You have decided to get a house. You must be wondering – “How to get a home loan?” Now that the complete home loan application process is online, all the information you need about the home loan, interest rates, repayment tenures, and other details are also online. Before delving into the internet to find all about it, having an understanding of the home loan terminologies will help you gain understanding of complete and accurate information.
Explained below are all the home loan terminologies at every stage of home loan process.
Stage 1 – Checking properties for purchase
A property that is approved by the bank for sale is known as pre-approved property. Builders submit applications to banks to approve their properties. The main purpose of getting the property pre-approved is to promote it for sale and make it easier for the bank to disburse home loans.
What to check?
If the property you have chosen to buy is pre-approved, here’s what you need to check:
- Builder usually shares all the important documents directly with the bank. If you have an idea to purchase a pre-approved property, make sure that you have access to all the legal documents for the property.
- Even if the property is pre-approved by Bank A, you can choose a different bank to apply for your housing loan. You are not bound to get home loan from the same bank that the builder has got the property pre-approved from.
If you purchase property that is not owned by the builder but another person, it is called resale property. It is termed ‘resale’ because the person you are purchasing from is the first owner of the property as he purchased it from the builder.
What to check?
When you decide to purchase a resale property, you need to check and confirm on two factors:
. One, the owner of the house that you are dealing with is the sole owner of the property. Two, the current owner (person you are dealing with) has copies of the legal documents maintained by the previous owner.
Stage 2 – Enquiring about home loan
When you apply for a home loan, the bank/lending institution does not provide 100% of the purchase price. Banks do not offer more than 80% of the property value/purchase price. Hence, 20% is paid from the borrower’s pocket. The difference between the property value/purchase price of the property and the loan amount sanctioned by the bank is called margin.
Down payment is another name for margin. This down payment is made by the loan applicant to the property owner directly.
Equated Monthly Installments (EMI)
After the loan amount is credited to the borrower, the borrower starts repaying the loan to the bank by way of EMI. This is calculated by the individual and banks while the person is yet finalizing on the loan he wants to take. The first thing that banks look at while approving for a loan, is the repaying capacity of the borrower. Only if the borrower is in a financial state to be able to pay back the loan month-on-month, will the process move forward.
Also, as a borrower you would want to know how much your EMI comes up to so you can plan your budget accordingly. Without stressing a lot, input the principal amount, interest rate and tenure of home loan on our free online EMI calculator to get to know your EMI.
Once you know the EMI, you can add it onto your monthly expenses in the budget to see the amount of emergency fund that you would have in hand post the usual expenses.
Stage 3 – Applying for home loan
Any asset that is of high value in the market currently can be used as a collateral for home loan. It could be property, gold jewelry, etc. In simple words, if you have jewelry of high value that you wouldn’t be using for some time, you can use it as a security for taking a loan.
It is called security or collateral because you submit the original property/asset/ownership documents with the lending bank for the asset as security. In case you are not able to make timely loan repayments to the bank or default on the loan, or delay payments, or stretch your approved tenure of repayment, the bank gains the right to appropriate the asset that you submitted as collateral.
When you submit an asset to the lending bank as a collateral, you can negotiate with them to provide reduced interest rates for your home loan. Since they have an assurance that their loaned money will be retrieved within the decided tenure, banks agree to lower the rate of interest.
Stage 4 – During loan application process by the bank
Credit score is the most important factor in obtaining any loan from the bank. CIBIL score of the loan applicant is checked when one submits his/her loan application. CIBIL score of an individual is calculated based on one’s credit history and repayment pattern of his/her credits. His/her income and complete financial history to date is taken into consideration.
7 parameters are looked into:
- Income of the applicant/co-applicant/guarantor
- Age of the applicant
- Educational qualification and nature of profession
- Details of employer
- Salary credit history
- Tax history and credit behaviour
- Assets and active investments
- Liabilities and existing loans
Once the bank is satisfied with the background verification and document verification of the home loan applicant, bank sanctions the loan and sends the offer letter to the applicant. As the name suggests, offer letter is an offer of providing home loan to the applicant. It has details such as,
- Loan amount sanctioned
- Tenure of the loan
- EMI/amount of money to be paid every month
- Interest rate
- Validity of offer letter
- Fine print – other terms & conditions of the home loan agreement.
The offer letter is usually valid for 6 months from the date is issued, unless a period or date is mentioned as validity of the offer letter. This is the official document of the bank that qualifies the loan applicant to borrow from the financial institution.
Stage 5 – Home loan approval/sanctioned by the bank
After the loan applicant’s documents are verified and are found satisfactory by the bank, the loan amount is disbursed/transferred to the borrower. The process of loan amount being released to the borrower is called disbursement.
Since home loans are usually large sums, some banks disburse in parts. The details of the disbursement process are also explained in the offer letter. It would have the total number of disbursements, the time period in which it will be done and the amount of money that will be disbursed in every release.
Not all banks disburse the loan in parts. Some banks release it in full. If you are particular about how you want to receive your loan amount, you can discuss it with your bank manager while submitting your home loan application and supporting documents. This will make sure he can include necessary and decided details in your offer letter.
Stage 6 – EMI Payments
It is a common practice for banks to collect post-dated cheques from the borrowers for the EMI payments. Some opt for automated payments from their bank account by setting up the date and amounts to be withdrawn automatically for the loan installments to be paid month-on-month. Whereas, others opt for issuing post-dated cheque to the banks.
Date, amount, bank name and account holder’s signature are the important things that you need to look for while filling out the cheques. The banks cannot use the cheques before the mentioned dates on the cheque, therefore, you can make sure that your EMI’s are paid on decided dates and you can utilize funds in your bank.
Now that you are well-informed about all the terms used during the home loan process, it’s time to get the house you have been waiting for. If you haven’t applied for a home loan yet, don’t wait any further. Reach out to us for best offers.