To start with the old maxim: home is where the heart is!
The dream of owning a home, one you can call your own, is overwhelming. Home loans have helped turn that dream into reality, for many. However, before applying for and obtaining a home loan, it is important that you familiarize yourself with a glossary of some typical terms associated with such a loan.
Here’s a quick guide:
Arguably the most talked about term in the loan business, EMI (an acronym for Equated Monthly Installs) refers to the monthly expenses you have to make to pay off your loan. The EMI is pre-calculated based on factors such as loan amount, term, and interest rate, and the borrower is notified of the same at the time of loan disbursement.
Usually, the bank would sanction a home loan, representing almost 70-80% of the value of the property. However, in all likelihood, it will be the borrower’s responsibility to make the necessary arrangements for the remainder of the funds. A down payment or margin is basically the amount of money the borrower should have on their own.
Before sanctioning the loan amount, banks usually assess your ability to repay the debt on time, taking into account factors such as your income, age, order of assets and liabilities, etc. Credit scoring simply refers to the process that banks follow in order to assess your repayment capacity and make sure that a default is not a possibility.
Post-dated checks are the series of checks that the borrower draws, for a future date of 1 or 2 years, from when the loan is taken out. These would be used to deduct EMI (Electronic Clearing Service) payments on the dates mentioned on the checks.
Before approval, banks often check the viability of a project or property that justifies the borrower taking the loan in the first place. Some builders / developers do this proactively in order to use it as an argument to promote the property.
However, one should carefully check all legal documents before purchasing a property, whether or not it is pre-approved.
In case of partial disbursement of the mortgage, the borrower would have to pay interest, but only on the amount that has been sanctioned by the bank. This amount is called Pre-EMI and is payable monthly, until the date of the last loan disbursement. After that, normal EMI payments would start.
Letter of sanction
A sanction letter, containing details such as loan amount, interest rate, repayment term and IMEs, serves as confirmation that the loan has been granted to the borrower.
However, in the event of issues related to the property (such as viability of the land, disputed status of the property) or the like, the bank, in such a scenario, retains the right to waive the sanction of the loan. This, of course, regardless of whether the sanction letter has been issued or not.
Collateral refers to an asset that a bank would require the borrower to pledge, in order to guard against any potential default. Normally, the house (or property), the purchase of which justifies the mortgage, is considered as collateral.
If the borrower does not repay the debt in full, the bank can claim ownership of the asset and possibly sell it to collect the royalty.
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This content was created in association with YONO SBI.