For most middle-class families it is a dream to live in their own house, be it an apartment or a row house built over a plot of land. But constructing or buying a home can be a grueling process, as you hop from one developer to another, figuring out the best deal fulfilling all your requirements. Even if you find the desired property, its expensive rates may blow your budget and if you do find the property that fits your budget, you may have to compromise on the location. Even in case you have land to build your dream home, construction costs may curtail you down. Almost all the home buyers have to face the nitty-gritty involved in the home construction or buying process, what adds to the buyer’s plight are the soaring property rates. There is no way one can imagine buying a home or constructing one without taking a home loan.
When it comes to home loans the first thing that pops up in mind is the formalities involved in the home loan disbursal process. Let’s peek into those various formalities involved in the home loan disbursal process and various other factors to be considered before you finally sign the agreement with the lender.
Home Loan Disbursement Process
The home loan disbursement process goes through several levels requiring thorough verification of the documents and detailed technical and legal valuation of the property. After which bank will take a call upon your loan home loan disbursement status.
The home loan disbursement process can largely be segmented into 3 phases- Application, Sanction, and Disbursement.
The home loan disbursal process is like any other loan process. It begins by filling an application form which is mostly like a KYC form, but you would also have to provide complete details regarding your income, property, or investments in the application. Apart from basic information, you may have to attach the following documents along with the form:
- Applicant’s/co-applicant’s passport size photographs
- Applicant’s/co- applicant’s proof of identity
- Applicants residence proof
- Applicants age proof
- Applicants office address
- Copy of last 6 months Bank statements
- Copy of previous 3 months’ salary slip
- Copy of 2 – 3 years of Income Tax Returns
- Copy of Form 16
- Your investment details- FDs, insurance, or stocks (if any)
For those who are self-employed or run their own businesses, they will have to provide complete details of their turnover, monthly income, and tax returns. If you are self-employed/businessman you may have to submit the following documents:
- Applicants/co-applicants passport size photographs
- Applicants/co- applicant’s proof of identity
- Applicants residence proof
- Applicants age proof
- Applicants business office address
- Assessed turnover details
- Minimum 6 months balance sheet
- Profit and loss assessment copy
- Income Tax returns
- Copy of owners and firms Service tax/VAT/ GST returns (as applicable)
- Advance tax payment receipts (if Any)
- Copy of complete property documents to be purchased.
Once the application process is through, the bank/lender will then scrutinize your application form. Their legal experts or lawyers will then legally and technically verify your property details and even inspect the property site to assess the property’s true value based on its construction quality and location. Banks legal department will only approve after they have authenticated the documents submitted by you—- like own contribution receipt, No Objection Certificate (NOC), and sales deed provided by you.
After the verification process is complete you will receive an intimation through a home loan disbursement letter which will confirm your loan sanction status. In case there is a requirement for any more documents to be produced or if any document is incomplete the bank will ask you to submit or complete the required documentation process before sanctioning the home loan disbursement amount.
Once your home loan disbursement has been approved you will receive a sanction letter from the bank stating the disbursed amount, installment date, loan tenure, and interest rate, and the validity of the allotment letter.
After receiving the home loan disbursement sanction letter, you will have to produce the down payment receipt known as ‘own contribution receipt’ to the bank officer. After receiving the down payment receipt bank/lender will further inform you of the date of the first installment. Before the final disbursement process, you will have to produce documents like allotment/sanction letter, agreement copy, encumbrance certificate, credit facility receipt, and after the documents have been processed. Bank will then legally and technically evaluate the property value.
After the completion of all the formalities and as per the terms and conditions of the sanction letter, the bank will then process the home loan disbursement amount. The sanction letter doesn’t necessarily bind the bank with the interest rate mentioned in the sanction letter. The bank is entitled to incur an interest rate as per the day on which the amount will be disbursed and not as mentioned in the earlier sanction letter for which the bank will issue a revised sanction letter.
The bank will either disburse the full amount at a single go or in installments as per the strength of your credit score and the progression of the property. If the construction is complete bank will disburse the full home loan amount. In certain cases, people with a good old track record and healthy credit score may even be eligible for a pre-approved home loan.
Since you have finally decided to apply for a home loan the first thing that may occur to your mind is, “how much loan am I eligible for?” Before the home loan process, it is important to determine your total eligibility, based on which the bank/lender will disburse a certain amount. Your eligibility is determined by various factors like your credit score, disposable surplus income, your income vs expenditure, your family members or spouse’s income, your investment value like shares and stocks, total assets, income stability vs liabilities, which highlights you’re paying capacity.
Apart from your income bank will also consider your age before approving. The whole purpose of the bank is to make sure that you have the capacity to repay the loan. Bank usually accounts for 50% of your disposable income as a repayment sum, hence the higher the income, the higher the loan amount. Apart from your income analysis, the home loan period and interest rate will also be factored in before the bank decides to sanction the total home loan disbursement amount.
Maximum Disbursement Claim
Before applying for a home loan, it is important to figure out how much down payment you can shell out from your pocket, which is also termed as ‘own contribution amount.’ Based on your down payment capacity you can calculate the home loan disbursement amount you need to claim.
Most homebuyers make 10% – 30% down payment depending upon their capacity, the rest they lend from the bank. Even if you qualify for a higher loan amount it is recommended that you make a maximum down payment and take a minimum of the loan amount as it incurs sizeable interest on the outgoing EMIs.
Banks/lenders will usually expect the buyer to make a minimum of 10% – 20% down payment of the total property value. While banks will disburse the rest of the amount which will even include applicable taxes like a stamp-duty, registration fees, transfer fees, and in some cases even property tax.
Bank may also charge a 0.5% -0.25% processing fees as a maintenance charge for handling your account like sending you timely intimations, issuing statements, providing income tax certificates, etc. Though exemptions or fee charges completely depend upon the bank’s policy.
In the case of the under-construction property make sure you get into an agreement with the developer where payments are not pre-scheduled but construction based i.e. make sure you agree with the developer wherein the payments are linked with the progression of the construction work and not pre-defined on a timely-based schedule. Though in the case of a fully constructed property, the bank usually sanctions the full home loan disbursement amount.
Re- Payment process:
Once you are through with the home loan disbursement process your next step is to ensure the timely repayment of the Installments aka EMIs. You can either schedule the timely repayment through ECS or issue a Post-dated check in the favour of the bank/lender.
Once all your formalities are complete and your dream of owning a house is fulfilled; you must maintain a healthy balance for timely repayment of the installments to have a hassle-free experience. A healthy repayment history will further play as an advantage if you ever wish to apply for a top-up loan or alter your loan tenure in the future.
Types of home loan Interest rates:
There are two types of interest rate on which you can avail of the home loan facility, fixed-rate and floating rate—–
In a fixed loan, the rate of interest is not flexible throughout the home loan tenure the rate will remain constant irrespective of the drop or rise of the rates in the market. Which usually is a safe option and can be advantageous when there is a steep rise in the interest rate. Though it can be disadvantageous even if there is a slight drop in the interest rate as a home loan involves a huge sum and are for the long term.
In a floating loan, the rate of interest is not constant and fluctuates as per the market or bank’s policies. Floating rate involves a bit of risk as in case there is a hike in the interest rates, the buyer will have to pay higher EMIs, whereas in case of price drop-in rates the buyer gets profited by paying lesser EMI compared to what he/she was paying earlier.
For most home buyers it is important to fully understand the home loan disbursement process as it also involves fine prints in the agreements. Therefore, you need to evaluate every detail minutely before applying or approving any bank, NBFCs for your home loan.
You can even visit websites where you can compare and evaluate various home loan products and their offerings. Most of the NBFCs and banks also provide a virtual home loan calculator where you can feed in your down payment amount, figure out your eligibility for the approximate claim and calculate the expected EMI to get a clear picture of whether you can afford to take a home loan or not.
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