Buying your dream home? To finance your purchase, you must be applying for a home loan. First time buyers are likely to be confused during the application process. The jargon involved while availing a home loan can be confusing. To make your home buying process easier, here are 10 terms you must know before applying for a home loan.
1.Down payment: When buying a house, the bank does not loan you the entire property cost. Banks will give you a home loan up to a maximum of 80% of property cost. You have to pay at least 20% to the owner/builder. The amount you pay from your pocket is the down payment or margin.
2. Types of rate of interest: You can either pay fixed rate or a floating rate. With a fixed rate, your interest payable remains fixed throughout the loan period. Whereas, floating rate varies as per market conditions. With a fixed rate of interest, you to pay an unchanged interest rate for the period of the loan. A floating rate gives you the opportunity to pay lower interest due to market fluctuations.
3. Sanction letter: It is a confirmation that you are eligible to avail of a home loan. It does not guarantee disbursement. In it, the institution mentions the loan amount and the applicable rate of interest. It also indicates loan period, equated monthly installments (EMIs) etc.
4. Modes of disbursement: On verification of the legal documents, the bank will release the loan amount. The loan can be in three ways: full, partial and advance. When the bank pays the entire loan amount to the builder/owner it is full disbursement. In partial disbursement, the bank pays the builder in phases depending on the progress of the construction. In advance disbursement, the entire loan amount is paid to the builder before completing the construction.
5. EMI: Repayment of the borrowed money to the bank every month is EMI. It depends on the principal amount, interest rate, loan tenure and mode of computing interest. Payment of EMI begins on successful disbursement of the loan. As the loan tenure increases, your EMI payable reduces.
6. Pre-EMI: In the case of partial disbursement, interest is payable to the bank on the amount released. This is pre-EMI. You have to pay the pre-EMIs until completion of the project when the final disbursement is made. If the project completion extends, you are likely to pay extra interest to the bank.
7. Post-dated cheques (PDC): You have to issue PDCs to the bank for a period of one or two years for payment of EMIs. A PDC is issued in advance bearing a future date. It can be realized for clearing only after the date mentioned on it.
8. Pre-approved property: When approached by a builder, banks perform the requisite due diligence of a project. If everything is in order, the property is a pre-approved property. Buyers should not consider a pre-approved property as 100% safe. Pre-approved or not, remember the principle “Caveat Emptor – Buyer Beware”.
9. Credit appraisal: Credit appraisal is the examination of your credibility to judge your ability to repay the home loan. Banks check your income, age, past experience, qualification, existing loans, etc. This gives the lending bank an insight into your past record. It helps banks determine your eligibility for loan and loan amount to be sanctioned.
10. Security: When availing a loan, you have to keep an asset with the bank as a security. This serves as protection for the bank if you are unable to or fail to repay the loan. Generally, the home on which loan is availed serves as an asset. In the case of non-repayment, banks can sell the home to recover the amount.