15 Home Loan Terms You Must Know

Home loan can be a complicated topic to comprehend. Nevertheless, is it of utmost importance to understand the topic in order to make the right decision while attaining a housing loan. Mentioned below are home loan terms that you need to know.

1. Margin – Margin in this case is the same as down payment. This is essentially the difference between the loan amount the bank provides and the total value of the property. Back in 2010, the Reserve Bank of India had set a ceiling limit on housing mortgages. A bank cannot provide a loan of more than 80% of the property’s total value.

   For example, you wish to buy a property worth Rs.1 crore, and the bank is willing to loan you 80% of the value and you will have to make a down payment of 20%. This means that the bank will loan you Rs.80 lakh and you will have to make a down payment of Rs.20 lakh. The margin in this case will be Rs.20 lakh.

2. Offer Letter – This is a formal confirmation letter, also known as sanction letter, that the bank sends out acknowledging that the bank has considered you as an eligible loan customer. This is valid for 6 months and in the event that you do not receive a loan in these 6 months, the whole procedure must be gone over from start.
3. Post-Dated Cheque – A post-dated cheque, as the name suggests, is a cheque written out for a future date. This in a common practise in the EMI payment of home loans. These cheques cannot be presented ahead of time.
4. Disbursement – Disbursement is referred to the release of the loan amount from the bank to the borrower. A loan will be disbursed after all the documents have been provided to the bank and the bank has approved the loan.
5. Full Disbursement – A full disbursement is when a bank disburses the entire loan amount all at once.
6. Partial Disbursement – As the name suggests, a partial disbursement is when the bank releases a partial portion of the loan to a borrower.
7. Advanced Disbursements – This is when the entire disbursement is made before the completion of the project. This is done on request and the understanding that a builder will complete his project on time.
8. Equated Monthly Instalments (EMI) – EMI is the monthly payments a borrower has to make towards a loan. EMI starts once the loan has been fully disbursed.
9. Pre-EMI – After a partial disbursement of a loan, only interest payments will be made on that amount. This is known as pre-EMI. This usually happens when a property is under construction.
10. Resale Property – Resale property is when someone purchases a property from somebody who has already owned it beforehand. This means you are not buying a home directly from a builder.
11. Pre-Approved Property – Builders that have got an approval by lending institutions for their projects is known as pre-approved properties.

There are numerous misunderstandings by borrowers regarding pre-approved properties. Some of them are mentioned below.

Availing A Housing Loan Is Certain: Many builders misinform borrowers by assuring them home loans from banks and other financial institutions that have pre-approved their project. This is flase. Each application is assessed individually and there is no guarantee that home loan on pre-approved project will always be approved.

The Project Will Complete On Time: Though the financial institute takes into consideration, the builder’s past records and ability to complete projects on time, it doesn’t mean that it will take any action if construction is delayed

12. Credit Appraisal – Credit appraisal is the evaluation of a borrower’s financial status to assess whether or not the borrower is eligible for a loan.
13. Security – Security is the asset provided by the borrower to the bank as collateral for the loan. If you fail to repay the loan, the asset will be compensated to pay off the outstanding amount.
14. Loan to value ratio (LTV) – This is the loan amount divided by the total value of the property. If the loan amount is Rs.75 lakh and the property is worth Rs.1 crore, the LTV will be 75%.
15. Interest – Interest is the amount payable to the bank over and above the loan amount. The EMI you pay will have a split of principal and interest. There are two types of interest, floating and fixed.