To own a Home is a dream of every individual, all of us struggle day & night to achieve this dream of having our own house. To fulfil this dream we get a support from our Banks and Financial Institutions (FI) by way of Home Loans. Though it may seem all banks are eager to lend, getting a loan sanctioned can be a tedious task. Taking a home loan is easier said than done.
Home Loam loan is one of the secured loan option offered by Banks and FI. Other secured loan offered by Banks and FI are Loan against Property, Working Capital Limits, Over Drafts etc.
In order to make the loan process simple and for better understanding of the entire process we have decoded the loans process and have explained the complex terms and the jargon’s which are used in loaning process, for enhanced understanding we have tried to define the loan terms as per the stages of the loan appraisal process. This is an effort to make the borrowers familiar with the entire loan process.
Types of secured loans
Home Loan – Home Loans also termed as HL .A Home Loan is a secured loan from a financial institution or a bank for the purchase a new house, including construction or renovation of the property. Home loans consist of an adjustable or fixed interest rate and payment terms. Home Loans are designed to help people purchase and/or construct or improve their real estate. There are a variety of home loan options available to consumers, depending on their personal needs.
Loan against Property– Loan against Property also termed as LAP. Loan against property (LAP) is also known as ‘Mortgage Loans’. it is a secured loan where borrower provides a guarantee by way of mortgaging his existing property as a security collateral. LAP loan is given at a certain percentage of the property’s market value, usually 50% – 65% of the market value is offered as a LAP. Loan against property is a very popular financial product to raise high value funds for business expansion or other financial needs by the self employed community.
Working Capital– Working capital limits also termed as WC or OD or DOD. A working capital loan is a secured loan given to business entities that has the purpose of financing the everyday operations of a company. Working capital loans are not used to buy long-term assets or investments and are instead used to cover business financial requirement, purchasing stock, wages, etc. Working capital loans have shorter terms, and the amount you are provided is based on the cost of running your business.
Mortgage – It is an agreement by which the borrower gives the lenders the right to take possession of the property given as security if the loan is not repaid. Usually all the documents of the property have to be deposited with the lender.
Loan Application Process
Loan application form: It’s a document that provides essential personal and financial information about the borrowers to the bank and FI. The details in the loan application form comprises of borrowers personal demographic information loan requirements, tenor required for the loan, means of repayment, financial details, residential and business addresses etc.
Applicant: The person who is the main custodian of the loan , who would be the primary signer of all the related loan documents.
Co-applicants– Any individual who will assume responsibility on the loan, take a title interest in the property and intends to occupy the property as their primary residence. Income of the co-applicants is clubbed to enhance the loan eligibility. A blood relative or spouse can be a co-applicant.
KYC– Know your customer documents also termed as KYC. It is a process to identifying and verifying the identity of the borrower. This is a mandatory process as per the mandate from RBI. Age, Address, Signature and Photo identity need to be verified basis specific set of approved documents.
Loan Reference– Banks & FI requires 2 individuals from whom they can take the borrowers professional as well as business references. They are required at the time of filing the loan application.
Financial Documents– These are the income documents which the borrower has to give to the lender for the appraisal of their repayment capacity for the loan. Some examples are Income Tax Returns(ITR), computation of Income (COI),Profit & Loss account ( P&L), Balance Sheets in case of self employed and Form 16, Salary Certificates, Salary slips, Banks statements in case of Salaried borrowers.
Collateral– Collateral is the security offered by the borrower to the lender to secure the loan. Its is the immovable property against which the lenders offer loans.
Principal Amount (POS)– This is also termed as loan amount. Principal is used to refer the amount borrowed or the amount still owned which needs to be paid back. It is separate from the interest.
Interest Rate(ROI)– This is also terms as ROI. Interest Rate is an amount charged represented as a percentage on the amount being borrowed as a loan. Interest rates are normally noted on an annual basis. There are commonly two methods for charging interest such as simple interest method and Reducing Interest Rate method.
Simple Interest method– Simple interest is a quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the daily interest rate by the principal by the number of days for which the amount has been used. Usually used in personal loans and car hire purchase.
Interest Payable per Instalment = (Original Loan Amount * No. of Years * Interest Rate p.a. ) / Number of Instalments
Reducing Interest method– This method is mainly used to calculate the interest payable for housing / mortgage / property loans and other interest payable such as overdraft (OD) facilities, and credit cards. You only pay interest on the remaining loan balance. A reducing balance interest calculation formula can be represented like this:
Interest Payable per Instalment = Interest Rate per Instalment * Remaining Loan Amount
Fixed Rate– Fixed rate interest is one where the rate charged by the HFC on the loan amount is constant over the tenure of the loan. A fixed interest rate protects the borrower from a rise in home loan rates. While on the flip side, he may not benefit if the market rates were to fall.
Floating Rate – The interest rate on the loan depending on a benchmark rate fixed by the home loan lender. This benchmark rate varies as per the market and the prime lending rate advised by the Reserve Bank of India. This change can happen as frequently as once in three or six months. All banks will not have the same amount of rate change at any given point of time.
Equated monthly instalment (EMI)– This is also termed as EMI. An equated Monthly instalment ( EMI) is fixed amount of payment made by the borrower to the lender on the specific date of the calendar month for entire tenor of the loan. EMI is a fixed amount used to pay off Interest as well as the Principal portion of loan every month till the complete loan is re-paid.
Loan Appraisal Process
Credit Appraisal – A home loan companies or banks will consider a number of parameters before it sanctions a loan to you. They will check your savings, income, age, qualifications, nature of work and work experience, etc. They will also verify how many loans you are currently servicing. Taking all these factors into account, lenders will determine whether you are eligible for a loan or not and also what should be the amount to be lent to you. This process is known as credit appraisal
Contact Point Verification (CPV)– This is also termed as CPV or Field Investigation (FI). This is a process in which the lender ascertain various things by meeting with the loan customer, observing his standard of living, evaluating his easy access and contractibility in the eventuality of default and his general reputation in the area where he resides or conducts his work.
Personal Discussion (PD)- This is an one on one interaction between the Lender and the borrower to ascertain the demographic and financial situation of the borrower. This meeting usually happens at the business premises of the borrower. This personal discussion of very crucial importance as decision regarding the sanction of the loan and other conditions are based on this meeting.
Loan to Value(LTV)– This is also termed as LTV. Loan to value is the percentage of the market value of the property upto which the lender can lend to the borrower. The loan-to-value (LTV) ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. This is the predefined percentage/ ratio to the market value of the property, beyond which the lender will not finance. For Home loans LTV goes upto 80-85% for LAP it goes upto 65-70% of the market value.
Fixed obligation to Income Ration (FOIR)– This is also termed as FOIR or Debt burden ration (DBR). FOIR (Fixed Obligations to Income Ratio) is a popular parameter which banks use to determine loan eligibility. Usually banks take a benchmark FOIR at 50% of your monthly Income. To put it in a simple way, say suppose if your monthly income is Rs.50000/- and you have other loans with EMI 10000. In this scenario, bank would approve you a loan which EMI would be maximum 15000 (if they mentioned FOIR as 50%). FOIR ratio varies from bank to bank and from case to case, but on an average it would be with 40% to 55% for salaried home loans, there is some flexibility in FOIR for Self employed.
Valuation (Val)– It is a process which lenders undertake for the fair assessment of the current market valuations of the property against which they are lending.
Title Search Report(TSR)– This is also termed as TSR. Title search report is a process to evaluate the legal documents of the property in consideration as an asset for lending. This is to ascertain the legitimate ownership of the borrower on the asset being mortgaged for the loan. It is the process of retrieving documents evidencing events in the history of a piece of real property, to determine relevant interests in and regulations concerning that property before creating a mortgage.
Obligation– Obligations are termed as an existing EMI being paid by the customer. These EMI gets reduced from the monthly income in order to derive the net loan eligibility.
Sanction- it is the entire process of a home loan, right from filling a loan application, credit and property appraisal of the borrower to the final approval of the loan amount. It is a concurrence from the lender that they have agreed to consider the borrower as one of their customer.
Sanction letter– Once the loan is sanctioned, you will get an offer letter stating a number of details.
- Loan amount
- Rate of interest
- Fixed/ flexible rate of interest
- Tenure of the loan
- EMI amount
- If offered under a special scheme, details of the scheme
- Any other conditions of the loan
Loan Disbursement Process
Loan Agreement– The Contract between the lender and the Borrower that explains the loan terms and conditions. This document includes details about the loan sanctioned such as Principal amount, repayment obligations, Interest rate and the security required. It is important to read the Loan Agreement carefully, and get legal and financial advice, before it is entered into.
Full disbursement– A full disbursement is when the entire cost is paid at one go; the home loan company hands over the entire payment to the seller. The cheque is disbursed (it is never in cash) only when you have submitted all the documents required and have made the down payment. If this is a resale, then the cheque is made out in the seller’s name. If you are purchasing your home from a builder, then it is in the builder’s name.
Partial disbursement– A partial disbursement is made in stages (not at one go as in the case of full disbursement). When purchasing an apartment from a builder and it is under construction, the home loan company will not release all the payment at one go. The money will be released in stages. For instance, after the completion of the first floor, 20% of the payment will be made, on the completion of the last floor, 40% and so on and so forth. Hence payment is construction linked and disbursed accordingly.
ECS mandate (ECS)– Electronic clearance system also termed as ECS. Its an electronic form of funds transfer where the borrower sign a one time mandate allowing to debit EMI amount on a specific date of the calendar month.
PDC– Post dated cheque also termed as PDC. Post-dated cheques are dated ahead of time and cannot be processed till the date indicated. Generally, the home loan company will ask for a year’s supply of cheques or maybe even two or three years. At the end, you will have to replenish the supply for the following years. These cheques will be addressed to the home loan company, signed by you and will state the exact EMI to be paid.
Amortization schedule– The amortization schedule helps you determine how much of your monthly payment will go toward the principal and how much will go toward the interest. This is very handy to know the monthly payments on your mortgage loans
Foreclosure (FCL)– Closure of the loan before the decided tenor of the loan. There may be some charges on the principal outstanding which varies from banks to banks.
Charges associated with Loans
Initial Money Deposit(IMD)- This is an initial commitment cheque which banks and FI take with the loan application form, in order to assess the commitment of the borrower to take the loan, This amount is usually Rs 5000 plus service tax and is non refundable. This amount gets adjusted in your processing fee once the loan gets sanctioned.
Processing Fee (PF)- Its is a nominal amount charged by the lender to process the loan application. Loan processing fee is charged to cover some of the costs involved in processing the loans such as , Valuation, Legal search, credit appraisal checks and other administrative costs.
Pre-EMI interest (Pre-EMI)- In the case of part disbursement of the loan, monthly interest is payable only on the disbursed amount. This interest is called pre-EMI interest and is payable monthly till the final disbursement is made, after which the EMIs would commence.
Pre-payment charges (PPC)– Charges levied on the closure of the loan before the ending of the agreed tenor at the time of sanction. Banks and FI don’t charge anything on partial closure of the loan upto 25% of principal outstanding in a calendar year. Also there is a mandate from RBI that if the loan has been taken in Individual capacity with floating rate of interest no pre-payment charges will be applicable.
Default– Failure to make the payment of the EMI on the agreed repayment date of the month
Bouncing cheque charge– It’s along termed as BCC or bouncing cheque charges. This is a charge levied by the borrower on the lender in case there is a non payment of EMI by way of clearance of ECS or PDC. The amount varies from Banks to banks.
Penal Interest charges – it is an additional interest charged by a lender to a borrower if instalments are not paid according to the loan terms. If an instalment is not received according to the repayment terms, sometimes if not received by the end of the month, the borrower is charged penalty interest on the delayed instalment/payment.