Top 12 Terms You Must Know Before Taking Home Loan!

Updated on March 7, 20198 mins read
taking a home loan

Updated: January, 2018 Taking a home loan is a mammoth task, especially with all the paper work and cumbersome legal formalities involved. A lot of first time home loan customers are unfamiliar with several loan jargons and find themselves at a loss while dealing with bank officials and builders. But taking a home loan is one of the biggest financial liabilities you will incur. Thus, before you take the leap, you must familiarize yourself with related terms and common practices. So, we have compiled a list of 12 Common Terms You Must Know Before taking a Home Loan: Taking a home loan Click on the topic you want to know more about or just scroll down and read them all, 1) Margin 2) Offer/Sanction Letter 3) Post Dated Cheques 4) Disbursement 5) Equated Monthly Installments (EMI’s) 6) Pre – EMI 7) Resale Property? 8) Pre – Approved Property? 9) What is Credit Appraisal? 10) Is Pre-payment of Home Loan Beneficial? 11) Security 12) Processing and Administrative Fees

1. What is Margin?

In 2010, RBI set a ceiling limit on home loans which limits the amount of loan one can take against property to 80% of the property value. This means that while the bank pays 80% of the total cost of your property, the remaining 20% needs to be paid by you. This remaining amount is referred to as margin or down payment. For example, if you purchased a property worth 75 lakhs, then the bank can fund up to 80% of total amount, which is 60 lakhs. So, the remaining 15 lakhs has to be paid by you. However, in practice a lot of other factors determine an applicant’s loan eligibility. Note: In June, 2017 this limit was enhanced. Now for loans up to 30 Lakhs, banks can fund up to 90% of the property value. The higher the margin amount, lesser will be your loan amount, reducing the total cost of your property (since interest paid on home loan adds on to total cost of property).

2. What is an Offer/ Sanction Letter?

An offer letter is a formal confirmation from the bank stating that it has agreed to consider you as one of its loan customers. It does not confirm sanction of home loan. The loan will be disbursed after a verification of all legal documents and eligibility of applicant. The validity of a sanction letter is generally around 6 months. If the loan is not availed during this period, the sanction lapses and the entire process needs to be reworked if applicant approaches bank again. A sanction letter usually states the following;

  • Amount of loan sanctioned
  • Loan tenure
  • Interest rate applicable
  • EMI and pre-EMI amounts applicable
  • Validity of sanction letter
  • Terms and condition of loan agreement

3. What are Post Dated Cheques?

Taking PDCs for home loan repayments is a common practice banks. These cheques are addressed to the bank, state the exact EMI amount and are signed by you. These cheques cannot be processed ahead of date mentioned on them. 4. What is Disbursement? loan disbursement Disbursement means payment. It refers to the release of loan amount to borrower by lender. Usually, banks disburse the loan amount once all the submitted documents have been verified and the down payments have been paid. A loan is always disbursed by cheque, which can be credited into a loan account with the bank; it is never given by cash. Most banks charge a loan disbursement fee. It is added the principal amount when loan is granted. This fee covers all expenses involved in giving the loan to you. A loan can be disbursed in different ways, depending on your arrangement with the bank and its policies:

  • Full disbursement: A full disbursement means the entire amount is paid in one go. The bank hands over entire payment to seller on your behalf.
  • Partial disbursement: A partial disbursement means that the payment is made in stages. If you are buying an under construction property, then the bank will disburse payments as the construction progresses. For example, after completion of first floor, 20% of the payment will be made and so on.
  • Advance Disbursement: An advanced disbursement means that the entire payment is made before the completion of project. This is done only if the buyer request the bank to do so, or is convinced that builder will complete construction on time. However, its not a common practice.

5. What are Equated Monthly Installments (EMIs)?

EMI payments EMI is the repayment you make to your lender every month. It is an unequal combination of your principal repayment and interest payments. According to the thumb rule, EMI should not exceed more than 30% of your total income, considering other liabilities. To arrive at EMI, your bank will consider several parameters;

  • Principal amount
  • Repayment period
  • Rate of interest

EMI payments start once the loan has been fully disbursed. A break up of your EMIs over the entire loan term can be found in your amortization schedule. It’s important to go over your amortization schedule regularly to keep a track of any changes in interest rate or loan tenure made by the bank.

6. What is Pre-EMI?

When you buy property which is under construction, loan amount is partially disbursed to the builder. When a loan is partially disbursed, only interest payments are made on that amount. These interest payments are known as pre-EMI. So the longer your builder takes to complete construction, the more interest you pay to the bank, adding on to the cost of your property. Pre-EMIs too have tax benefits. After the construction is completed, you can claim tax deduction in five equal annual installments. However, any principal repayments made during this period are not liable for tax deductions. But this should not stop you from making repayments as it brings down your loan burden considerably.

Is paying full EMI a better option than pre-EMI?

Even though paying pre-EMI seems more lucrative in the short run, as you have to pay only the interest component, opting for full EMI payment is more beneficial in the long run. This way you start repaying principal amount even before you get possession, reducing total cost by reducing the tenure of home loan. For example, in the case of pre-EMI, if loan tenure is 20 years, and the builder takes 3 years to complete construction, you will actually end up making interest payments for 23 years.

 7. What is Resale Property?

ResaleProperty   When you buy property from someone who already owns it before, it is termed as resale. It indicates that you are not buying a new home straight from the builder and are not the first owner of that property. While buying resale property, make sure you have a record of all previous owners of property and the reseller has undisputed ownership. This will ensure smooth processing of loan application.

 

 

 

8. What is meant by Pre-approved property?

pre-approved property Now days, several builders get their projects pre-approved by lending institutions. A pre-approved property means that the concerned financial institute has verified all legal and technical documents of the project and has found them in order. So any buyer, who applies for a home loan for this property, need not get the legal verification done again. There are several misconceptions held by borrowers related to pre-approved properties, here are a few of them:

  • Getting a home loan is assured: Several builders misguide customers by assuring them home loans from the financial institute which has pre-approved their project. This is not true. Each application is assessed individually and there is no guarantee that home loan on pre-approved project will always be approved.
  • The project will complete on time: Though the financial institute takes into consideration, the builder’s past records and ability to complete projects on time, it doesn’t mean that it will take any action if construction is delayed
  • The project is legally safe: Though in most cases this holds true, sometimes, small banks  undermine several legal aspects and approve the project to get more business. So it’s always advisable to check which bank has pre-approved the project. A reputed bank is less likely to undermine such details which giving approval.
  • Less documentation is good:  Since the project has been pre-approved, the builder can directly share several documents with the bank, keeping you out of the loop. This way you are saved from the hassle of handling so many documents, but you will never get access to important documents related to the project.
  • You cannot take home loan from other lenders: This is not true! Just because the project has been pre-approved by a particular bank, it doesn’t mean you have to take the loan from them. The builder may try it’s best to convince you otherwise, but you are free to take a home loan from any lender of your choice.

9. What is Credit appraisal?

Credit appraisal is a check on the applicant’s financial situation to determine eligibility for home loan and the maximum loan amount. Credit worthiness of an applicant assures his repayment capacity. Several parameters are considered to confirm the credit worthiness of a loan applicant; credit appraisal

  • Incomes of the applicant and co-applicant
  • Age of applicants
  • Qualifications
  • Nature of profession
  • Employer
  • Security of tenure
  • Tax history
  • Assets owned and investments
  • Additional sources of income
  • Recurring liabilities

10. How is Pre-Payment of loan beneficial?

When a borrower chooses to make lump sum repayment of loan, it is termed as pre-payment. Pre-payments are beneficial as they help get rid of debt faster by reducing loan tenure.

11. What is Security in a loan?

home loan security Security is the asset provided by borrower while taking loan. In this case, the property being purchased serves as asset for home loan. If you fail to repay the loan due to certain circumstances, the bank can sell this property or convert it into an asset to recover loan amount. Therefore, before finalizing a loan, you must analyze the terms and conditions of various banks, and choose the one with favorable terms.

12. Processing & Administrative Fees

Every bank charges processing and administrative fees for processing the documentation of your home loan. On an average, the fee ranges from 0.5% to 2% of loan amount.  Though it seems like a small percentage, it can add considerable weight to your home loan costs. Several banks offer schemes wherein they waive off processing fee, to attract more customers. So while choosing a bank, it is advisable to opt for one which offers the lowest or no processing and administrative fees. For more information on home loan related terms, refer to; 3 Important Home Loan Terms Before You Switch! SwitchMe is an end-to-end service that helps you with everything related to your Home Loans! Signup for identifying the right lenders to figuring out the best tenure, interest rates or balance transfers. Also get one FREE call from one of our Advisors. Our customer, Mr. Girish Nambiar says “SwitchMe consultants are very proactive and responsive. They would listen to your challenges and provide creative ways to solve your problems. They are willing to go above and beyond to make their customers happy and they always stick to their commitment.”


Tarini

Tarini

Tarini comes with a degree in Mass Communication and Media studies. She joined SwitchME as a content writer and moved on to being an assistant product manager. Tarini is an experienced Content Strategist with a background in Product development and management. She is skilled in SEO, social media strategy and online content marketing and likes to travel when possible
381 COMMENTS

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  1. saitsh
    Mar 30 2018 at 8:25 am
    Reply

    Hi I am the first buyer of the property,i mean i am the first registered property owner will i get a home loan for construction.

    • Suma Ganesh
      Suma Ganesh
      May 23 2018 at 12:55 pm

      Hi Satish,
      Thank you for writing in to us
      Yes, you can get a home loan for buying land and construction.

  2. Ganeshan M. V.
    Nov 16 2017 at 1:18 pm
    Reply

    Dear Sir,
    is there any possibility for sanction a home loan for legally incorrect land document ?

    • Suma Ganesh
      Suma Ganesh
      Nov 17 2017 at 9:44 am

      Hi Ganesh,
      Thank you for writing in to us.
      Usually banks are very strict on eligibility of borrower and property.
      There are host of Housing finance corporations and other lenders who do offer loans without proper documentation.

  3. Ganeshan M. V.
    Nov 16 2017 at 1:14 pm
    Reply

    Dear Sir,
    if there is any possibility for mutual understand between a Bank Manager and a Bank Valuer to make Home Loan Sanction to sale a property to a third party by submitting illegal document to the bank ?

    • Suma Ganesh
      Suma Ganesh
      Nov 17 2017 at 9:46 am

      Hi Ganesh,
      Banks strictly follow regulations and due diligence.
      You could approach housing finance corporations or other lenders and try.

  4. priyanka Bhardwaj
    Oct 08 2017 at 7:13 pm
    Reply

    Hi, I had taken a home loan of Rs.18.53 lakhs in Nov 2011 from SBI availing its Maxgain facility. Right now outstanding is Rs.14.45lakhs and EMI is Rs.19,000 approx at 9.7% Base Rate. I feel I should put in a request to the bank to link my home loan to MCLR and reduce its ROI to 8.35% (as available to women). How would you advise? What kind of reset period do I take? By how period will the loan tenure come down to? Are interest rates likely to go down further or are there chances to increase? Will the Maxgain facility then be withdrawn (of being able to park funds in OD account that will reduce interest and may be used if I want to in case of some emergency or requirement), once the MCLR link is done? Anything else I need to know, REQUEST your advise. Many Thanks, Priyanka

    • Suma Ganesh
      Suma Ganesh
      Oct 25 2017 at 11:45 am

      Hi Priyanka,
      Thank you for writing in to us.
      You can convert your loan to MCLR to benefit from lower interest rates. You will also be able to continue the loan under SBI Maxgain.
      For details on procedure, costs etc, we would request you to registered on our website.
      One of our experienced advisors will guide through it all.

  5. RN
    Sep 16 2017 at 5:27 pm
    Reply

    Hi,

    I am planning to buy a flat in Mira road and have approached DHFL for loan. The loan requirement is of 30 Lac and I have got a sanction letter for 33 Lac including Insurance cover. The sanction letter even states that the loan disbursement is subject to Legal and technical clearance. Internally they have confirmed to go ahead and the sales manager of DHFL has verbally confirmed to go ahead with registering the property. I am in a fix now as there is no written confirmation from DHFL to go ahead with registration and tomorrow post registration and after sharing the required papers, if DHFL fail to release the amount then I am at complete loss. Pls let me know the exact procedure as the sales manager of DHFL says no bank gives a written confirmation for the above.
    Pls throw some light.

    • Suma Ganesh
      Suma Ganesh
      Oct 31 2017 at 10:36 am

      Hi RN,
      Thank you for writing to us
      This is standard procedure at DHFL. You may not face any issues if your property is compliant with general regulations. The company will not give you a written communication for disbursement until your application is cleared by legal and technical teams.
      Please check if this is what is called “pre approved loan”.

  6. Venkat
    Sep 16 2017 at 12:49 pm
    Reply

    Hi Tarini
    I have applied HDFC NRE home loan for 40 Lacs. The executive said it will be sanctioned within fifteen days. Now more than one month the process not yet completed and worry about that. The proceesing fee of Rs.12,000/- already debited in my account. The Executive saying the documents are clear and there is no issue, cleared within one or two days.

    I finalized one property for 40 Lakhs and pay Rs.1 Lakhs as advance booking amount on 4th Sep 2017. Balance 20% to be settled by me before fifteen days (ie 18th sep 2017)

    Also I have my previous loan amount of 4.00 Lakhs balance in Standard chartered bank (my first home loan balance). My credit history and track record is good and no default.

    Since there is no proper feed back from bank and clarity I am getting worried

    Kindly advise how to proceed and or try some other alternative.

    Thanks/Regards

    VENKAT

    • Suma Ganesh
      Suma Ganesh
      Oct 31 2017 at 10:44 am

      Hi Venkatesh,
      Apologies for the delay is responding to your query.
      Has the issue been cleared?

  7. Srikanta Dutta
    Nov 08 2016 at 12:10 am
    Reply

    Hi,

    My friend and I want to buy a flat and both will have the same share of the property. we want to take a joint home loan from SBI. Is there any provision for that ?

    • Sumita Nath
      Sumita Nath
      Nov 28 2016 at 4:25 pm

      Hi Srikanta,

      Friends cannot take Joint Home Loans from any of the banks or financial institutions.

  8. gaurav
    Sep 29 2016 at 1:03 am
    Reply

    hii tarini u r doing gr8
    my question is i have recentely purchased a flat of cost 26.1 lac nd the home loan sanctioned amount is 21lac and 20% i have paid to builder approx 5.1 lac my emi tunure is for 30 years
    but suppose after 5-10 years in future due to any reasion i want to sale the property then is it possible to sale the property as u know emi is still pending kindly suggest me

    • Sumita Nath
      Sumita Nath
      Sep 29 2016 at 11:00 am

      Hi Gaurav,

      If you wish to sale the property in the future then it is possible if the buyers agrees to takeover your loan.

  9. Ashish Kumar
    Sep 18 2016 at 9:11 pm
    Reply

    Hi ,
    Hope you are well !
    I have a approved load of maxgain 42 Lakhs , But I have not done any disbursement for it yet , They have given me Monatary Period of 18 Month´s to Start the EMI , Now I don´t wanted to take the Disbursement , Can I close this account of 42 Lakhs which is there in my SBI Bank account and
    will SBI charge me anything for it to cancel now the Approved Loan without taking any disbursement ??
    Please help , need your suggestion on this
    Thanks and regards
    Ashish Kumar

    • Sumita Nath
      Sumita Nath
      Sep 22 2016 at 1:21 pm

      Hi Ashish,

      If you haven’t signed any agreement with the bank, then you can close this account.

    • Ashish Kumar
      Sep 22 2016 at 7:38 pm

      Hi Sumita ,

      Thanks for the reply

      My Point Is I don´t know which agreement you are talking about but let´s suppose even I sign any agreement .. and I don´t want to take loan of single ruppee on that which is right now reflecting in my saving account so can´t we close it , which is how come it should be our right´s no that we want to continue or nor because I have not disburse any single money from that !!

      It just that I want to close so should back can impose any legal right´s and can stop me to close it ?

      regards

      Ashish Kumar

    • Sumita Nath
      Sumita Nath
      Sep 28 2016 at 11:19 am

      Hi Ashish,

      Could you please explain how the amount is getting reflected in your saving account, because the money is usually disbursed to builder in case of new home loan or the bank in case of transfer.