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How to Sell a Home with an Outstanding Loan

Updated on: 14 Dec 2021 // 29 min read // Home Loans
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Are you planning to sell your house? Does it still have an outstanding loan on it to clear? Are you worried that your outstanding loan will reduce your chances of selling the house? Well, good housing finance schemes such as HDFC Home Loan and others help many to afford their own house quite early on in life. However, an outstanding loan on your property may get restrictive at times.

There is no doubt that selling a loan-free property is much easier as compared to one that for which you are still paying the loan. However, many people do not realize that selling a property with an outstanding Home Loan requires a completely different approach; which is not as complicated a sit may seem. Read on to find out.

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When to Sell a Property with an Outstanding Loan?

Unless you are in a financial crisis or must sell your property urgently due to pressing reasons, here are the factors one must take into account before selling a property with an outstanding loan:

  • Selling the property within one year of purchase:

If you are selling your property within one year of purchasing it you will have to pay the Short-Term Capital Gains (STCG) Tax on the profits you earn from the sale. This stands at 10% to 37% based on the income bracket you fall under as STCG is taxed as ordinary income tax. Even if you use the money from the sale to buy another property, you are not entitled to any tax deductions.

  • Selling the property after one year of purchase:

If you are selling your property after one year of purchasing it you will have to pay the relaxed Long Term Capital Gains Tax (LTCG) on the profits you earn from the sale. This stands at 0%, 10% and 15% depending upon your income. The LTCG tax helps save up to 19.5% of the regular income tax through deductions if the proceeds are invested to buy another house. The new property could have been bought a year before selling the old property or within two years of the sale.

Considering that selling a property earlier than one year leads to higher tax implications it is best to avoid selling your property within a short span of time if there are no pressing compulsions.

Things to Consider before Talking to Prospective Buyers

Get your documents in order:

If your property has an outstanding loan against it, your original documents related to the property will certainly be with the lending institution. However, you must have all related photocopies of each document with you especially when you are selling the property before clearing the loan. These include the following:

  • The sale deed copy
  • The mother deed copy
  • Documents related to the loan sanctioning
  • Tax receipts of the property
  • The utility bills related to the property
  • Society NOC
  • Housing society share certificate if any
  • Encumbrance certificate

These documents will be required to prove ownership to the buyer interested in purchasing your property.

Inform your bank about initiating the sale process timely:

It is very important to inform your bank about your intentions of selling the property and that you have initiated the process. Following which, you will receive a letter from the bank stating your loan outstanding amount. This by itself works as a substantial proof of ownership related to the property.

Inform any prospective buyer of your outstanding loan:

It is mandatory and important to let any prospective buyer know that you have an outstanding loan liability on the property they are interested in and carry out negotiations accordingly.

How to Sell the Property without Clearing the Loan?

If you want to sell, your property without clearing the outstanding loan liability here are your options: 

The buyer decides to pay for the property using own savings

This is a straightforward process where the seller takes a loan outstanding certificate from the bank and the seller makes a down payment of the outstanding amount to the bank to settle the loan amount directly.

When the loan is clear, the bank hands over the original documents to the seller, who then starts the proceedings to transfer the property in the buyer’s name. The two parties can settle the balance amount in the manner best suitable to them.

The buyer also decides to take a loan for buying the property

In this case, two things can happen:

  • Buyer takes a loan from the seller’s lender

Whenever a bank lends a loan against a property, it checks two things – the details of the property and the financial capability of the buyer. If the buyer decides to take a loan from the seller’s existing lending bank, the details of the property already exist with the bank. Therefore, the bank only needs to check on the buyer particulars and the process is relatively faster.

Once it is done, the three parties (seller, buyer, and lender) enter into a three-party agreement also called the Tripartite Agreement. Under this agreement, a portion of the loan that the bank issues to the new buyer goes into settling the seller’s previous loan and the rest is given to the seller as payment. However, the bank treats the buyer as a new loan applicant and he will have to bear all processing charges involved in taking a new Home Loan.

  • Buyer takes a loan from a different lender

It is possible that the buyer has already got his loan approved from another lender and decides to go ahead with that. In this scenario, the seller will have to ask his bank to give the outstanding loan certificate, as well as, all the list of documents it possesses. Once the new lender is satisfied it issues the amount of the outstanding loan to the seller’s bank and clears his loan. Upon settlement of the previous loan, the seller’s bank hands over all property-related documents to buyer’s bank. Following this, the buyer’s bank disburses the remaining loan amount to the seller’s account, thus completing the transaction.

Buyer Checklist for Properties with an Outstanding Loan

If you are a buyer who is looking at buying a property that has an outstanding loan, here are the things to consider:

  • In case you are opting for the same lender, you must check and be aware of the loan terms and conditions on which the seller had taken the loan, in case you are opting for the same lender.

  • If the original loan was availed as a part of some scheme, you must check if the lending institution will pass on the same benefits to you as well.

  • You must research the prevailing Home Loan Interest Rates and other benefits because new loans usually can be availed at lower rates and better benefits.

  • Keep in mind that marginal cost related to funds-based lending is based on the ongoing market scenario and fixed interest on the other hand works out to be relatively higher in comparison.

Also Read: 7 Smart Tips to Manage EMIs of Your Home Loan Efficiently

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