How does the home loan process work?
Home loan is the main source of the finance for most of the people in India. Using home loans, ordinary people can see the dream of own a house. But many people have very little information about this lengthy and tedious process. Yes lengthy and tedious process, as it involves many steps and legal procedures, it is quite time-consuming work. Even the finding a good property is not a simple task with traditional work, but you can find the property in Lonavala with few clicks.
Finalize the property
Under construction property and ready-to-move property, both have their pro and cons. In most cases ready to move property costs slightly more as compared to the under-construction property. In some cases under construction, the property gives the time to the borrower to manage the money. While in ready to move property is immediately available.
Loan application
Compare for less interest rate
Generating the inquiry is quite a simple and straightforward process like any simple buying process. The most important factor here is the interest rate. There are lots of banks providing the best interest amount. Here the primary focus must of lowering the interest rate, not the best service. Anyone can search a bank for the lowest interest rate. You can also visit home loan interest rates for an overview. Make a list of banks and their interest rate and choose the most possible minimum interest rate. Even if this is a simple process, it is the most important step in the home loan process. Even a 0.1 percent of interest rate can save you money from thousands to a few Lakh.
Making Inquiry
Inquiring about the home loan process can be done in two ways.
Online : In an online inquiry, you just have to find the official website of the bank which is chosen in the previous step, in the loan section of the bank you can inquire. It may be different for all banks, extra efforts may be required to search the inquiry form.
Home branch : Here you need to visit the home branch’s loan department for the inquiry. Please confirm the interest rates and other updates from bank officials regarding the government scheme, like subsidy and other schemes for women.
Negotiate for the best possible interest rate
Yes! You can also negotiate for the best possible interest rate. If the credit profile and credit score are nice then you can get a better interest rate. There are other factors also which can help you in negotiating for the lowest interest rate like, Income level. As previously mentioned, even 0.1 percent can save you a good amount of money in the home loan process. Here you can also check other existing consumers of the bank who got the lowest interest rate. It might be possible some other people got a lower interest rate than your expectation. You have to confirm the interest before proceeding further. Once you have chosen, the interest rate then you can’t get back again.
Processing fee & other charges
It is also important to understand the processing fees of the bank. It may vary from 0.25% to 1% percent of the loan amount. Most of the banks offer processing fees between 0.25% to 0.5%. Like interest rates, your goal must be reducing the processing fees as low as possible to 0.25%.
Some banks may ask for the legal and technical due diligence charges extra. You also have to confirm this before, because once you paid they might ask for the extra charges for this other than processing fees. Processing fee payment without confirming these charges may cost extra for you.
Documents
Requirements of a document in the hosing loan process are different for the different types of occupation. Few of the documents are common for all. The requirement of the documents gets divided into three types of people.
Salaried
If the person is doing a job then the below documents are required for the home loan process.
Index | Document |
1 | Application form with 2 photographs duly signed |
2 | Identity proof |
3 | Residence proof |
4 | Age proof |
5 | Last 6-month bank statement |
6 | Last 3 months salary-slips |
7 | Processing fee cheque |
8 | Form 16 or Income tax returns |
Self-employed professional
If the person is CA, Doctor, Architect, Advocate, or other professionals then the below documents are required for the home loan process.
Index | Document |
1 | Application form with 2 photographs duly signed |
2 | Identity proof |
3 | Residence proof |
4 | Age proof |
5 | Last 6-month bank statement |
6 | Last 3 months salary-slips |
7 | Processing fee cheque |
8 | Form 16 or Income tax returns |
9 | Education qualification certificate |
10 | Last 3 years income tax returns with computation of income |
11 | Last 3 years CA Certified/ audited balance sheet, profit &loss amount |
Self-employed Nonprofessional
If the person is a proprietor or having a partnership firm then the below documents are required for the home loan process.
Index | Document |
1 | Application form with 2 photographs duly signed |
2 | Identity proof |
3 | Residence proof |
4 | Age proof |
5 | Last 6-month bank statement |
6 | Last 3 months salary-slips |
7 | Processing fee cheque |
8 | Form 16 or Income tax returns |
9 | Education qualification certificate |
10 | Proof of business existence |
11 | Business profile |
12 | Last 3 years income tax returns with computation of income |
13 | Last 3 years CA Certified/ audited balance sheet, profit &loss amount |
Due Diligence by the bank
Due diligence is the standard process of banks in which verification of documents, analyzing the risk, and also some investigation process happens. This process is mainly divided into 4 steps.
Financial check
In this step bank usually starts the investigation and scrutinizing the bank statement of the 6 months. The same statement was provided in the previous process. Bank checks what type of transactions are going on. Patterns of deposits and withdrawals. Business activity, other repayments, saving history, and even the investment history are checked. This process verifies the loan eligibility. The average bank balance is also checked for eligibility.
Cheque transactions are also checked, whether cheques issued by the account are regularly passing or bouncing. If the cheque bouncing cases are more than the certain limit, it will create difficulties. If you are paying the installments for the other loan, then it also gets checked. As the rule, a bank cannot give a loan beyond the 50% of the total income. If another loan is going on from that account, then that amount will get reduced from the required loan amount. It decides the eligibility against the required loan amount. Net income checked for eligibility. Bank checks it by the salary slip or from the profit. It is checked every month.
Nearly every person is aware of the term CIBIL Score. This score indicates how the repayments of the previous loans were. Credit record, number of loans, and credit card repayment history are also checked. If the credit score is more than 750 then approval is easy for the bank else more interest rate or rejection of the application may happen.
Field Verification
Bank performs the field investigation to check the residential address and contact details. The Bank representative visits the residential address and cross verifies the contact details like phone number and email address. If the person is an employee then the employer’s credential gets checked. Even address, industry, type of the business, and stability of the particular industry is also checked. For some sectors, it is difficult to get the approval of the loan like BPO. These sectors have problems with the job security of the employees as well as the stability of the business. This process is done by the bank representative with a physical visit to the residential address and business place.
Technical Due Diligence
This process includes the investigation of the property details. The Bank representative physically visits the property. The Bank representative checks the quality of the construction, the condition of the property, and whether there is any illegal encroachment is there or not. Property valuation is also done in this step. This step is done by an approved third-party valuer. It performs the independent valuation. Here the loan amount is decided based on an evaluated amount, not on the purchase amount. Most of the time the valued amount is calculated less than the purchase amount. This process gives the actual market value of the property to the bank.
If the property is under construction by the builder, then the current stage and the progress of the construction are checked. Whether stages are completing on time or taking some time or delayed, these things are checked. The quality of the construction approved layouts, and building plans are also checked.
Legal Due Diligence
The bank checks the title of the property. It is checked to verify whether the seller is the actual owner or not. The Bank also checks for the non-encumbrances on the property like third-party claims, existing loans on the property, and pending taxes. To verify this bank completely checks the chain of the title. From the first owner to the current owner every title is checked by the bank. Property title documents like sale deeds or gift deeds are also checked in this process. Other than the title document, the possession certificate and sale agreement are also checked by the bank.
If the property is under construction, the bank checks whether the title of the land and builder’s details matches. Allotment letter and builder-buyer agreement are checked. You can also check whether the project is already approved by the bank or not, If yes then you can ask for the APF code (Approved Project Financial code).
Credit Appraisal and loan sanction
Once your due diligence process is done, the maximum EMI repayment capacity is checked based on income and other liability. Consider 40,000 as your monthly income. If you are already paying the installment of the other loan which is 5000 then your disposable income will be 35000, but the bank will only consider 50% of the disposable income which will be a maximum of 17,500. Maximum loan eligibility is based on the LTV ratio which is about 80 to 90%. The remaining 10 to 20% is considered to be invested by the user. Here other factors like. It also depends on credit score, Income, Age, Experience, Employer, and nature of the business.
Offer letter & Acceptance
After the previous step, the bank offers the maximum sanctioned loan amount. After the offer of loan, the amount bank sends the offer letter. This offer letter includes the sanctioned amount, rate of interest, type of rate of interest (fixed or variable). Fixed interest rates are stable and do not change, while variable interest rates changes, variable interest rates are completely market-driven. Then Tenure of the loan is also mentioned (the Time period of the loan in years). EMI also shows in the offer letter. The mode of monthly EMI payment is also get mentioned in the offer letter. Other than the Special government scheme, the Validity of the offer and terms and conditions shows in the offer letter.
In the acceptance letter, you have to mention the loan amount which you wish to get. This amount should be less than equal to the maximum loan amount. It is not mandatory to get the full amount as a loan, one can choose the less amount. After confirming the offer letter’s details, the user has to sign the letter of acceptance and send a copy to the bank.
Loan Agreement
The borrower signs the loan agreement, there might be multiple borrowers if the owners are multiple. Bank collects the PDCs of the equal amount of the total loan amount for security purposes. If the mode of repayment is a cheque, then the bank collects a few PDCs for the installments.
For under-construction property tripartite agreement is also get signed in between Bank, Builder, and Borrowers. This agreement is signed additionally to the loan agreement. In under-construction property, loan disbursement is made as construction stage, directly to the builder because there is no sale deed registered yet. After the loan agreement process, you have to hand over the original documents to the bank.
Sale deed and DD handover to seller
For the ready-to-move property, the final step is the sale deed. This sale deed also gets registered at the sub registrar’s office. The Bank also ensures whether the down payment is made or not. On the same day of the sale deed registration bank handovers, the DD of the full loan amount to the seller and bank collects the original documents directly from the sub registrar’s office. It is very important to collect the receipt of the list of documents that the bank has collected, it will help you in the future if the bank misplaced the documents.
*The information provided in the article is created by referring to the different documents from the internet, this article should not be used as legal material. this information just for educational purposes.
