About Loan Against Property

A Loan Against Property (LAP) is a kind of a personal loan but with a difference. The significant difference is that the personal loan is unsecured, whereas a Loan Against Property is secured finance. Borrowers offer their residential, commercial, or industrial property against which the banks provide finance.

The purpose of the Loan Against Property is to meet individual emergencies, including the unforeseen ones like medical expenses. Besides, the borrower can use the Loan Against Property for expenses like marriage, educational, and any other purpose except for speculation. Similarly, a Loan Against Property is also available for meeting business expenses like a working capital requirement, procurement of business assets, and so on.

Loan Against Property Vs. Personal Loan

The similarities between the Loan Against Property and personal loan are as follows:

  • Both the loans are available as "No Questions Asked" loans implying that the banks do not ask for the end-use of funds. A borrower declaration stating the end-use should suffice.
  • Both these loans can be used for meeting personal and business requirements

The differences between the two facilities are:

  • The rates of interest that apply to a personal loan are higher than that of a Loan Against Property.
  • The repayment tenure for a Loan Against Property can extend up to 15 years, whereas a personal loan is usually repayable within 5 years.
  • The income eligibility norms for a personal loan are comparatively more stringent than it is for a Loan Against Property.
  • The personal loan is a clean and unsecured facility, whereas the borrower offers equitable mortgage of the property as collateral for a Loan Against Property.
  • The personal loan requires the borrower to have a higher credit rating as compared to a Loan Against Property.
  • The personal loan does not require much documentation, whereas the documentation procedure for a Loan Against Property is a detailed one.

Loan Against Property - Features and Benefits

Loan Against Property has the following features and advantages:

  • The ideal way to mobilise funds for meeting individual and business expenses
  • Better than a personal loan in many aspects
  • Puts your idle property to constructive use
  • Affordable rates of interest
  • Extended repayment tenures
  • Simplified sanctioning process
  • Relaxed eligibility norms
  • Convenient documentation

Loan Against Property - Documents Required

Every bank has its requirements as far as documents are concerned. However, we shall look at the general documentation. The list can be an exhaustive one. However, the applicant should provide only relevant documents.

Know Your Customer - Identity Proof documents

Applicants can submit the self-attested photocopy of one of the following documents as proof of identity:

  • Passport - The personal details page and address page
  • PAN Card - Preferably both the sides of the PAN Card
  • Voter's ID Card
  • Driving License - It should be in force
  • Aadhar Card - E-Aadhar Card is also acceptable

Apart from these documents mentioned above, banks also accept some of the following documents as proof of identity:

  • Employee ID Card with the name and signature of the Employing authority
  • NREGA Card with photo
  • Certificate from a local authority identifying the applicant - Such a document should include the photo, title, and address of the applicant.

Know Your Customer - Address Proof Documents

  • Salaried persons have to provide address proof of their residence alone
  • Self-employed individuals should also provide evidence of their business address

A self-attested photocopy of one document among those listed below can suffice. However, the applicant should note not to submit the same paper for address and ID proof.

  • Passport - The address page and the personal details page
  • Voter's ID Card - If the address is correct
  • Driving License - In force
  • Aadhar Card - If the applicant is staying at the same address
  • Rental agreement or leave and license agreement - if staying on rent
  • Latest utility bill such as landline telephone, postpaid mobile, electricity bills, water bill, and so on - It should not be more than two months old.

Besides these documents, banks also accept the following documents as address proof:

  • Bank statement with address
  • Latest credit card statement
  • A certificate from a local authority certifying the name and address of the applicant along with a photograph.
  • Postal ID card - This card is not eligible for proving identity
  • NREGA Card with photo

Business address proof can include the documents listed above. Apart from these documents, the following papers can also suffice to prove the address and existence of the business:

  • GST Registration Certificate (if applicable)
  • Income Tax Assessment Order
  • Import Export Code Number Certificate
  • Any other certificate that proves the existence and address like the Shop & Establishment Certificate, Bar Council Certificate, Medical Council Certificate, and so on. 

KYC Documents - Date of Birth Proof

Self-attested photocopy of one document is enough:

  • Passport - Personal details page
  • PAN Card
  • Aadhar Card
  • Driving License
  • Std X and Std XII Passing Certificate
  • Birth Certificate - If it includes your full name

KYC Documents - Signature Proof 

One of these documents can suffice:

  • Passport
  • PAN card
  • Bankers certificate - the ideal one

KYC Documents - Non-individuals

Loans against property are available to non-individuals, as well. Non-individual borrowers can include partnership firms, private and public limited companies, trusts, associations, HUF, societies, and so on.

Partnership firms

  • Partnership deed copy - The Registered deed is preferable
  • PAN Card of the firm
  • GST Registration Certificate (if applicable)

Companies

  • Certificate of incorporation
  • Memorandum of Association
  • Articles of Association
  • Certificate of commencement of business (if applicable)
  • PAN Card of the Company
  • Board Resolution
  • List of Directors
  • Name of directors who are authorised to execute documents on behalf of the company
  • KYC details of such directors
  • GST Registration 

Hindu Undivided Family

  • PAN Card of the HUF
  • Karta Declaration Form
  • List of all-male co-parceners

Trusts

  • Trust deed copy
  • Certificate from the Charity Commissioner - If it is a non-profit-making trust
  • PAN Card of the trust
  • Name of the trustees
  • KYC of the trustees authorised to operate the account
  • Resolution

Societies and Associations

  • Bye-laws of the society
  • Society registration certificate
  • KYC details of persons authorised to operate the accounts of the society

Income Documents

Salaried Individuals

  • Latest payslips - A minimum of 3 months
  • If there is a considerable variation in the pay - Salary slips of six months are necessary to arrive at the average salary
  • Form No 16 issues by the employer
  • IT Returns - A minimum of 3 years 

Self-employed individuals/professionals

  • Income Tax returns with the computation of income statement for a minimum of the past three years - IT Assessment order would be the most ideal.
  • Financial statements including audited B/S, P/L
  • If audited, the tax audit forms (if applicable)
  • Professional Qualification Certificate

Non-individuals

  • Same as that of self-employed individuals

Bank Statements

  • Salaried persons should produce the statement of the savings bank account where their salaries are credited - a minimum of 6 months.
  • Other bank savings account statement if any
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  • Self-employed persons and non-individuals should provide the savings/current account statement for the entire year to determine the credit of the income into the account.
  • Similar statements are necessary for all such accounts mentioned in the balance sheet
  • The partners and directors should also produce their savings account statement for a minimum of 6 months.
  • If the applicant has loan accounts outstanding, they should submit the statement of account to enable the bank to establish the regularity of payment.

Property Documents

The property documents are necessary to determine the genuineness of the title to the property. The borrowers have to deposit the original title deeds of the property with the bank as collateral.

  • Sale Deed of the property
  • Latest Encumbrance certificate
  • Latest property tax paid receipt
  • Any other document that the bank panel advocate might require to determine the genuineness of title to the property.

Miscellaneous Documents

  • Undertaking from the borrower that they will not use the Loan Against Property for speculative or illegitimate purposes.
  • Other documents like PDCs, ECS mandates, and so on

NRI Borrowers

Apart from the regular KYC documents, the NRI should provide copies of the following additional documents:

  • The Visa
  • Employment Contract
  • Payslips - Minimum of three
  • Tax Returns (if applicable)
  • Power of Attorney in favour of a person resident in India to execute documents on his/her behalf.
  • Statement of bank account overseas
  • Statement of NRE/NRO A/c in India for 6 months
  • Credit report from a reputed credit rating agency in the country of their residence

Loan Against Property - The Procedure

The process starts with the loan application received from the applicant:

  • On submission of all the documents in order, the bank will forward the property documents to the panel advocate to conduct a legal search.
  • At the same time, the bank panel valuer will inspect the property and deliver the valuation report.
  • In the meanwhile, the bank completes its due diligence by confirming the employment/occupation status of the applicant.
  • The processing of the loan will start after the bank receives the valuation certificate.

Loan Against Property - Amount Eligibility

Generally, the Loan Against Property eligibility is calculated as the least of the following values:

  • The maximum loan amount permissible in the specific loan product (can differ from one bank to another).
  • The maximum amount depending on the Loan to Value Ratio (Usually, 50% to 90% of the market value of the property as per the valuation certificate).
  • Four times or five times the gross annual income (depending on the credit policy of the individual banks).
  • The maximum amount permissible after considering the EMI/NMI ratio (depends on the bank's policies).

The EMI amount depends on the repayment tenure, which, in turn, depends on the age of the borrower. (Generally, the borrower should not be more than 70 years of age at the time of the maturity of the loan).

Loan Against Property Documents - FAQs

Why should NRIs provide a credit rating report from their countries?

The banks in India cannot access the credit history of the borrower in respect of funds borrower abroad. Therefore, the NRI borrower should arrange for this report to enable the bank to assess the credit behaviour of the borrower.

Should Indian residents provide a credit rating from bureaus like CIBIL or Experian?

No, it is not necessary because the banks can access and call for the credit report through their official channels. 

Is the Loan Against Property available only to IT assesses?

It depends on individual banks. Some banks have stipulated the minimum net annual income to be 3 lakhs, whereas some banks have a higher amount. If the minimum amount is such that IT filing is compulsory, the borrower has to submit IT returns. Self-employed persons should necessarily submit IT returns

Can the property offered as mortgage be rented to a third-party?

Some banks insist on the property to be either vacant or self-occupied. Central Bank of India does not sanction Loan Against Property on rented property. The bank has a specific product, Cent Rental to cater to such cases. In the regular mortgage scheme, the property should not be rented out. However, other banks do not have any such restriction. It depends on the bank where you apply for the loan.

Is the mortgage loan available of a vacant piece of residential land?

Banks consider vacant residential plots as collateral for loans against property. Generally, the LTV ratio is such loans is around 50%.

Can I offer the same property as security for my home loan and mortgage loan?

Yes, there are no restrictions on this score. The borrower can offer the same property provided it satisfies the LTV ratio condition.

Does the bank accept commercial properties let out to various parties as collateral for a Loan Against Property?

Yes, there is no problem with accepting such properties. The borrower should declare the entire rental income in the IT returns. 

Can a person apply for a Loan Against Property without any income?

Yes, such a case can arise at times. Under such circumstances, the borrower should arrange for a co-borrower with a regular source of income.

Who can be the eligible co-borrower under such circumstances?

The co-borrower should be a close blood-relative such as parents, children, spouse, and even siblings. 

Who should be the primary applicant in a Loan Against Property?

The property owner should be the prime applicant in a Loan Against Property. Banks allow the addition of co-applicants for enhancing eligibility. If the property is in joint names, all the co-owners of the property automatically become co-applicants.