10 home loan terms you must know

aking a home loan?

Here are 10 terms that you must get familiar with.

1) Margin

When you take a loan, the home loan company will not put up the entire amount. It will only put up around 80% to 90% of the cost of your home.

You will have to put in the balance 20% or 10%.

Even if they go up to 95%, you will still have to put in the balance 5%.

This amount is called the downpayment or the margin.

This is the term used when you are buying a home from someone who already owns it and is selling it. Hence it is referred to as a resale.

It indicates you are not buying a brand new home straight from the builder or buying one currently under construction.

3) Credit appraisal

The home loan company will take a look at a number of parameters before a loan is sanctioned. Your savings, income, age, qualifications, nature of work and work experience are some of them.

They will also look into how many loans you are currently servicing.

Taking all these issues into account, they will determine whether or not you are eligible for a loan and what the sanctioned amount should be.

This process is known as a credit appraisal.

Many builders get their properties pre-approved by home finance companies. Generally, if a builder gets pre-approved by a number of players, it speaks well of the builder.

The home finance company will examine all the legal documentation and approvals. If everything is in order, the builder will get a stamp of approval. Also, the home loan player will view the builder's ability and track record to complete the construction in time. 

However, this does not mean the home finance company is going to take any action or waive any charges if the construction is delayed.

All it means is that the property falls within the legal purview and the builder has a good track record. 

5) Equated Monthly Installments

An EMI is the amount of money you will have to pay every month in order to repay your loan.

An EMI is an unequal combination of your loan amount (principal) and the rate of interest.

The EMI remains constant throughout the repayment period. Let's say you have a five-year loan with an EMI of Rs 4,400. You will have to pay this amount for the next 60 months to the home loan company.

To arrive at the EMI, the home loan financier will look at

• The principal (the actual loan amount).
• The repayment period (the number of years you will take to repay the loan).
• The rate of interest.
• How the rate of interest is computed (monthly reducing, quarterly reducing or annual reducing basis).

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 downpayment.

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. After the completion of the last floor, 40% and so on and so forth. Hence payment is construction linked and disbursed accordingly.

7) Advance Disbursement Facility

If the house is still under construction, then a partial disbursement is made. However, in some cases, the home loan company may be willing to make the entire payment even if the construction is not complete.

This is known as an advance disbursement and will occur only in both these instances:

i. If the buyer requests the home loan company to do so.

ii. If the home loan company is fairly convinced the builder will complete the construction on time.

8) Pre-EMI

When you buy a home that is under construction, the home loan company will not pay the entire amount to the builder.

Payment will be made in stages. As construction is completed, payment is released. This is known as partial disbursement.

You start paying your EMIs only after the final disbursement. Till then you pay the home loan company a rate of interest on the amount partially disbursed. This interest is called pre-EMI.

If your home loan is going to cost you 8%, you will be charged 8% simple interest on payments made till date. This will go on till the final payment (disbursement) is made and your EMIs start.

So the longer your builder takes to complete construction, the more you end up paying.

9) Offer 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

This letter does not mean the loan is yours. It only means the home loan company has agreed to consider you as one of its customers.

It will then look into the various property and legal documents as well as value the property you are buying. The loan will only be disbursed once these formalities are complete.

10) PDCs

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.