Can I Avail of Home Loan Against Unapproved Property?

Updated on: 05 Dec 2023 // 5 min read // Home Loans
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The concept of urban planning has been relatively new in India. If you look at any major city in the country, only Chandigarh has the distinction of being a planned city. Almost all other cities have grown in a relatively unplanned manner. In Delhi, for example, the growth of the city has been and continues to be so fast that urban planning has often been unable to keep up. As a result, there are a number of unapproved properties in the city and its surrounding areas.

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At the same time, people need a place to live and call their own. With the growing income levels and population levels in the city, the demand for Home Loan products has gone up considerably. Banks and NBFCs have been providing Home Loans for people for many years now, and as the demand has gone up, they have started to evolve their lending practices and protocols to cater to rising demands. In recent times, the government has launched many schemes to ensure that the urban housing levels of India improve at a regular pace. As a result of this push from the government also, the banks and NBFCs have started to cast a wider net to provide Home Loans.

SBI Home Loan has become very popular in recent times. They have been voted “The Most Preferred Home Loan Provider” as per AWAAZ Consumer Awards. Further, SBI has also been voted “Most Preferred Bank Award” as per TV18 and AC Nielsen-ORG Marg survey that was conducted in 21 cities all across India. The bank offers Home Loans to people between 18 years and 70 years of age, and their maximum loan tenure can be as long as 30 years. No other bank has offered such a long tenure on their Home Loans. 

Another great factor about SBI Home Loan is the very low processing fee charged by the bank. They levy a market lowest of just 0.4% of the loan amount as processing fee, subject to a minimum of Rs. 10,000 and a maximum of just Rs 30,000. GST is charged over the fee as applicable. Not only does no other Home Loan provider offer such a low percentage of the processing fee, no other lender has a higher ceiling on the processing fee they charge. The loans are easily available to both salaried and business income borrowers. SBI also offers interest concession to women borrowers and a Home Loan overdraft facility.

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Let us now briefly look at the process undertaken by lenders before they sanction a Home Loan. When you Apply for Home Loan, the lender will open two lines of due diligence before making the lending decision. The first line of due diligence covers the borrower’s credentials. The lender asks for KYC, income, and tax documents from the borrower to adjudicate if the borrower is credit-worthy enough to take up and service such a huge debt. The second line of due diligence is opened against the property in question. The bank will check many factors like the age of the property, market value of the property, municipal approvals of the property if it is in an urban area, as well as the title of property being clear.

Getting a Home Loan against unapproved property is possible, but the process will involve certain considerations which may not have been applicable in approved properties. 

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Urban vs. Rural or Semi-urban areas: Getting a loan on an unapproved property will be much easier in a semi-urban or a rural area as compared to an urban area. There are many factors behind this. Property in urban area will always be more expensive than in any other area, sometimes by a factor of as high as 5 times. This means that the bank will have to take a much higher risk for lending on an unapproved property in the urban area and will, therefore, be exceptionally cautious. Most lenders, especially NBFCs, will easily lend on unapproved properties in non-urban areas especially when the borrower has a CIBIL score of more than 800 and is not borrowing with a net monthly income to equated monthly instalment ratio of more than 10%.

Higher Home Loan interest rates: The bank or NBFC, which is lending on an unapproved property, is taking a risky decision and will want to make the most out of the deal. This means that the Home Loan interest rate on an unapproved property will always be higher than that of an approved property. This difference may also depend on many other factors and can be mitigated if the borrower has a high credit score and clean credit history. Yet, borrowers must be prepared to pay as much as 1% to 2% higher Home Loan Interest Rates.

Shorter loan durations: Generally, Home Loans are offered in durations between 15 to 20 years. Though some banks also offer longer durations like 25 years or even 30 years if the borrower is young and the property is located in a good area. With unapproved property, these longer durations will simply not be an option. Lender is trying to keep the shortest possible risk duration, so they will only offer Home Loan against unapproved property for 10 to 15 years of tenor. If the borrower can show a very good credit history, they may increase this by a year or two, but you cannot expect longer duration Home Loans for such profiles.

Lower property valuation and LTV ratio: The lender will always place a lower value on an unapproved property than its current market price simply because they consider such property as a high-risk loan. Banks will value such properties at only 80% of what the actual market value will be. Further, they will also not give loans on the LTV of approved property. So, the Home Loan amount will be even less.

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Take for example, an unapproved property with a market value of Rs. 10 lakhs. Banks will value it at 8 lakhs. They are not going to lend at 80% LTV, which they do for an approved property but anywhere between 70% to 75%. So, you can expect Home Loan on such property anywhere between 6.5 to 7 lakhs only. 

All in all, if you want a Home Loan against unapproved property, you must have a very good credit score, and you must be ready to accept lesser loan amount at higher interest rates. It is recommended to use professional advice so that you can avail of the maximum amount at the best possible rate.

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