Nowadays, everyone buys his or her house using a home loan. Read on to learn more about how the process functions.
The house buying process can be easy or fraught with hassles. A big part of the issue tends to involve the home loan. Although obtaining a housing loan is quite a smooth and efficient process, many people find it frightening. This is largely because they go about the process unprepared or do not quite understand how a home loan works. Here is a basic idea of the steps involved in obtaining a home loan.
Constituents of a Housing Loan
A housing loan is not very different from loans for other purposes. A home loan too consists of two parts, namely the principal and the interest. Principal refers to the actual amount you are borrowing as a loan, while interest is the cost of borrowing the loan amount. Repayment of a housing loan is usually for a fixed period such as ten years. Both the principal and interest amounts are combined together to come up with a monthly payment. This is referred to as an equated monthly installment or EMI.
There are two types of interest rates for a housing loan. The first type is 'fixed-rate' wherein the interest rate is fixed at one number for the entire duration of the loan. The second type is 'floating-rate', in which the interest rate is revised periodically. This usually depends on current interest rate levels set by the national governing body.
Applying for a Loan
In loan terms, the bank to which you apply is called a housing finance company (HFC). After deciding what type of loan you want and which bank to apply to, you need to contact the bank and ask them for an application form. Fill in the form and submit it to the bank. Many banks now allow you to do this online.
Besides the form itself, you will also need to submit other documents required by the HFC like proof of identity, income tax details, residence address, employment status etc. You will also have to give a cheque of a specified amount as a non-refundable processing fee. This fee is generally between 0.5 to 1 % of the loan amount.
Validating the Information
After the submission, your application form is processed by the bank. During this process, the bank will validate or verify the details on the application form. This involves checking the residential address of the individual, visiting his office, and checking his employer's credentials.
At this point, the bank may also call you in for a personal interview. In addition, the bank may also contact the people whom you have given as your references. In this stage, the bank actually decides if you are eligible for the loan.
Sanctioning the Loan
Once the bank is satisfied with the applicant's credentials, the loan is sanctioned. The bank issues a sanction letter, which contains details pertaining to the loan amount, interest rate, period of repayment, etc. The letter will also contain the general terms and conditions of the loan.
You will then have to submit all the documents pertaining to the house you are purchasing, including official papers. These documents are considered as security for the loan amount and will remain with the bank until the loan amount is repaid. The documents received by the bank are subjected to scrutiny by the bank's legal department.
Disbursing the Loan
The bank will first visit the property site of the applicant. They will check whether the concerned authorities have legally cleared the project. They will also focus on whether the building adheres to the construction rules. Only after everything is clear, the bank will disburse the loan amount. In the case of an under-construction building, the loan amount will be disbursed in stages, as each phase of construction is completed. If a building has already been built, the entire loan will be disbursed at one time.
Getting a home loan is no longer a tedious process. With increased competition, banks are simplifying procedures to make it easier for applicants to secure loans. Most people who apply for a loan will have it sanctioned in a matter of days.