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Home buyers tips on mortgage

By Santosh Mishra  |  0 comments   |  3133 views  |   Jun 03 2012

This is a cheat sheet for you get started in a jiffy. The following Q/A session are a great primer for both first time and experienced homebuyer. We will also encourage you to amble through our buying guide to develop a deeper understanding.

What is the policy for co-ownership?
Only immediate relatives are allowed co-ownership (i.e. parents and son and husband and wife). If you are thinking about other relatives like brother/sister or cousins then you are out of luck. Most of the lenders don?t allow co-ownership of this type. The key reason for this exclusion is that if there is a future dispute between the joint borrowers then the income cannot be pooled for the eventual recovery of the loan.

Is it possible to take mortgage after buying a house?
Most lenders would consider any property bought during the last 3-6 months as a regular home loan application. You would be eligible for the same rates and income tax benefits as any other . However, if you delay and the property purchase becomes more than 6 months old it will be treated as Loan against Property. The rates for the same are higher and there would be no tax benefits as well. ­

What is the eligibility norms for self employed professionals?

Most home loan lenders offer special privileges to self-employed professionals. They recognize the fact that in such cases, income is generally under stated and the earning potential of such individuals is higher than what has been disclosed. Every mortgage lender has its own conditions regarding the type of professionals they would cater to. The mortgage lender also decides on the qualifications required for such professionals to qualify for the relaxed norms for loan eligibility calculations.

Is there any loan provision for purchasing land?
  • Yes, loan for land purchase is available as long as it is for residential purposes only.
  • Many mortgage lenders offer this loan. You can get up to 85% of the purchase amount based on your credit profile and paying capacity.
  • You get no tax breaks if you take a loan to buy a plot of land. But, if you take a loan for construction, that means a loan to build a house on that plot of land, then you can get a tax break.
  • In such a case, the tax benefits are available on both portions of the loan the one to purchase the plot and the one taken to construct the house thereon.
  • Please note that the benefits under Section 80C and Section 24 can be availed only when the construction of the house is complete.

What is a "pre-approved property"?
Many large builders get their projects "pre-approved" by specific home loan lenders. The lender examines the legal documents of the title of that project, the stage of construction as well as the builder's track record to complete the project in time. It then declares all properties in the project to be ?pre-approved?. You do not need to go for legal and technical checks in case of a "re-approved"property.

What is Pre EMI?
You've chosen a property which is still under construction. So the lender makes the disbursement in parts based on the progress of the construction of your property. However till the home loan is fully disbursed you have to pay simple interest at the rate you have agreed upon with the lender. This is known as the Pre EMI. And from the month following in which the full disbursement is made you will start paying your EMI.

What is Floor Space Index?
Floor Space Index refers to the ratio of the built up area of a property to the area of the land on which it is built. An FSI of 60% would mean that the total built up area of the building can be equal to only 60% of the area of the land on which it is being built. There are FSI specifications released by the relevant municipal body or development authority for all construction in its area. It is also known as Floor Area Ratio (FAR).

What is a fixed rate home loan and when is it profitable for you?
A fixed rate home loan is one where the interest rate charged by the lender is constant over the tenure of the loan. It is advisable to go in for a fixed rate only if you feel that the rate is going to increase. See our mortgage tool section to learn whether fixed rate product is good for you.

What is a variable rate home loan and when should you take one?
A floating rate home loan is one where the interest rate charged by the lender keeps changing with respect to a benchmark rate over the tenure of the loan. Typically, the benchmark rate depends on the basis of their cost of funds and the prevailing market rates. Thus your interest rate changes periodically. It is advisable to go in for the floating rate if you feel that the interest rates have reached its peak and can only go downwards. See our mortgage tool section to learn whether variable rate product is good for you.

Can the Fixed rate of Interest change during the loan repayment?
The Fixed Rate of Interest ideally remains fixed over the tenure of the loan. This rate does not change after the final disbursement has been made. However, nowadays, many lenders are reserving the option of changing the rate on a fixed rate home loan after 3 or 5 years. So please read the fine prints before you sign up for a fixed rate home loan.

What is the difference between monthly rest & annual rest?
In a monthly rest, the interest is calculated on the outstanding principal at the beginning of every month. Once the interest is calculated at the rate applicable to you for the month it is deducted from the EMI received during the month. Annual rest works on the same principal only the interest is calculated on your outstanding principal at the beginning of every year. It is also commonly known as "Yearly Reducing Balance". Monthly reducing balance is a better option all other things being equal as you get immediate credit for repayment and the interest component keeps reducing almost immediately on a monthly basis.

What are the charges other than interest that you should be aware of?
Almost all lenders charge certain administrative or processing fees apart from interest. You must compare all these charges as well before signing on to a home loan contract.

  • Legal fees- payable to the lender or to the legal consultants of the lender
  • Technical or Valuation charges- payable to the lender or to his technical consultant.
  • Stamp duty on creation of mortgage- some banks charge this fee while other banks normally just have a clause that requires this to be paid in the event the state government actually charges this amount.
  • Prepayment Charges- This is the biggest charge that most homebuyers overlook. A loan can be prepaid either in part or in full at any given point of time. However, most banks have an upper limit on the number of times a person can prepay his loan in a year as well as on the minimum amount you can prepay each time. Currently banks to allow repayment without any charges if it is funded from own sources. In case the borrower, is transferring the loan to another lender he will need to pay the full charges.
What are the tax benefits that I can avail of for repaying a home loan ?
You will be eligible to claim both the interest and principal components of your repayment during the year.
  • Interest can be claimed as a deduction under Section 24. You can claim up to Rs. 150,000 or the actual interest repaid whichever is lower. (You can claim this interest only when you are in possession of the house)
  • In case of joint application the joint owners will each get benefit as described above
  • Principal can be claimed up to the maximum of Rs. 100,000 under Section 80C. This is subject to the maximum level of Rs 100,000 across all 80C investments.
  • You will need to show the statement provided by the lender showing the repayment for the year as well as the interest & principal components of the same.
Can you take advantage of tax benefits from a home loan as well as claim House Rent Allowance (HRA) ?
If you took a home loan and are still living in a rented place, you will be entitled t
  1. Tax benefit on principal repayment under Section 80C
  2. Tax benefit on interest payment under Section 24
  3. HRA benefit

Of course, you can claim tax benefits on the home loan only if your home is ready to live in during that financial year. Once the construction on your home is complete, the HRA benefit stops. If you took a home loan, got possession of the house, have rented it out and stay in a rented accommodation, you will be entitled to all the three benefits mentioned above. However, in this case, the rent you receive would be considered as your taxable income.

Can I get tax rebate under sec 80 C of both the loans when I have two housing loans on two different properties?
Yes, you can get the 80C benefit on both loans. However, the total amount that you will be entitled to will be a total of Rs 100,000 across both the homes. The interest paid on a home loan is not directly deductible from your salary income for either of your flat loans. Income from house property will be calculated for each flat you own. If either of theses calculations shows a loss, this loss can be set off against your income from other heads. As for Section 24 deduction, on yourself occupied house you can take advantage of interest payments up to Rs.1, 50,000. For the other property, you can claim actual interest repaid, there is no limit for the same.

Is it necessary to get property insurance, while availing a home loan?
Most lenders do not insist on property insurance when disbursing a loan. However, it is strongly advisable to buy insurance as your home would be one of your most valuable assets. The home insurance rates are very affordable especially when bought for a long duration say 10 years. It would cost close to Rs. 50 per lakh of property value per year.

Can I sell the property, even when the home loan is outstanding?
Yes, you can sell the property with the consent of the lender. This consent letter usually mentions the amount at which the home loan can be considered fully paid off. This amount is inclusive of prepayment charges as applicable and calculated at a future date to give you enough time to find a buyer. Based on this letter, you can negotiate with potential buyers. If the buyer, wants to take a loan to purchase the property the process is much simpler if he approaches the same lender. Then the lender does not need to release the title papers to another lender before getting the payment. If the buyer wants to make an outright payment- he can make the payment out to the bank directly based on the consent letter. And the balance amount is paid out to you. The property papers will be released only after the bank has recovered the entire amount including prepayment charges.

Can you increase or decrease the loan amount even after it has been sanctioned?
Yes, the change in amount can be done at any point before disbursement. Any increase in loan amount will however be subject to the eligibility conditions. The bank might also charge you excess fees on requesting an increase in the loan amount. The bank is not obliged to return excess fees paid in case you are requesting for a reduction in the loan amount.

What is an acceptance Letter?
Once a home loan is issued by the bank/housing finance company by way of sanction letter, the applicant communicates his willingness to accept the loan by way of an acceptance letter. He has to send this within a time frame of 1-3 months from the date of the sanction letter.

What is advance EMI?
These are a set of equal installments paid out in advance at the time of disbursement of loan. You will need to give post dated checks on this.

What is Credit Appraisal?
Every Housing Finance Company or bank has its own panel of credit appraisal officers who process applications. They take into account various factors like income of the applicants, number of dependents, monthly expenditure, repayment capacity, employment history, number of years service left over and other factors, which affect the credit rating of the borrower. Proof of income will also be verified for the purpose of approval of loan. The time taken for receipt of such information is crucial since it affects the length of time required for a home loan approval.

What is EMI - Equated Monthly Installment?
This is the fixed amount payable every month for repayment of the loan over the tenure of the loan. The interest and principal component of this installment changes on a monthly basis. Usually, post dated cheques of the home loan EMI amount are taken upfront.

How much is your down payment?
Lenders normally give loans up to 80-85% of the value of the property. The balance would have to be paid by the buyer, as a payment before he draws on the loan amount. 

What isLoan to Value (LTV) ratio?
They are terms used by lenders to signify the loan amount that a person is eligible for on the total value as well as the total cost of the property. The balance amount for purchase of the property is to be funded by the customer from his own sources.

What is the role of FCI (Field Credit Investigation) ?
Stands for Field Credit Investigation or plain Field Investigation- most financiers appoint an outside agency, who authenticates the identity of the client and confirms his place of residence and office address. 

Why should you care aboutFOIR (Fixed Obligation to Income Ratio)?
This is a ratio commonly used by lenders to calculate loan eligibility. This ratio includes all the fixed obligations that you pay every month including all loan EMI paid every month. The Fixed Obligations however, do not include statutory deductions like PF, Profession Tax, etc. and deductions for investment like Voluntary PF, LIC Premium, Recurring deposit, Contribution towards society, etc. 

Why is FSI ( Floor Space Index) relevant?
FSI as it is more popularly known as refers to the ratio of the Built up area of a property to the area of the land on which it is built. An FSI of 2:1 would mean that the total built up area of the building can be equal to twice the area of the land on which it is being built.

What is the role of a Guarantor?
The role of a guarantor is commitment by the way of agreeing to the terms and conditions of the loan and bearing liability to the extent of the loan together with the interest and other charges. The guarantor comes into play only when there is a default by the borrower. Usually a guarantor is not required for home loans.

What is a LCR (Legal Scrutiny Report)?
The documents which are pertaining to your property needs to be scrutinized by the legal personnel of the housing finance institution to ensure that you are buying a property that is clear and marketable.

What is NEAR (Net Effective Annualised Rate)?
This is the net rate paid by the client after taking into account all discounts, other charges paid, subventions, advance installments and is the rate to be used for evaluation of two or morehome loan offer .

What is Registration Value?
This is the value of the property, which is declared and is registered in the court of law. The duties, charges and taxes are paid by the seller and the buyer on the basis of this value.

What is Home Loan Insurance?
When you take a home loan, you owe the lender money. If you are not able to repay then the lender will take away your home. So, in a situation where you lose your life and no surviving member of the family can repay the loan, your home may be taken away by the lender. You can protect yourself and your family by buying Home loan insurance, also known as Loan Cover Term Insurance.

For example, say you took a home loan of Rs 30 lakh. In the next two years, you have paid back Rs 10 lakh of the principal amount, and Rs 20 lakh remains to paid. However, at this point you meet with unfortunate tragedy, and no one can meet the EMI payments due to the lender. In this scenario, if you have Home loan insurance, the insurer will repay the remaining amount of Rs 20 lakh on your behalf. If you did not have this insurance, your home might be repossessed and your survivors might not have a home to live in.

Should you take Home Insurance?
Your home is your most valuable asset and the result of your life's hard work and savings. You must protect it against natural disasters such as floods or earthquakes, or against fire. Therefore, it is important to get home insurance for building and contents so that you can at least recover the replacement cost of your home or your belonging in the event that something happens to your house.

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