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Before you embark on this journey, here are 10 essential home loan terms you should know:
1. EMI (Equated Monthly Installments)
When you take out a loan, the term you’ll hear most often is EMI. It’s the fixed monthly payment you make to repay your loan. The EMI is calculated based on the loan amount, interest rate, and tenure, and it’s known to you before you take the loan. Understanding your EMI helps you plan your finances better.
2. Down Payment or Margin
Banks typically finance 70-80% of the property’s value through a loan. The remaining 20-30% must be arranged by you, the borrower. For instance, if you’re buying a house worth ₹50 lakhs and the bank approves a loan of ₹40 lakhs, you’ll need to arrange ₹10 lakhs on your own. This amount is referred to as the down payment or margin.
3. Resale Property
Resale refers to properties that have been previously owned by someone else and are not being bought directly from a builder. Understanding the resale market can help you make a more informed decision when buying a home.
4. Credit Appraisal
Before approving a loan, the bank evaluates your ability to repay it by checking factors like income, age, savings, employment, assets, liabilities, and more. This thorough assessment is called credit appraisal, ensuring that you’re financially capable of handling the loan.
5. Pre-approved Property
Some properties are pre-approved by banks, meaning they’ve already passed a bank’s verification process. While a pre-approved property might seem safer, it’s crucial to conduct your own checks before making a purchase.
6. Security/Collateral
In some cases, banks require collateral—an asset used as security against the loan. This asset can be claimed by the bank if the borrower defaults on the loan, ensuring the bank can recover the funds.
7. Post Dated Cheques (PDCs)
PDCs are cheques issued by you, the borrower, with future dates. They are used to pay your EMIs over a specified period, usually 1-2 years, through Electronic Clearing Service (ECS).
8. Sanction Letter
A sanction letter is a formal document from the bank stating that your loan has been approved. It outlines the loan amount, interest rate, tenure, and EMI details. However, even after issuing a sanction letter, the bank reserves the right to cancel the loan based on property-related or other issues.
9. Disbursement Mode
Once all verifications are completed, the bank disburses the loan amount in one of three ways:
– Advance Disbursement: The entire loan amount is given before construction is completed.
– Partial Disbursement: A portion of the loan is given before construction, with the rest disbursed upon completion.
– Full Disbursement: The entire loan amount is given only after the construction is fully completed.
10. Pre-EMI
Pre-EMI is the interest you pay on the loan before the full loan amount is disbursed. This typically occurs during the construction phase when the loan is partially disbursed.
