At a certain point in our lives, we all want to become homeowners. Owning a home is the most reliable way to ensure your financial stability. It is a lifelong asset that every one of us may hand over to our youngsters, ensuring their financial security. However, the journey of purchasing a home is not as straightforward as it sounds. With real estate prices soaring, the overwhelming majority are capable of paying just a fraction of the actual home price as their down payment. The remaining amount will be backed by a home loan. The first part of planning for a house loan is becoming informed about every one of the loan’s terminologies.
If you are searching for a housing loan, you might find yourself having trouble relating to the specialized terms—especially if you are somewhat novice to the marketplace. To assist you in making a sound choice with an open viewpoint, below are a number of the key terms involved with a housing loan.
In advance of getting into all of the home loan language, let’s define what it entails to take out a housing loan.
What Does the Term “Home Loan” Define?
A housing loan simply refers to the sum of funding that can be borrowed from a financial institution, NBFC firm, or housing financing firm at an interest rate that is either variable or fixed. The person taking out the loan repays the loan amount in cost-effective monthly installments over a certain period, typically a maximum of 30 years. To be eligible for a loan for housing, the property must be either personally owned or commercial. One can select from a variety of house loans. Let’s start with an awareness of the many types of housing loan agreements.
- Home Purchasing Loan
This is the most frequent sort of housing loan, and it allows you to buy an existing home, flat, or house that is currently under the building phase or has already been built.
- Construction Loan
This is financial assistance made available to those who own a property or piece of residential property and want to build a house on it. This financing is perfect for people who want to construct a new home in their area.
- Home Renovation Loans
A home renovation loan often covers all of the costs associated with remodelling the building, such as the application of paint, redesigning, repairing leaky rooftops, electrical wiring servicing, and other such expenses. A person may choose to take out an unsecured renovation loan with higher rates of interest or offer their property as security to achieve lower rates of interest.
- Land Purchasing Loans
Another essential phase in home loans is a land-purchasing loan. If you want to buy a few acres of land and build your house according to your wishes, you may apply for a land-purchasing loan. Those wishing to build farm buildings, bungalows, and villas typically seek these types of loans, with the land serving as collateral.
- Home Expansion/Extension Loan
If you opt to improve and add a room, such as a kitchen or storage space, or simply separate two little bedrooms from a single huge bedroom, you may apply for a house expansion loan. This financing additionally lets you add a story to your existing building.
- Joint Home Loan
A jointly-taken housing loan is one in which two individuals are designated as co-borrowers. Whether you and your spouse have been included as co-applicants for a housing loan, you may be able to sign up as joint homeowners and take advantage of tax breaks related to home loans.
- Amortization Schedule
This implies a thorough structure of periodic repayments of any loan, including a breakdown of the principal amount and interest payable in an EMI until the loan is fully reimbursed.
- Housing Loan Balance Transfer
A housing loan balance transfer enables you to move the remaining loan balance to a different lending institution that offers cheaper interest rates and more favourable conditions and terms.
- Top-up Housing Loan
If you require additional funds beyond your existing loan sum, you can apply for a top-up housing loan.
In the previously mentioned explanations of house loan terms, we frequently used the phrase collateral, which is commonly used in the context of housing loans. Therefore, let us begin by explaining one of the other key terms linked to house loans.
- Collateral/Security
Because house loan amounts often range between lakhs and crores, financial institutions demand some type of asset as security in situations where the borrower finds it difficult to reimburse the money due. This is referred to as collateral. The two words security and collateral may be applied similarly since the financial institution holds the item being pledged as collateral if the borrower fails to complete the repayment of the loan.
A housing loan offered with collateral often has a lower rate of interest because the asset being pledged protects the lender from losses. Regarding the situation of home loans, the asset used to secure the loan is typically considered collateral. It provides the financial institution with the legal power to get back the remaining balance of the loan’s balance by selling the asset in question.
- Equated Monthly Installments
EMI refers to Equated Monthly Instalments. Someone who borrows might pay back the loan in installments every month. The EMI includes both the principal as well as the interest parts of the loan. The financial institution calculates and determines the EMI based on the loan’s rates of interest and duration. The person who borrowed the money must keep making EMI payments until the full principal loan sum, together with interest, is completely paid off.
- Loan Tenure
Financial institutions offer house loans for a set duration. You can repay the housing loan with interest and principal in EMIs over 20–25 years. In some circumstances, housing loans are available for up to thirty years. If you choose a long-term house loan, you will have to pay more for the interest.
- Interest
Interest is the amount that the applicant has to reimburse the financial institution in addition to the main loan amount granted. Applicants can pick between two different kinds of housing loan interest rates: fixed rates and variable rates.
- Fixed Interest Rates
A fixed rate of interest indicates that the person who borrows can repay the house loan at a set rate within the loan term. In such cases, the monthly installment amount continues to be constant throughout the loan term. This pricing is suitable for those who meticulously arrange their budgets.
- Floating Interest Rates
An interest rate that swings or fluctuates according to market circumstances. If one selects a fluctuating interest rate, he or she ends up repaying a different EMI payment every month based on the base rate.
- Margin
Whenever it’s related to house loan terminologies, the margin is an extremely important concept. In the context of housing loans, the phrases margin and down payments are interchangeable. The margin is what’s left between the loan amounts offered by the financial institution and the real property value. Most financial institutions normally supply 80% of the real property worth. The person who borrows pays the remainder. Means, he or she pays 20%, as a margin or down payment.
Accordingly, if you want to buy a residential property worth a crore, you’re required to pay 20 lakhs as a down payment, whereas your financial institution offering a loan sum is Rs 80 lakhs.
- Credit Appraisal
Just before approving your loan, the financial institution carefully looks at the request for financing based on numerous aspects. These depend on your earnings, monetary savings, age, professional position, and scores on your credit report. They will look at your past-due bills, credit repayment history, periodic credit card debt, and numerous other factors. These variables assist them in determining if you are suitable for the loan and, if so, the amount of loan that should be granted to you. This is referred to as a credit appraisal.
- Loan Disbursement
Disbursement refers to the process by which the financial institution releases the loan funds to the person who asked for them. The total amount of the loan will only be released after the financial institution gets all the required documentation and approves the funding request.
- Sanction/ Offer Letter
The offer letter, also known as the sanction letter, is an official acknowledgment from the financial institution that the request for financing is being reviewed. The offer letter normally includes information on the loan value, rates of interest and type, loan duration, EMI value, conditions of repayment, and additional details. The offer letter will be effective for six months, during which you have to finish the loan procedures. Even so, the offer letter doesn’t say that the loan will be granted. The loan amount is given only after the financial institution is satisfied that the property and documentation are in order.
- Pre-Approved Property
Before approving a loan application, lenders perform a sanity verification. They undertake their due diligence on the piece of property you want to buy, the contractor handling the project, and others. They are going to make sure that the property’s titles are clear. In some circumstances, financial institutions collaborate with builders, buildings, or projects, and the building or project may be regarded as pre-approved by the financial institution. In such circumstances, the contractor may refer you to the lenders for housing financing. Considering this, buyers should be mindful of the home lending idiom “Caveat Emptor: Let the Buyer Be Aware,” which states that an approved property in advance is not always a sound investment.
- Resale Property
This is a housing loan word applied when buying a piece of property from yet another property owner who has decided to market it. These are consequently considered resale properties. The above implies that you are not buying a freshly constructed home directly from a building contractor or an investment property that is currently under construction.
- Loan-to- Value Ratio
The loan-to-value ratio, abbreviation LTV, generally means that the loan value gets divided by the entire worth of the asset being financed. Thus, if you take out an 80 lakh loan for a house worth 1 crore, the LTV ratio is 80%.
- Pre-Closure
If an applicant has the funds to close a loan before the specified time, he can choose between pre-closure and foreclosure. The applicant eventually makes a large payment to complete the repayment of his loan. Based on the sum of the loan reimbursed, he might or might not be entitled to penalties for concluding the loan in advance of the specified time.
Bottom Line
Everyone dreams of owning their own home at a certain point in their lives. Among the most convenient ways to purchase a property of your own is to try out for a housing loan. However, when looking for a loan to purchase a house, you’ll come upon a lot of jargon that you, as a customer, may not understand. But keep calm because, in this little guidance, we have mentioned several of the most commonly used phrases in house loan documentation, as well as their definitions.
This guidance will help you to pick up the best offer as per your requirements. Fortunately, no one will be able to take advantage as a layman in your first-time loan journey. So, read these terms carefully and be aware of them before applying. Before applying for loans, go through the specific loan’s terms and conditions. Because these may vary from lender to lender.