This is Part II of the article to explain and simplify the terminologies/concepts around home loans in India.
So, let’s get started from question 19 onwards
19. What are the ‘documents’ required by banks from borrowers/co-borrowers of home loans in India?
- Loan application form duly filled.
- Applicant Photographs (passport size)
- Proof of identity for KYC requirements- viz. Pan card, driving license, voter’s identity card
- Proof of residence- electricity, telephone, Passport, Voter Id, property tax receipt
- Applicant(s) Bank statement with transaction details for the last six months, salary-slips, a bank statement showing evidence of salary being credited, Income tax returns for past two years (usually)
- Legal Documents of the property under consideration
- Estimation/Valuation report from the financial institution’s authorized evaluator (who surveys and ascertains)
- Allotment letter of the property, legal documents of the applicants or property-related (especially residential plots), No Objection Certificates, and other property/personal documents as required by the financial institution.
20. What are the tax benefits of home loans in India?
- Tax benefit of exemption from home loans principal to the extent of INR 1,50,000 under section 80C annually. This means that if your taxable income is INR 4 lacs, this amount (of INR 1.5 lacs) gets reduced from the taxable income. Hence, your taxable income, which was earlier INR 4 lacs, gets reduced to INR 2.5 lacs. Consequently, you end up paying much lesser income tax as per your income tax slab.
- Tax benefit of the exemption on home loan interest as per section 24 of the Income Tax Act in India. Under this provision, if your home is self-occupied, only then you benefit from INR 2,00,000 of interest paid by you on your taxable income.
- Maximum benefit for co-borrowers: In case of joint or co-borrowers, each borrows benefits to the extent of INR 3.5 lacs of tax exemption amount each, on the total taxable income, Break-up of INR .5 lacs being INR 1.5 lacs for section 80 C, and INR 2 lacs as per section 24 of IT Act, for ‘principal’ and ‘interest’ exemption respectively. So, for two people (co-borrowers), the tax benefit is a reduction of INR 7 lacs from the taxable income collectively (i.e., both co-borrowers put together).
21. What is a top-up loan?
This is a special feature offered to excellent payers, who make timely payments without default. The bank does not mind taking a risk with such borrowers and is happy to offer a loan equivalent to the amount of loan repaid.
This is preferred by those borrowers who are looking for a personal loan and can use this amount for anything since it is given as a cash component and NOT for the sake of the property. The best part is that the rate of interest is much lower than a personal loan, and there is hardly any paperwork involved.
A borrower taking a top-up loan can use it for any personal use such as buying an automobile, children’s education, purchasing household items, etc.
23. What are the benefits of having a co-applicant?
A co-applicant is benefitted in case the primary applicant has a low credit score owing to a poor track record of cheque bounces, defaults, and delinquency with any financial institution.
When a co-applicant has no default or bad credit history, the primary applicant (with bad history) benefits. Having a co-applicant improves the chances of the loan being approved by the financial institution based on the good credit standing of the co-applicant with CIBIL and the bank records.
24. Is a good credit score with CIBIL really critical for home loans in India to be approved?
Yes, it is. The bank will certainly determine your creditworthiness before lending their money to you for buying your home. Lending money is a risk which the bank takes. The bank or a financial institution does not want to deal with a deadlock or legal situation with the payments not coming in as per the agreed schedule.
Your credit score is an indicator to the bank whether or not it is safe to give you a loan for a 5 to a 30-year term and whether or not you have a clean record of honoring your financial commitments/liabilities.
Besides, as a person with good credit history, you may even get a ‘lower interest rate.’ Those with bad credit history may be offered a ‘higher rate of interest’ to factor-in the ‘risk’ the bank is taking in offering a loan to such high-risk individuals.
You may check your CIBIL score here CHECK CIBIL SCORE
25. Can a person with a low credit score apply for a home loan?
Yes, one can. However, the chances of the application being accepted become low due to the risk involved. Banks do not want to deal with a person who is likely to add to their Non-Performing Assets.
Hence, even if the intentions are clean, it is advisable to get a ‘co-borrower in your application like your spouse, parents, or even children.
The chances with a co-borrower improve drastically when the co-borrower has a steady source of income, along with an excellent credit history.
26. What is meant by pre-EMI interest?
Once the loan for a property is approved and disbursed by a financial institution, sometimes, the EMI does NOT begin immediately, and the EMI actually begins later (after a few months or even years).
In such a situation, only a pre-EMI interest is charged by the bank. As a borrower, this means that you are making monthly payments to the bank for the interest component only’.
This means that out of your monthly payment, NOTHING is being apportioned towards the repayment of the principal amount. Hence, it is called pre-EMI interest. This is why the pre-EMI interest amount is lower than the full EMI amount since the ‘Full EMI includes the principal amount’ as well.
27. What do we mean by a ‘margin’ on a home loan?
When we buy a property worth INR 40 lacs, we do not get the entire money, and the lender (bank) gives only upto INR 32 lacs and keeps a margin of INR 8 lacs. The bank expects this amount to be self-financed by you.
In percentage terms, it is about 20%. So, in the example here, 20 % is the bank margin, and upto 80% of the total cost of the property only is sanctioned to you as the total home loan amount.
As per industry standards, 20% is the usual ‘margin’ implemented; however, the financial institutions can be flexible (increase or decrease) depending on the bank’s individual risk-appetite. Sometimes, a case-to-case decision is made, and the ‘margin’ may be higher or lower than the standard 20%.
28. What are the additional costs which are not included in the home loans in India?
Costs like the initial down payment for the property (over and above loan approved), legal charges like stamp duty, registration of conveyance deed, charges of transferring the property to your name in society, etc., are not included in the home loans component.
The bank needs to see you contributing to the property you wish to buy. For that, it is necessary for you to have your skin in the game for paying all the initial down payment and all other additional charges & costs.
29. What do we mean by an amortization schedule?
When a loan is approved, a certain tenure is selected by the borrower depending on age and other factors. Based on mutual agreement, the bank gives out an amortization schedule which gives a clear break-up of the repayment schedule.
The amortization table indicates both the ‘principal’ and the ‘interest’ component paid with every installment for the entire tenure on a month-on-month basis. It also indicates how much the total repayable amount is a month on month till the end of the tenure. This table usually includes the start to the end of:
- month & year
- the loan amount
- the monthly payment
- the portion of monthly interest
- the portion of monthly principal
- balance end of a certain month
- the percentage of ‘principal vs. interest’ being accounted-for, from the first month till the last month of the full tenure (5 years to 30 years)
The amortization schedule also makes it clear that during the initial period, it is mostly the ‘interest’ element that one repays.
Hence, it is important for a new home buyer to look at the interesting part in the amortization table and to opt for a shorter tenure to reduce the interest pay-out over the complete tenure, which may range from 5 to 30 years.
30. What is a home loan pre-approval? For how long is it usually valid?
This is a facility where the banks tell the interested customers how much of the total home loan amount they are eligible for. A proper approval process is followed, and the total eligibility amount is confirmed along with an ‘in-principle sanction.’ This helps the potential home loan buyers to explore and evaluate the property options based on their total loan amount eligibility.
Once the pre-approval comes, it is usually valid for a period of six months, and this gives ample time to the home buyer to take a decision on the desired property to be bought. The validity period may differ for different financial institutions or situations.
31. What is the difference between taking a home loan for an ‘apartment/built-up house’ and a ‘residential plot of land’?
Taking a loan for an ‘apartment’ or even a ‘built-up house on a residential plot’ is like taking a ‘home purchase loan’ since the residential unit fit for inhabiting. This is a more commonly issued home loan in India where the tax benefits of section 80C and section 24 can also be availed.
However, if a buyer wants to first acquire a residential plot only with the house to be built later, then unlike an apartment, the tax benefits cannot be availed by the buyer.
32. What happens if a person defaults in making the payment of an EMI for the home loans?
Besides a payment default leading to a bad credit report to the CIBIL, the bank will charge a certain ‘ECS or cheque bounce’ penalty. An ECS or a cheque bounce severely damages the reputation and credibility of a borrower.
In extreme and recurring cases, the bank can take legal recourse leading to even selling the property to recover the dues. It is usually in extreme cases that the banks recover the amount of the loan disbursed by liquidating the mortgaged property.
The lenders’ (banks) financial interests are protected by the SARFAESI Act (i.e., the Securitization & Reconstruction of Financial Assets and Enforcement of Security Interests Act) so that borrowers are not able to take undue advantage of the situation.
33. What do we mean by a ‘balance transfer’ of home loans in India?
When you transfer your home loan amount from one bank to another bank for a certain benefit or convenience, it is called a balance transfer. A balance transfer is usually taken when the interest rates of the competing bank/financial-institution are very attractive or when there are some additional benefits that seem very lucrative to the borrower.
Balance transfer becomes easier when the borrower is already on a floating rate of interest since foreclosure charges are not applicable on the floating rate of interest as per the RBI mandate.
However, the bank you are already aligned with will make a good effort to retain you as a customer, especially if your repayment records are excellent, your net worth/income levels are satisfactory, and if you are a profitable customer for the existing bank.
33. What is a loan against property?
A Loan against property (LAP) is a loan given to an existing owner of a fully owned and fully constructed freehold residential or commercial property. People opt for this loan for family or personal needs like children’s education in a foreign country, marriage, or for business/financial considerations.
In such cases, the property against which the loan is provided is considered much more valuable than the loan given.
Usually, a loan against property is given to the extent of only 50% of the market value. The tenure of a LAP is usually 15 years, or till the person attains retirement age, whichever is lower.
Recap, please go through the Home Loans in India part 1