If you are planning your dream home, you may need to fund the purchase through a loan. As a first-time homebuyer, you may find the entire procedure to apply for finance overwhelming. You may be confused when you come across the technical terms.
To help you, here are ten essential terms that you must understand before applying for a loan.
- Down payment
The financial institutions do not lend the entire cost of your home. Most lenders offer up to 80% of the home price. The balance amount must be paid through your personal resources to avail of disbursement. This initial amount you pay towards the purchase is known as the down payment.
- Rate of interest
A home loan is available either at a fixed or floating rate of interest. If you choose a fixed rate, the applicable interest remains constant during the entire loan tenure. On the other hand, the applicable interest under floating rate changes according to the overall market rates.
- Sanction letter
This letter is issued by the lender to confirm your home loan eligibility. However, it does not guarantee the disbursement of the loan amount. The letter comprises the amount, the applicable rate of interest, Equated Monthly Installment (EMI), and loan duration.
- Disbursement modes
The lender verifies all the legal documents and then disburses the loan amount. It may be disbursed in full, part, or advance. The entire amount is paid to the developer or owner under complete disbursement. Partial payment is done to the builder as per the construction schedule. The advance payment provides the entire amount to the developer before completion of the construction work.
- Equated monthly installment
The borrowed amount is repaid in EMIs. The EMI schedule is based on the rate of interest, loan duration, principal amount, and mode of calculating the interest. The EMI commences as soon as the loan is disbursed. The EMI amount reduces when you opt for a longer duration.
If the lender releases only a partial amount of the loan, you need to pay interest only on this amount. This is known as pre-EMI and you need to pay this amount until the construction is completed and the entire loan amount is disbursed. In case the project is delayed, your interest payout is higher.
- Post-dated cheques (PDCs)
When you avail of a housing loan, you need to provide the lender PDCs for a certain number of EMIs. A PDC is issued with a later date in the future on which it is deposited for clearance.
- Pre-approved properties
Some developers approach lenders to approve their projects for loans. The financial institutions offer such approval after completing the due diligence. However, it is important to check all the project-related details because pre-approved projects may not be completely secure.
- Credit appraisal
Credit appraisal is done to determine your capability to repay the loan. Lenders analyze your income, previous experience, existing loans, age, and qualifications during the appraisal.
Security means that you need to provide an asset as collateral. In most instances, the lenders create a charge on the property. This acts as a protection against defaults. If you do not make timely payments, the lenders may sell your property to recover their dues.
Owning a home is one of the biggest financial decisions. It is important for you to understand all the terms and conditions that regulate the housing loan industry. It is recommended you compare different lenders before making your decision.