding loan. These payments are made every month on a date that is stipulated by your bank till such time that the loan has been completely repaid. The three things that go into the calculation of an EMI are:

  • The amount of the loan
  • The rate of interest
  • The tenure of loan

What is Loan to Value Ratio?

The loan to value ratio is arrived at by dividing the loan amount by the agreement value of the property. To illustrate with an example, if the value of the property is Rs 40,00,000 and the lender is giving you a loan of Rs 36,00,000, the LTV is 90%.

It is an equation that is used by lenders to assess their risk in lending a mortgage to you as a borrower. The purpose of establishing a loan to value ratio from a lender’s perspective to see that it is not lending you more money than what the property is actually worth. As the LTV increases, so does the perceived risk for the lender in case of a default.

While calculating the loan to value, please note that the banks do not include documentation charges in the cost of the property such as stamp duty, registration, etc. RBI has now made it mandatory to inexclude such charges from the loan to value of the property. Though this means you will have to cough up a higher down payment, it means you take a smaller loan and pay lesser EMIs. However, a Housing finance company may find you up to 90%, including the stamp duty and registration charges of the property.

What is Pre-EMI Interest?

If you decide to purchase a property that is under construction you can request your lender to link the disbursal of the loan amount to the stages of the property construction by opting for a pre- EMI payment. EMI, as we have discussed earlier consists of the principal and the interest component. The pre -EMI is the interest component that you pay monthly on the amount availed till the construction is complete and you get possession of the property.

Though a pre-EMI may seem cheaper at first, it results in more number of payments as the borrower ends up paying interest till such time as the property is under construction as well as after the full disbursement of the loan amount.

In case there is a delay in the project construction, the borrower may end up burning a hole in his pocket as he ends up paying more than the principal amount of the loan, even before getting the possession of his property. However, if you are an investor, willing to sell the property soon after you are granted possession, taking a pre-EMI option makes sense for you.

Pros and Cons of Floating rate Home Loan

  • The benefits of opting for a floating rate of interest:

The one clear benefit that a floating interest on a home loan has been that it is cheaper than a fixed rate by at least 2 to 2.5%. Even if there were to be a case where a floating rate exceeds a fixed rate of interest it will only be for some period of your entire loan tenure as interest rates a cyclical in nature. Needless to say, floating interest rates bring in a lot of savings for the borrower when the interest rates soften in the market.

  • The drawbacks of opting for a floating rate of interest

The drawback of such rates is the impact they have on your monthly outgo as EMI. Given the uneven nature of floating rates, either your EMI may shoot up one fine month throwing your monthly budget out of gear or you may end up repaying substantially higher due to an increase in your loan tenure (EMI remains same). However, if you think that this aspect does not bother you, going in for a floating interest rate does indeed make sense.

Pros and Cons of Fixed rate Home Loan

Benefits of opting for a fixed interest rate:

Your EMI remains the same irrespective of the conditions prevailing in the market

It is a great option for those who are good at budgeting and do not want their monthly outgo to go haywire because of market conditions

Gives the borrower a sense of security and peace of mind.

Drawbacks of opting for a fixed interest rate:

The major disadvantage of a fixed rate of interest is that it is at least 1-2.5% higher than a floating rate of interest.

The other disadvantage of such a loan is that if the interest rates decrease significantly, a borrower who has opted for a fixed rate of interest does not get any advantage.

As a borrower, you must also cross check with your bank whether you are allowed to fix your interest rate for the entire loan tenure or only for a few years. If you perceive that the interest rate cycle will be on the rise for the next few years, it’s a good idea to be locked under the regime of a fixed interest rate on your home loan.

Can I get a loan to purchase a plot of land?

Most banks offer land loans as long as they are purchased exclusively for residential purposes.

Investing in a plot of land and constructing a house can often work out to be a less expensive option for a homeowner. You can claim tax benefits for the construction of your house.

In order to avail a land loan, you will need a variety of legal documents. It is prudent to hire the services of a lawyer to ensure that the property is free from dispute. The lender will also ask for things such as original ownership documents of the land, tax receipts and other records. Make sure you have all of this in order before you approach a bank for a land loan.

Some banks also have self-imposed restrictions like they may want the land to be within the municipal limits or put down a clause that compels a borrower to begin construction of the house within six months of the property purchase.

What are the Tax Benefits available if I take a Home Loan?

Buying your own home is a big financial responsibility. Taking a mortgage for the same seems like such a big burden that most people tend to shy away from taking this step. However, there are loads of benefits that home loans offer as well that should serve as an incentive if you are planning to buy one. Here are some direct benefits of taking a home loan.

Tax benefits- The EMI for your mortgage loan has two components, the principal and the interest.

Interest payment- According to the dictates of the Income Tax Act, you can claim benefits under Section 24 on the interest payment you make. The processing fee that you paid at the time of taking a loan or a penalty paid to close the loan prematurely can also be claimed under this section. The maximum limit for deductions for property (under the head of interest payments) that is self-occupied can be Rs. 1.5 lakhs.

Principal payment- For principal payments you can claim deductions under Section 80 C. However, the maximum deduction that can be claimed under this section is Rs. 1 lakh along with other investments such as insurance premiums, ELSS, school fees, etc. Deductions on stamp duty and registration fee can be claimed in the financial year in which the property was purchased. Please remember, all these deductions are valid only if the property is self-occupied. Also, all deductions are reversed if the property is sold within the first five years of purchase.

Let’s consider an example. Rajesh and Ruchi Kishanpuriya decided to take a joint home loan of Rs. 60 lakhs in a 50:50 ratio in 2012. In a joint home loan, both the individuals can claim double tax benefits under the heads of principal and interest payments. Under Section 24 of the Income Tax Act, they can get a tax benefit of a maximum of Rs 1.5 lakh each on the interest they are paying. Similarly, under section 80C they are eligible for a tax exemption of upto Rs. 1 lakh for the principal amount of the loan. So in effect, they are saving up to Rs. 5 lakhs on taxes (1.5+1.5 lakhs each interest payment = Rs. 3 lakhs and 1 lakh each on principal payment= Rs. 2 lakhs). However, they are able to reap these benefits because they are co-owners of the property and it is self-occupied.

How does the tenure affect the cost of the loan?

There are two components of a home loan EMI payment, the outstanding principal repayment and the repayment of your interest. For the initial few years of taking a loan, you do not make a substantial payback on your outstanding principal. Instead, your monthly payment services the interest rate component of your loan.

Higher tenure= higher costs

As you progressively make payments over the tenure of the loan your amount of interest component decreases and you start contributing more towards the principal outstanding repayment. So far so good right? But did you know that by increasing the tenure of your loan, you are actually increasing the amount of interest payable too, and in the process increasing the cost of ownership of the house? Therefore, when you reduce the loan tenure, you cut your interest costs and overall cost of purchase too.

Can I add a co-applicant to my application? What are the pros and cons of adding a co-applicant to my Home Loan application?

If you are applying for a home loan, you can consider the possibility of doing so along with a co-applicant as long as he or she is not a minor. There are also specified relations that are allowed to co-apply for a home loan. Here is all that you need to know about co-applying for a home loan.

Who can be a co-applicant?

In order to increase one’s loan eligibility a borrower may want to apply for a loan jointly with a co-applicant. Since both salaries/financial abilities are taken into consideration, the eligibility automatically increases. However, lenders will accept only certain relationships as per their stipulations. Here are some possibilities of who can team up.

Husband and wife

In this day and age, most young working couples aspiring to build their own home, consider the possibility of taking a joint loan in order to have a better home with higher loan eligibility.

Father and son

If an only son applies for a loan he can do so with his father, where the father’s income will also be taken into consideration. Both father and son have to be co-owners of the property. It does not, however matter who the main owner is, because it is taken for granted that the only son will inherit the property as the legal heir.

Father and sons

In case an individual has two or more sons, he can opt to jointly apply for a loan with one of them. He should not however be the main owner of the property in such a case. Upon his demise all his children become his legal heirs and should have an equal right over the property. In such cases the father may be a co-owner or may not own the property at all.

Father and unmarried daughter

An unmarried daughter can apply jointly with her father, but in such a case only her income and not that of her father’s is considered. Also, she must necessarily be the owner of the property in case of a subsequent marriage.

Brother and brother

Two brothers can jointly apply for a loan, in case they are staying together and intend to do so in the future as well.

Pros of taking a joint home loan:

Firstly, it enhances your loan eligibility and you can therefore consider looking at a better property than you would as a single applicant.

Both borrowers get the income tax benefit. Tax benefits of home loans are classified under Section 80 C and Section 24 of the Income Tax Act. Each borrower therefore becomes eligible for a maximum deduction of Rs 1 lakh for repayment of principal (under section 80 C) and Rs 1.5 lakhs for the interest payable (under Section 24). There is an additional exemption under section 80EE of Rs 1 lakh in interest for first time home buyers taking loans less than Rs. 25 lakhs in the finance bill 2013.

If you and your spouse earn equal incomes, it will be wise to opt for an equal ownership so that you can get the maximum tax benefits.

Cons of taking a joint loan

If both spouses are applying for a joint loan, it becomes impossible for either to take a mid-career break, because they are locked into high debt.

If the primary borrower defaults, passes away or files for insolvency (is the inability of a debtor to pay back the debt), the co-applicant has to take on the entire burden of the loan.

Joint loans have a bearing on your CIBIL score. If there is an irregularity of payment by one of the applicants, it will have a negative impact on your credit score as well.

So before you take a joint loan, ask yourself if you are truly ready to get into a joint commitment to repay the debt. Also, if you are applying for a home loan with your spouse, sign an agreement in the presence of a legal counsel about the terms and conditions of splitting the property in case there is a marital dispute later.

What are the additional charges payable along with a Home Loan?

When you are comparing lenders and checking out home loan options, you should not only look at interest rate comparisons, but also the various other fees and charges that is levied upon you. Some of these fees need to be paid upfront while you are taking the loan, while other charges are levied during the tenure of your loan. While negotiating with lenders you should have a clear idea about the various other charges so that you can negotiate well and get the maximum benefits. Here is a checklist on charges that will come in handy when you are shopping for a home loan:

  • Processing fee: Almost all lenders levy a non-refundable processing fee on your home loan. This fee is usually in the range 0.25% to 1% of the total loan being sanctioned. Some lenders may cap the processing fees for a high ticket loan.
  • Administrative fee: Some banks charge an administrative fee at the time of sanctioning your loan. This may vary from bank to bank. Some banks have even waived it off. It makes sense to consider such lenders who have done away with this fee.
  • Legal charges: Lenders incur a legal cost when they evaluate or verify the property you are buying. Some banks have the policy of recovering these charges from the borrower. Ask about any such charge upfront while negotiating, so that you do not find your costs escalating later.
  • Stamp Duty: You will need to pay a stamp duty to the Government during the transaction of your home purchase. Normally this stamp duty is 0.25 % for loans below Rs 10 lakhs, while for loans above Rs 10 lakhs the stamp duty may be 0.5 % of the total loan amount. You will need to make this payment during the registration process of your property.
  • Prepayment penalty or foreclosure charges: When a borrower makes extra payments beyond the stipulated repayment (EMI) schedule, it is called a pre-payment. Most banks allow you to make a certain number of pre-payments in a year without any penalty. However, borrowers still have to bear a foreclosure charge if they repay the entire amount of loan before the completion of the loan tenure. This generally happens when a borrower opts for a balance transfer to another bank. This fee may range between 2% to 4 % of the total principal outstanding of the loan. If you negotiate, banks may waive this prepayment charges as RBI has mandated not to charge foreclosure charges for floating rate home loan.
  • Duplicate statement: Each year your lender will send you a statement that gives the details about the amount of repayment you have made in the year broken down into principal and interest payments. You need this statement for filing your annual taxes. If you lose this statement the bank will charge you Rs. 100 – Rs. 500 for sending you a duplicate statement.
  • Delayed payment: If you make some repayments beyond your stipulated date you will need to pay delayed or a late payment fine shall be a maximum of 24% per annum on the amount outstanding against your EMI amount.
  • Cheque bounce charges: If you r cheque for repayment bounces because of the lack of fund in your account, you will have to pay a cheque bounce charge to your lender. These charges may be between Rs 250-500. As a borrower, you must bear in mind that repeated delayed payments will have a negative bearing on your CIBIL score.
  • CERSAI Charges: The Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) is a company licensed under section 25 of the Companies Act, 1956 and registered by the Registrar of Companies, New Delhi. CERSAI was promoted by central government to prevent frauds involving multiple lending by different banks on the same immovable property. A bank or housing finance company may charge Rs 250 or Rs 500 (respectively for creation/modification of security interest)

While shopping for your home loan, you must clarify and negotiate on each of these charges with your lender, so that there are no nasty surprises later.

Why your loan got rejected?

Applying for a home loan entails a lot of hard work, from putting together the documents needed to prove your eligibility to ensuring you have enough funds to make a down payment on your dream home. But even after you think you have done the best you could, the bank may reject your loan application on some factor that you could never imagine would thwart your chances of getting a loan. To avoid finding yourself in such situations, take a look at the possible reasons why a loan application may get rejected.

Your CIBIL score is poor

It is very important to manage your debt responsibly even before you can think of availing of a home loan. If you have a poor track record of repayments, meaning that you have slipped up on a few EMI payments when it comes to an existing personal loan or a car loan or you have accumulated huge dues on your credit cards it will reflect on your CIBIL score. A poor CIBIL score is a strong enough reason for any lender to reject your loan application right away.

Your profile does not fit into the bank’s internal policy!

When it comes to giving loans each bank has its own internal policy and set of guidelines that it follows. There might be cases when a credit profile, income of the customer or even the geographic area he lives is not agreeable with the bank’s internal policy.

A huge debt pile without a matching income

Availing debt is easy these days, with loans and credit card offers sounding too tempting to ignore. But if your prospective lender finds that you are juggling too much debt with income that is too little, it will not be willing to give you a home loan.

You have been hopping jobs too often

If you are hopping jobs every two or three months, your home loan lender may perceive this as instability and your inefficiency as a professional. Ideally, any lender would prefer that the borrower be working with an organization for a minimum of one- three years before applying for a loan.

Your current residential address is in a “negative zone”

Although banks seldom part with this information, the truth is that almost all banks have cities divided into three broad categories, the white, grey and black zone. Borrowers living in the white zone can qualify easily, those living in the grey zone may be asked to provide additional documentation and those in the black zone are considered very risky. Although such discrimination is frowned upon by RBI, such discrimination based on geographical locations is a stark truth even today.

The property of your choice is too old

Banks will not be willing to give you a home loan, if you have chosen an old building with an age of 20-30 years. The age criteria will differ from lender to lender, and you may have to put in a higher amount as down payment to get your lender to negotiate.

Your application has been rejected previously

All banks maintain a record of loan applications that have been rejected before. This information remains in their database. Even when you make a fresh application the verification checks that are conducted during your credit appraisal process will throw up your rejected loan application. If such a thing does happen with you, it’s best to discuss with your bank what went wrong back then, and how you have addressed the issue. If you are able to prove your creditworthiness and have enough credentials backing you up, the bank will definitely take a re-look at your fresh application.

So here’s what you need to do in order to ensure that your lender does not reject your application:

Manage your debt responsibly. Make payments on time and keep your financial health in shape.

Keep a check on your credit score by getting your credit report from CIBIL. If there are issues that need to be addressed, do so as soon as you can, in order to avoid trouble when you are taking a home loan. Your credit report should be looking good at least six months prior to when you intend to apply for a home loan.

Before applying for a loan, get acquainted with the lending policies of the bank or housing finance company of your choice. It is very important to know if they have any restrictions regarding builder, minimum area or location.

Get all your paperwork in order before you make an application. All the information that you provide in your loan application is verified by the bank. So it’s essential to keep your books in order.

You need to be aware of all the various aspects of taking a home loan, before you actually apply for one and knowing what can cause your application to get rejected is an important part of it.

What is the penalty if I miss an EMI payment?

There are times in life when one is faced with an unavoidable financial crunch and as a result may end up missing some EMI payments. In such cases, your bank will allow you pay the missed EMI with that of the next month. But as a customer, you should know what is the true cost of missing an EMI.

A hefty late fee

It may not seem like a large amount on a month on month basis, but calculated on an annualized rate of interest it can work out to be a substantial amount, that you will be required to pay as a penalty. Let’s understand this with an example. Suppose you have a Rs. 40 lakh loan at an interest rate of 10.5% and your tenure for the same is 20 years. Your EMI in this case works out to be Rs 39,935. If you miss a single payment on your mortgage, you pay an unnecessary penalty payment of Rs. 799 (2% per month) at an interest rate of 24% per annum.

You may lose your eligibility for a balance transfer

If you miss the EMI payment on your mortgage three or more times, you will not be allowed to switch your loan to another bank or housing finance institution, even if there is a better opportunity available. No bank will be willing to take you on as a customer as you will be put in the high risk category.

Missing even a single EMI payment has a negative impact on your CIBIL score. Most of the banks and lenders in India now report your repayment behavior to CIBIL and other credit bureaus. A single default on your home loan will shave off 50-70 points on your CIBIL score at one shot.

Sometimes, people may miss payments because of sheer negligence. Following are the cases in which you may end up missing an EMI payment:

Bounced cheque- One of your postdated cheques (PDCs) may have bounced or a direct debit may have been dishonored because of insufficient funds in your account. Some banks may charge you a penalty (of up to Rs. 500 for bounced cheque) in addition to the 24% per annum interest on the amount overdue.

Non submission of fresh PDCs-You may have slipped up in submitting fresh PDCs to the bank after the completion of a 12 month cycle. This is a common mistake that most borrowers make. To make sure you do not miss an EMI payment because of your carelessness, make sure you set a reminder about when your PDCs are coming up for a renewal.

Mistakes on your cheques- Mistakes made on a postdated cheque too can cost you dearly. You may be at peace because you know that all your PDCs are up to date, but if you have made a mistake while writing out the cheques, such as illegible handwriting or a signature mismatch, your cheque will bounce. It is therefore wise to be attentive and focused when you are filling out your PDCs for submission.

Missing a single payment on a housing loan EMI may have direct consequences as you can see here. Taking on a home loan is a huge responsibility and you will have to be up to speed in order to service it well.

Can I switch my Home Loan to another bank? Pros and cons of doing so.

If you are an existing home loan customer of Bank ABC and find that you are stuck in a higher band of interest rates, because your existing bank is slow to pass on the benefits of a lower interest regime (during a lower interest rate cycle), you could consider re-negotiating the interest rates with your bank based on your good track record of repayment.

However, if Bank ABC refuses to give you a hearing, you could always consider switching your loan to another bank to get the benefits of a lower interest rate. You may also be willing to make a balance transfer if you are not satisfied with the service that Bank ABC provides. In banking parlance, this process is also called “refinancing”.

The process of a balance transfer

You submit a letter to your existing bank (Bank ABC) requesting balance transfer of Home loan and to provide a certificate confirming the balance outstanding and the list of property documents held by them

Bank ABC processes your request and gives you a no objection certificate confirming your outstanding amount along with the list of property documents held by them

You submit this letter to your new bank (Bank XYZ) which runs a credit appraisal process and sanctions your loan amount.

The loan amount once disbursed is passed on to Bank ABC, which closes your loan account.

Your property documents are handed over to Bank XYZ and your remaining postdated cheques or ECS with Bank ABC are cancelled.

You start paying off your loan to Bank XYZ at a lower rate of interest.

Advantages of balance transfer

Getting a lower rate of interest – This is undoubtedly the most popular reason to transfer your loan. An interest differential of 0.75% to 1% is a good enough reason to consider a balance transfer

You can bring down the tenure of your loan- Say, you have received a good salary hike and can afford a slightly higher EMI now but Bank ABC is not ready to lower your interest rates. You can then switch your balance to Bank XYZ at a lower rate of interest, pay a slightly higher EMI and save up considerable amount of money in the long run by lowering your tenure. As a result, you will end up owning your own home sooner

What you should watch out for

The charges involved- Before you think of a balance transfer to another bank consider the various charges involved. You must firstly take into account the processing charges (can be anywhere between 0.25 to 1% of the amount being sanctioned). Some banks have a fixed amount as a processing fee (some banks have capped it at Rs 5000) while others may charge a fee on the basis of your financial position (whether you run a business or are a salaried individual). Other charges include stamp duty, valuation fee, legal charges and other allied charges that Bank XYZ may charge you (since you have to go the rigmarole of credit appraisal again). Some banks may even ask you to open a savings account with them and route the EMI through this account. Yet others may ask you to fix a certain amount as a fixed deposit as a collateral. Compare all these charges with the benefits you are getting and see whether you are still making substantial gains

The so called freebies- In order to woo customers some banks use the baits of other products such as accident insurance or a free credit card. Before you bite the bait, question yourself whether you really need such products or at least check the terms and conditions under which such products are issued

Finally, before you make the decision of a balance transfer, read all the terms and conditions of both the banks you are dealing with. After all, all banks are in the business of lending, so why would one bank offer you substantial benefits over the other? Clear all your doubts and suspicions before you take a final decision.

Can I pre-close my loan before my Home Loan matures? What are the pros and cons of doing so?

The home that you have purchased is probably the biggest asset that you will ever have, but if you have bought it on a home loan, you must also realize that it is the biggest debt that you have. Home loans are long tenure loans and the interest you pay on them is much higher than your principal amount borrowed. For instance, if you have taken a Rs. 60 lakh loan for a tenure of 20 years at an interest rate of 10% you end up paying an interest of Rs 78,96,240 on it. Therefore the actual cost of your home works out to be Rs 1, 38,96,240.

If you haven’t considered this colossal interest payment yet, it’s time for you to wake up and smell the coffee! Once, you realize that you are spending so much money on the interest component, you would obviously look for a solution to bring down the total cost of your loan. The solution lies right in front of you! It is called partial pre-payment on your home loan. Most of the lenders in our country allow you to make monthly pre-payments. Let us consider some of its advantages and disadvantages.

Advantages of prepayment

Interest payment savings: This is the most obvious advantage of prepaying your loan. All financial advisors would tell you that when you prepay even a small amount it goes towards the principal payment of your loan and as the principal amount reduces, so does the interest amount. Common wisdom says that every surplus that you have such as a salary hike or a bonus payment, it should go towards the payment of your home loan, but it may not be possible to do that always. Instead, you could consider saving a small amount of money every month on other expenses and use it towards pre-payment over and above your EMI.

Let’s understand this with our previous example of a Rs. 60 lakh loan with a 10% interest for a loan tenure of 20 years. Your EMI for the same is Rs. 57,901. If you do not make any pre-payment the total cost of your home works out to be Rs 1, 38, 96,240. Now, if you were to make a small pre-payment of Rs. 2,000 from the 6th month of your loan tenure (effectively paying Rs. 24,000 each year), you could save a total of Rs. 8,53,962 and bring down your loan tenure by 1 year 10 months. Look at the tables below to understand better:

No prepayment penalty: In June 2012, the Reserve Bank of India abolished prepayment penalty on all floating rate home loans, making life easier for borrowers. Some banks, however, have a lock in period of six months before which you cannot start making prepayments towards your loan.

Disadvantages of prepayment

Losing out on an opportunity cost: Before considering prepayment you should ensure that there is no other financial instrument in the market that would have given you a higher rate of return than the interest rate that you are paying on your home loan.

Lack of diversification: Your property will comprise a lion share of assets. By prepaying your mortgage loan, you are not increasing any investments (although you are lowering debt). If you choose not to prepay, you can invest in other asset classes and thereby reduce your risk of exposure to a single asset class.

Although it is up to you to decide what is the best thing to do, the pros of prepayment outweigh the cons as you will end up being debt free faster and there are no other risk free financial instruments that offer guaranteed returns that are higher than the rate of interest you will pay on your home loan.

Can I sell my property before my Home Loan matures? What are the implications?

Your home or the first property that you have bought is undoubtedly your biggest asset, but sometimes due to some unforeseen circumstances, you may have to sell it off even before your loan has been fully repaid. Some of the reasons may be that you find that you need a bigger house because your family has grown or you must move lock stock barrel to another state because of a job opportunity.

In such cases you may find a buyer in a person who is looking at real estate as an investment and would rather invest in a property with an existing loan rather than going in for a property that is under construction. This is because he might find it much easier to carry out a transaction on an established property that has already been verified by a lender once (because it has an existing mortgage on it). Therefore, there are fewer chances of a fraud.

But whatever may be the reasons for the buying or selling of such properties there are several questions that you may have from the customer’s perspective. Is it even possible to sell or buy a property with an ongoing loan? Can the prospective buyer of the property settle your existing loan or do you have to settle the loan before you look for a buyer? What if the prospective buyer himself needs to avail a loan to purchase such a property? These are some of the common questions that come up while discussing a transaction on a property with a mortgage. Read on to get some clarity on buying or selling a property on a loan.

The documents that a seller will need:

Here is a list of the main documents a seller will need-

The purchase deed of the property. This is to confirm that the property in question is in his name and he has the right to dispose it. In case the property is one that has had a previous owner, the buyer will also want the copy of the previous deed

Photocopies of the stamp duty and registration of the house (since the originals will be with the lender)

A ‘No Objection Certificate’ (NOC) will be needed from the housing society if it is an apartment in a society

In case the property is jointly owned, a letter of consent from the co-owner stating his wish to go ahead with the sale

One thing that needs to be clarified at this stage is that, a property cannot exchange hands when it is still under the ambit of a housing loan, so the buyer must settle the outstanding loan on behalf of the seller. There are two ways to do it. He either settles the outstanding amount with his own funds or he takes a loan for the same. We are going to take a closer look at both options:

Let’s assume that the seller is Rajan and the buyer is Sanjeev and the bank Rajan has taken a loan from is Bank NMG.

Option I: The buyer uses his own funds

Rajan needs to obtain a letter from Bank NMG that states that upon full repayment of Rajan’s dues, Bank NMG will have no problem relinquishing the property documents.

Sanjeev will have to pay the full outstanding amount into Rajan’s loan account, after which Bank NMG will initiate the process of releasing the property documents.

Once the bank receives the money it will issue a ‘No Due Certificate’ (NDC) to Rajan and releases the property papers after a maximum of 10 days, after which the legal procedure can be completed to establish Sanjeev as the new owner.

Option II: The buyer takes a home loan

In this case too, the outstanding loan amount needs to be settled first

Sanjeev applies for a loan from Bank NMG (or any other bank) to clear Rajan’s home loan dues. Bank NMG carries out a credit appraisal process on Sanjay’s application, as in the case of any fresh home loan application.

If it is satisfied with Sanjeev’s creditworthiness, Bank NMG will issue a loan to Sanjeev.

The rest of the process remains same as point 2 and 3 from Option I.

So, you can indeed sell or buy a property that has a mortgage on it, but as a seller, you must remember that if you sell the property within three years of purchasing it, you will incur short term capital gains tax which will hamper your return on investment. Also, selling the property within 5 years of buying it will result in reversal of tax deductions. Thus, it may be stated with some conviction that as a buyer, you will be at a vantage position buying a property with a mortgage, the seller may have to compromise heavily on his profit margins if he sells it within the first few years.