Availing home loans is generally considered the most preferred financing option for individuals looking to purchase a house. This credit facility enables them to secure high-value loan funds rather quickly and also offers the convenience of tailored repayment schemes with flexible tenors. But despite its several obvious merits, a housing finance deal can only work in your favour if you are acquainted with the home loan process and its basic fundamentals.
Most importantly, knowing how a home loan works will help you avoid unsavoury situations such as home loan rejections or confusing/unfavourable loan terms, which may make repayments difficult at a later stage. Any setback in paying off the EMIs will not only be stressful for you as a borrower, but it will also impact your credit score adversely. And, a low credit score impedes your eligibility for securing suitable credit deals in the future.
A Comprehensive Guide to the Home Loan Process
In order to obtain a home loan in India, the following aspects of the housing loan process should be understood well:
Application for a Home Loan
The home loan procedure begins with putting in a formal home loan application to your bank or lending institution of choice. Fill out the form carefully. Any mistakes or discrepancies can result in unnecessary delays and hassles with the possibility of loan denial.
You need to provide your personal, professional and financial details as asked. Lenders will also require several documents as listed below to process your loan request:
- Proofs of age, identity and address
- Proof of education or professional qualifications
- Employment details
- Bank statements
- Proof of income
- Property details (if finalised)
Payment of Home Loan Processing Fee
Lenders charge a non-refundable loan processing fee which is usually between 0.5% to 2% of the loan amount. You may be levied an additional Goods and Services Tax (GST) of 18% on the fee. Lenders require this fee for initiating the loan application process, but at certain times, they may waive it as a goodwill gesture. You can, therefore, negotiate with your lender to gain this benefit.
Applicant’s Verification and Assessment
Once lenders receive your loan request and processing fees, they will evaluate your application before deciding the loan amount that you may be eligible for. They might call you for a personal meeting at their office to get a better idea of your actual requirement and repayment potential.
Further, a representative from the lender’s office may visit your workplace and place of residence to validate the information provided in the application. Lenders will authenticate all the details and facts mentioned therein as part of the mandatory Home loan verification process. They will also pull up your credit records from the credit bureaus to check your credit history and CIBIL score.
Scrutiny of Repayment Capacity
Appraising an applicant’s repayment capacity is the most crucial aspect of the home loan process. Lenders will sanction or deny your house loan request depending on how satisfied they are with your ability to repay the loan (the principal and interest amount) on time. It is also possible that your lender might issue a conditional sanction. This implies that you need to meet all the stipulated conditions before the home loan can be disbursed.
Home Loan Offer Letter
After lenders approve your loan application, they will finalise the probable terms and conditions that can be offered on your home loan. This will be drafted as an official home loan offer letter, which will essentially contain the following information:
- The sanctioned loan amount
- The applicable rate of interest
- Type of interest rate: floating or fixed
- Loan repayment tenor
- Mode of repayment
- Special scheme (if any)
- Loan-related terms and conditions
Upon receiving the offer letter, you should go through the document carefully and verify if the details are in line with your requirements and discussion with the lender. If the contents of the letter seem acceptable, you need to sign the acceptance copy and submit it to the lender. This copy will be retained by them as part of their documentation records. At this stage, lenders may levy administrative fees.
Evaluation of Property
Just prior to loan disbursal, lenders will examine the property for which the loan is being availed. You will need to furnish original copies of the title deed, No Objection Certificate and other documents that the lender might ask for. While availing a home loan, the property itself serves as collateral. Hence, lenders take custody of the necessary loan-related documents and return them only after receiving the loan repayment in full.
Lenders will carry out a legal check of the property to ensure that the title is clear and there are no disputes. They will also conduct a technical valuation. For an under-construction property, they will survey the project location, its stage and quality of construction; and assess the property on several established parameters.
In case of a ready-possession property or a resale one; lenders will review its age, construction quality, maintenance, locality, ownership and legal clearances. They will assess its value on the basis of various criteria before sanctioning an appropriate loan amount.
Home Loan Disbursal
Lenders will commence the registration process once all the formalities are complete. Their lawyer will ready the legal documents in the prescribed format on requisite stamp papers. Then, you will be asked to sign the home loan agreement and issue post-dated cheques for the stipulated term. Soon after, your lender will dispense the loan amount, either lumpsum or in stages, as per the type of disbursal agreed upon.
Summing Up
Although the basic home loan process may always remain the same, there could be certain variations in the sequence of steps therein depending on your lender’s policies. Home buyers must be aware of these subtle differences and the subsequent repayment liabilities prior to applying for a home loan in India.
However, first and foremost, invest your time in market research to select a lender who is willing to offer lower home loan interest rates. This will keep your borrowing costs within manageable limits. Also, look out for festive offers and special rates. Compare the various interest rates and resultant EMIs using a Home Loan Calculator to make informed choices and derive maximum benefits from your home loan.