It has virtually become impossible for one to purchase a residential property through outright down-payment. As a result, prospective home buyers largely depend on Home Loans to buy a property of their choice. With a steady increase in the number of applicants applying for a Home Loan, various banks and financial institutions are now offering high-value Home Loans at attractive interest rates. Though availing a Home Loan is nothing uncommon and is the most natural thing in the present times; it is something that significantly affects your financial future.
For a first timer, taking a Home Loan is a whole new world in itself. Certainly, most people aren’t experts at lending terms and processes. Hence, understanding what you are getting into and what you are liable for when Availing a Home Loan can be advantageous on many counts. But the first step to understanding the concept of Home Loan is to understand some of the most common terms used. With this knowledge, you will be in a better position to make an informed decision in selecting a Home Loan.
Here are the top 12 terms you must know before taking a home loan:
The most important thing to understand with the offer letter is that it doesn’t mean that the bank has agreed to sanction the loan. The offer letter is an official document that states that the bank has agreed to consider you as a potential customer.
For example, say, you have applied for Axis Bank Home Loan. Once you receive the offer letter, it means that the bank has started the process of checking whether or not you are eligible for the loan. Only if you meet the eligibility criteria will you be provided with the loan.
The offer letter is very important as it provides information on some of the most important parameters pertaining to your home loan application. In it, you will be provided information on the loan amount, loan tenure, the rate of interest, and the pre-EMI information, the terms and the conditions of the loan and the validity of the offer letter. The information can be used to calculate your monthly EMI using any of the available online Home Loan EMI Calculators.
Generally, the validity of the offer letter is around 6 months, and in case the loan isn’t disbursed within this period, you have to start the home loan process all over again.
The next step in taking a Home Loan is credit appraisal. This is the phase where the borrower and his financial situation are being appraised to determine the eligibility for the Home Loan. Hence, the various documents that you have provided during the application process, your financial status, monthly income, credit score, eligibility, etc. will be scrutinized. You will be provided with the loan on completion of the credit appraisal only if the bank deems you eligible.
Disbursement in plain terms means transferring the loan amount to the seller. In general, practice, no bank provides the borrower with hard cash. The most common means of disbursement is in the form of a cheque or demand draft, which can then be deposited into the borrower’s account. Banks today are doing away with this extra step too and are directly transferring the loan amount into the seller’s account, in case the borrower is eligible for the loan.
When taking a Home Loan, you will not be provided with the entire cost of the home you are planning to buy. The RBI sets a cap on the amount of loan a person can take against the property he is planning to buy. Currently, the cap varies from 70% to 90%, depending on the value of the property. But since the lender isn’t providing the entire cost of the property as loan, you are expected to pay the rest of the amount, which is known as the down payment or the margin. In case the lender provides you with 80% of the cost of the property, the margin or the down payment to be paid by you is 20%.
Once the loan is sanctioned, the repayment of the loan begins. The repayment is generally made in the form of post-dated cheques. You will be expected to provide cheques addressed to the bank for the EMI pertaining to the particular month, which will then be presented by the bank every month.
EMI or equated monthly instalments are the payments that you make to the lender every month towards the repayment of the loan. An EMI generally constitutes a part of the principal amount and the interest to be paid for the month. You must pay the EMI as per the repayment schedule annexed to the loan agreement. An easy way to calculate your Home Loan EMI is to make use of the Home Loan EMI calculator available online. To calculate EMI of your Axis Bank Home Loan, all you would require is your Axis Bank Home Loan Interest Rate, Loan Amount and Loan Tenure.
If the property being purchased is still under construction, only a part of the loan amount is disbursed, and the customer is charged just the interest in the form of pre-EMI. Though pre-EMI is less compared to actual EMI, the interest paid over the span of the loan tenor can be more (compared to just paying EMI from the beginning), especially in case of delays in the construction.
Resale property denotes the property that isn’t new or is pre-owned. In case you are taking a Home Loan for a pre-owned property, it is important to have proper documentation and records of all the previous owners to increase the chances of the Home Loan being sanctioned.
Sometimes builders get their ventures pre-approved by banks. This is called pre-approved property, and it is easier and involves less documentation for taking a Home Loan for pre-approved property.
Security or collateral is the customer’s asset against which the loan is being provided. Basically, it means that in case the borrower defaults, the bank sells this asset to recover the loan amount provided. The advantage with Home Loans is that the property being bought using the Home Loan itself is considered as the collateral for the loan.
Prepayment is the option that allows the customer to pay off a part or the entire loan amount in one-go in case his/ her financial situation permits. Generally, all financial institutions provide the option of prepayment, but some of them levy a charge in lieu of this option, i.e. prepayment fees.
Most lenders charge a fee from the customers when processing an application for a Home Loan and related services. These are generally termed processing and administrative fees, which greatly differ across lenders.
Availing a Home Loan is a long term financial commitment, and it is essential for you to acquire as much information as you can before taking a final decision.
Also Read: 5 Benefits of Taking a Home Loan
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