A home loan has an exhaustive set of terms that every applicant must understand before applying for a home loan. If you are looking to buy a home, then you must have started searching for home loan details on the internet and there might be certain home loan terminology which you may or may not have understood instantly. It is important to understand the different aspects of a home loan and what these different terminologies mean before you apply for a loan.
Below mentioned is 19 most frequently used home loan terms that every aspiring home loan applicant or existing borrower must know about:
1. EMI - One of the most used home loan terms is the EMI. A loan EMI is an Equated Monthly Instalment that a loan borrower must repay to the lender. The EMI includes the interest and principal component of your home loan. Depending on the home loan amount, the tenure that the borrower opts for, and the rate of interest offered by the lender, a monthly instalment is calculated.
2. Down Payment - When you are buying a property, the amount that must be arranged from the borrower’s end to pay the home seller is known as the down payment. Most banks and lending institutions are generally willing to fund anywhere between 80% to 90% of the property rate as the principal loan amount. The other 10% of the property rate is what a home buyer needs to put up as a minimum.
Higher the down payment amount, lesser the home loan amount needed from the bank. This will mean that your interest will be lesser, and so will your EMIs. Hence, it would be better to try and give a higher home loan down payment if it is not too taxing on your financial planning or budget.
3. Loan to Value (LTV) Ratio - The Loan to Value ratio (LTV) is the ratio you receive when you divide the loan amount by the total value of the property. So, for example, if the loan amount is 60 lakhs and the value of the property is 1 crore, then the LTV, in this case, will be 60%.
4. Fixed and Floating Interest Rate System - When you are applying for a home loan, you will come across the choice of interest rate system, where you can choose between a fixed rate or a floating rate. Fixed interest rate is where you take the home loan at the interest rate finalised with the lender at the time of applying for the loan. Floating interest rates can fluctuate with market trends and increase or decrease with time.
If you expect the interest rates for home loans to trend down, then a floating rate system would make sense. On the other hand, if you don’t want to take any chances or unnecessarily be stuck with a very high-interest rate in the middle of your loan tenure, then it is better to opt for a fixed interest rate system. Moreover, home loans that attract a floating interest rate can generally be foreclosed for no additional charge.
It is important that a home loan applicant understand both these interest rate options, pros and cons, and then decide on the interest rate system that is ideal for them.
5. Loan Foreclosure - Once a home loan has been disbursed, the borrower has the opportunity to foreclose or pre-close the loan as per the lender’s terms and conditions. If a borrower has adequate money to close his home loan before the home loan tenure finishes, then it is best to foreclose the loan. By foreclosing the home loan, a borrower can save on the remaining interest amount. However, it is important to know if the lender charges any penalty fees or other charges for foreclosing the home loan before you opt for the same.
6. Loan Offer Letter - A Loan Offer Letter is also referred to as the Sanction Letter, which is the formal recognition from the lender that the borrower’s home loan request has been considered. This letter will contain all the details and breakdown of the home loan, i.e., loan amount, loan tenure, rate of interest offered by the lender, EMI amount, terms and conditions of the home loan, etc. The borrower is yet to agree to the offer letter and have all the property-related and other documents in place for the loan to be disbursed.
7. Home Loan Disbursement - Disbursement is the final process wherein the lender releases the home loan amount to the borrower after all the paperwork is clear and verification is in place. Home loan disbursement can be of three types:
Advance disbursement: An advance disbursement is when the entire loan amount is disbursed even before the project is completed. This type of disbursement is done on request and prior understanding between the lender and borrower (builder), in which the latter agrees to complete the project within the given time frame.
Partial disbursement: A partial disbursement is when the lender is releasing a limited portion or only part of the loan amount to the borrower.
Full disbursement: When the lender disburses the loan amount to the borrower in one go, it is considered a full disbursement.
8. Processing Fees - A processing fee in a home loan is a percentage of the loan amount that is charged to the borrower. This is a fee charged by the lender for dealing with your home loan application and is a one-time fee. Most banks also specify the minimum or maximum amount that can be charged as processing fees. Additionally, you also need to pay a GST of 18% on the processing fee as this is a service charge.
9. Pre-EMI - EMI payments for a home loan commence only after the loan amount has been fully disbursed to the borrower. Until then, the borrower can pay the interest rate on the partially disbursed loan amount. This is known as the Pre-EMI, and while it might not be a widely used home loan term, it is vital to understand in detail.
10. Loan Amortisation Schedule - The amortisation schedule has a breakup of your home loan, i.e., EMIs, which the borrower will pay every month with the principal and interest amount split. If there are any additional charges or hidden fees being levied, it is easy for the borrower to understand in detail by looking closely at these figures.
11. Pradhan Mantri Awas Yojana (PMAY) - Pradhan Mantri Awas Yojana, i.e., PMAY, allows eligible home loan applicants to enjoy a subsidy on housing loans (up to 6.5%) with the Credit-Linked Subsidy Scheme (CLSS). This is a crucial home loan tip, especially for first-time buyers, as they could use this scheme to their advantage if they are eligible. This subsidy is extended for the economically weaker classes of society, and the government of India considers the income of the entire family and not just the applicant to check the eligibility of this scheme.
12. Security - The asset that a home loan borrower provides to the bank as collateral against the loan is known as security. In a scenario where the borrower fails to repay the home loan, the security is used to compensate for the outstanding loan amount. The term security and collateral have the same meaning in home loan. In the case of a home loan, the property you are buying is kept as collateral with the bank until the home loan is fully paid up.
13. Credit Score - A CIBIL score is the score given to an individual by credit bureaus, which decides the creditworthiness of an individual, and banks often request for credit reports of loan applicants from these bureaus to determine eligibility. This is one of the most crucial home loan terms, as a CIBIL score of 650 and above is what most banks look for to process the loan application. Higher your CIBIL score, more your chances of getting loan approval quickly and even availing discounted rates for the home loan.
14. Interest - Interest rate in a home loan is the cost of borrowing the principal amount from a lender or financial institution. The principal amount in the home loan is the amount you need to buy the home. When you are repaying this amount over a period of time (decided by you), the bank charges you an interest rate on this principal amount, and that amount is known as the home loan interest rate.
15. Post Dated Cheque - Once the home loan is being processed by the lender, the borrower needs to provide cheques that are dated ahead of time, i.e., Post Dated Cheques that the lender will encash for the next few months as per the EMI date borrower selects. A lender can typically ask for 1-3 years of Post Dated Cheques, which are addressed to the lending institution, and the cheques must have the loan amount and borrower’s signature written on it.
16. Pre-Approved Home Loan - If your credit score is good (750 or more), then banks deem you eligible for a particular loan amount even before you have applied or raised a request. This is called a pre-approved home loan offer and can be valid for up to 6 months in most cases. You can always compare the pre-approved offer a lender is extending against the other home loan interest rates offered by different banks.
17. Home Loan EMI Calculator - A home loan EMI calculator helps you calculate the EMIs you will be paying to the lender every month. All you need to input in this calculator is your preferred loan amount, the loan tenure of your choice and the rate of interest offered by the lender. The calculator will show you the Easy Monthly Instalment, i.e., EMI, that you will be paying every month. To help you calculate the repayment schedule that you will be following for the selected loan tenure, there are tons of free home loan EMI calculators available online.
18. Property Documents - Property documents mean all the documents that a seller of a property, or a builder in case of a new property, passes on to the prospective buyer of the property. The sale deed of the property, No Objection Certificate (NOC), Conveyance deed, Lease, etc are some of the property documents mandatory to apply for a home loan. Builder agreement and payment receipts with the allotment letter are also needed. For properties that are under construction, home loans can be obtained without property registration documents. However, post completion, the property needs to be registered, and a completion certificate of the same must also be obtained.
19. Technical Check - A technical check is a check or verification done by the bank before disbursing the loan to the borrower. In this technical check, the lender sends a property expert to check the property that is going to be bought by the borrower. The expert checks the current stage of construction or current condition of an existing property, age of the building, construction quality, etc., and if everything is up to date before reporting to the bank. Once the technical check is cleared, the bank then proceeds with the application.
Learning about the different home loan terms is crucial for loan borrowers and even aspiring home buyers. Understanding these terms in detail can help you know all about home loans and make an informed decision when it comes to applying for a home loan, repaying or foreclosing it.