Home Loan Process | A Step-By-Step Guide To Housing Loan

Home Loan Process | A Step-By-Step Guide To Housing Loan

In this blog we will discuss about home loans, Documents needed for home loan, how much will be the processing fee and what all the other charges that you need to pay while taking home loan etc. In order to understand home loan let's go through the roadmap on which how a property is being bought and how the concept of loan works. So the first and foremost step is to finalize a property. Properties are generally classified into two types, first one is ready to move property and the second one is under construction property. Now, how can we buy ready to move and under-construction propertyYou will get to know all the processes when buying those properties , what all documents of the seller you should check. When you  are planning to buy a property in most of the cases you need financial support for that you need to take a loan. So let's discuss the process of home loan.

Steps in home loan

The first and foremost step in a home loan is to give an application for a home loan. Loan application majorly do three work . First one is you generate an enquiry. Second one is you negotiate the processing fee with the bank. Third one is you submit your documents with the bank. The second step in home loan application is  due diligence by the bank. It means bank do the field investigation in order to analyze the financial background of the applicant. The bank will also do technical due diligence and legal due diligence of your property. 

Third step in home loan is credit appraisal and home loan sanction. The bank will check your credit score and based on the credit appraisal the bank will finally sanction the loan amount. The fourth step in home loan is your offer letter and acceptance. Once the credit appraisal is completed by the bank they will tell you the sanctioned loan amount and will send you an offer letter and that you need to sign and accept. 

Once you accept the offer letter you will sign a a final loan agreement with the bank and which is the fifth step in a home loan. The final step is that  a Sale Deed is signed between the buyer and seller, and at that time the bank will directly handover the final DD  to the seller. Here you will take possession of your own property. This is all about the roadmap of getting a home loan starting  from finalizing the property till property possession. Now let's go into detail.

Loan Application

It is the first step of the process. In this you will first generate an inquiry. Now how will you do that? you can do it either by online through various websites available across the web or by going directly to the nearest bank. After completing the inquiries, you need to compare the interest rate provided by various banks. Your main aim should be to attain the lowest interest possible. After comparing the interest rates, you should go the bank which offers lowest interest rate . 

Then you need to negotiate the lowest interest rate with the bank. Lowest interest rate are generally given for those who have good credit score. Income level also influence to get lowest interest rate from the bank. Right from the beginning you should negotiate with the bank for the lowest interest rate possible. The next important thing that you should know is that you should clearly understood about the processing charges and other additional charges of the bank. The processing fee usually varies between 0.25% - 1%. 

Many banks charges processing fees and other additional charges between 0.25% - 0.5%. So you should negotiate with the bank regarding this part too. Other than this banks separately charges for Legal and Technical Due Diligence. But in some cases this could also happen , the banks agrees to 0.25% processing fee. But once you pay the processing fee and got connected with the bank, they will ask legal and technical due diligence separately. So you should make sure that you got a clear understanding on the charges that you need to pay to the bank including all the additional charges.

Documents needed for home loan

This is the most important section in the application of a loan. Documents are broadly different  for the three different class of people. First one is salaried class, documents here is applicable for people who are doing salaried  job. Second one is self-employed professional and the third one is  self-employed non-professional. If you are  having a proprietorship or a partnership firm then the third one is applicable for you. So let's look at what all are the documents that are requirement for home loan. First of all you need to submit the application form with duly signed photograph. 

Generally two photographs are being required. Then you need to submit identity proof, residence proof, and age proof. These are the general documents that you should have in your hand before applying for home loan. Also keep copy of aadhar card, passport as well as pan card while applying for loan. After doing all this things you need to submit your 6 months account statement to the bank. The next document that you need to submit to the bank is your salary statement, you need to submit your  3 month salary statement to the bank. By analyzing your salary statement bank is calculating your monthly earnings. 

After doing that you need to pay the bank with a cheque for processing fee. Processing fee usually varies between 0.25%- 0.5% of the loan amount. This  is the amount that you need to pay to the bank as an upfront payment. After doing that you need to submit either form 16 or income tax report of last year. These all are the  documents which are compulsorily required for salaried class. 

Self employed non professionals requires their proof of business existence and their business profile. In addition to all this documents you need to have documents regarding your educational qualification. and income tax return for nthe last three years.  Then finally CA certified audited balance sheet is required with profit and loss account statement is also required in the case of self-employed. When you are going to apply for a bank loan, keep all these documents ready. 

Due Diligence by the bank

Due diligence is the verification of all documents. This is a very important step for a bank loan.  The bank mainly do due diligence in four ways. The first step is the financial check.  In the financial checks what happen is that bank will scrutinize the six month bank slips. They will check the type of transaction you do. If you are self-employed then they will check the type and number of transactions, your credit history , your savings, etc. They will also check your cheque bounce and cheque return history. If your cheque bounce and cheque return history is over the number of limits in a particular year then the bank will generate a red flag there. If that is the case you will face difficulty in getting loan. 

After that, your loans and liabilities will be checked. How many more loans are you paying. After that you net income will be evaluated. Net income and other loans play a prominent role in loan eligibility.  Then your CIBIL score, your credit repayment history etc will also be analyzed.  If you have a CIBIL score of more than 750. Then you will easily get loans. If your CIBIL score is less you are most likely to get loan of small amount and that too with high interest rate. So it is very essential to maintain a good CIBIL score. The bank will do a field investigation after that . Your residential address, phone number, mail id etc are checked physically by a bank representative. and they will come to your house to verify this. 

Then your company address and credentials are also checked, In which industry it is operating and what is the financial stability of the organization. There are many sectors which are very difficult to get loan. for example it is very difficult to get loan for BPO industry. It is difficult to get loan in BPO industry because the attrition  rate are very high in this industry, the job is risky and the sector is considered as unstable. For the field investigation, they physically visits your home and by bank representatives. 

Technical Due Diligence

The next step under the due diligence is the technical due diligence. Under Technical Due Diligence, the Due Diligence of your property will be checked. What all comes under this? First of all  physical visit to your property will be done to check , what is the condition of the property how is the construction quality, checked if there is no encroachment, if there are no tenant over there who has taken possession on the property.  These all things which are checked. After that valuation of property is done, and which is done by an  approved evaluator appointed by the bank, it is generally a third party and it will do an independent evaluation.  

Suppose you want to buy a house and you say I am buying a house at Rs 75 lakh. But an independent evaluator appointed by the bank estimates its value to be around Rs 60 lakh in the market . So your loan will be calculated according to the value of Rs 60 lakh as estimated by the independent evaluator and not by Rs 60 lakh. If you buy a property at the market rate then this is not a big  issue, in very small cases this could be an issue. That's why the bank does an independent evaluation to determine the actual market price of any property.  

After that some under-construction property additional Due Diligence is done. Under construction property means if you are buying property from a builder that is not yet ready and is under construction. So in that case, stage of construction is checked and the progress of construction is seen if the construction is on schedule or not. If delayed then not by much from the schedule. Then how is the quality of construction. Then approved layout and building plans are checked by the bank. Bank checks all the documents, it also does Legal Due Diligence under that, we will also see what all documents are required. 

Legal Due Diligence

Then after Technical Due diligence, comes Legal Due Diligence. What is checked under legal? First of all there is title check. Bank will check if the seller is the real owner of the property or not. Ownership of the seller is checked here. After that, no encumbrances should be there. It mean there should be no third-party claims over the property. It could be a problem if there is a third-party claim. Suppose there is a court case over the property Or suppose there is a loan or a liability of some kind, or some tax is due or property tax is not paid for some years. So all of these things are checked, for this a proper Chain of Title is checked the bank meaning from the first sale till the last sale whenever the property is first sold 15 years ago or 20 years ago. So the bank checks all the records for the last 15-20 years, they check them all. 

Then property documents are checked. Which contain Title documents like sale deed, gift deed whatever the main title document is, gets checked. Posession certificate is checked, when did you get the posession of the property, you should have the papers. From you mean the seller should have the required papers and you can provide those to the bank.  Then the bank also takes a copy of your Agreement for Sale with the seller. And checks in what amount have you bought the property. For example, you bought the property for Rs 50 lakh then the same value should be mentioned in the Agreement for Sale too. From this basis true value of loan is calculated. 

Finally in the case of an under-construction building all the documents of the builder is checked. First, the Title is checked whether the land title is in the name of the builder or not. Bank take a copy of an allotment letter. Along with that, the bank takes a builder buyer copy and all the documents are scrutinized, so that the bank is not at risk of any kind. Other than that if you invest in an under-construction property you can check if the project is already approved or not. Most of the projects are already approved by the bank you can directly apply to those banks from where it is already approved. So for that, you can ask for an APF code from the builder APF code is Approved Project Financial code. 

What is an APF code? So once you get the APF code and discover the project is already approved by a bank, so you can go with that bank. So once all the Due Diligence is finished and the bank has done your background check and for the property. After that, the next step is for credit appraisal and loan sanction Credit appraisal means once all the Due Diligence is cleared after that the bank calculates you maximum EMI repayment capacity. Now whatever is your income and your loans and liabilities. Liabilities mean credit card payment suppose you monthly pay some payment so that is accounted and what is your total income then according to this how much EMI can you pay every month. 

Let me give you an example suppose you get a salary of Rs 50,000 per month. alright. And from that suppose Rs 15,000 goes to repayment . Suppose you took a car loan and a personal loan so additional payment for both let's suppose sums to Rs 15,000 So Rs 15,000 is deducted from this (Rs 50,000) right. So your disposable income is left to be Rs 35,000. From this the bank will say the maximum you can pay is just 50 % for a loan right. So it may happen they just give you a loan for only Rs 17 lakh 50 thousand. Rs 17.5 lakh or maximum it can go to Rs 20 lakh in this case. 

That how home loan eligibility is calculated. Home loan eligibility. I have given a proper calculator you calculate EMI by yourself and for how much can you take a home loan based on your salary you will get to know that too? So once the bank calculated your EMI, how much EMI can you pay after that your loan eligibility is calculated. So loan eligibility depends on a lot of factors one is loan to value ratio. First of all, suppose if you bought a house for Rs 50 lakh you won't get a loan for Rs 50 lakh anyway. You can get a maximum loan of Rs 40 lakh to Rs 45 lakh A margin of safety is kept in this the bank said 10% to 20% money you pay from your pocket. Like in this case you have to put Rs 5 lakh to Rs 10 lakh from your pocket. So you can get a maximum 90% loan of the property value. But generally, you get up to 80% but if the amount is small you can get 90%. 

After that, your loan eligibility also depends on your credit score as I said earlier that your credit score or CIBIL score should be 750+ so your loan eligibility would be better. Loan eligibility also depends on your income, suppose have a high income then your loan eligibility also increases. So in case suppose you want to increase your loan eligibility. So you can also take a joint home loan with your spouse or with someone else or you can buy the property jointly, in that case, your eligibility increase. So I have also given tips for this too I have made a video on 5 tips to loan eligibility you can also watch that video of mine. 

Then finally your age, experience, what type of employer you have, how is the nature of business, loan eligibility also depends in this. So once your loan eligibility is calculated how much can you take a loan. So after that, the bank tells you a sanctioned loan amount. And you get an offer letter after the bank tells you the sanctioned amount. So this was our step four. Your bank will send you an offer letter that this much amount is being offered to you. And what all details will be there? First of all sanctioned loan amount will be mentioned there.

So suppose you are buying a property of Rs 50 lakh and suppose you are not repaying a loan of any amount and suppose 80% of the amount is approved by the bank. So suppose a Rs 40 lakh loan is approved right. So this amount will be written over here Rs 40 lakh. After that, your rate of interest will be written over there suppose your rate of interest is 8.3%. So this 8.3% can be fixed or variable. Here it would be written properly 8.3% variable interest rate. Now this 8.3% variable mean, every year it can change these are market driven rates. If the interest rates are low next year then this will be below or if this increases so your interest rate can also increase.

Along with that, there are some fixed interest rates too. So suppose you are getting this 8.3% variable. So assume that you will get 8.8% to 9% in fixed interest rate. Always fixed interest rates are higher. So this is not the case that fixed interest rate will be always fixed. Nowadays fixed-cum-floating interest rates are also available. So maybe it can happen that this 8.8% to 9% interest rate is fixed for only 3 years. So you too have the choice if you want to go with a variable interest rate or you want to go with a fixed-cum-floating interest rate. 

Tenure for the loan is fixed that suppose you took a loan for 20 years or 30 years. Alright, along with that your EMI is also mentioned that approximately how many EMI would be there according to that tenure. Then mode of repayment is also mentioned if you electronically want to pay this is Electronic Clearing System ECS if you want to pay electronically you can opt for that too. Or you can opt for post dated cheques. Then if there are any special scheme like under Awas yojana is there any special scheme interest rate subsidy is being given or any special scheme run by the bank gets mentioned in there. 

After that there is a validity of offer mentioned, this is generally valid for 2 to 3 months the offer letter. So you need to accept the offer under that period. Then other terms and conditions are also mentioned in the offer letter. So once you get the offer letter, you need to accept that. You should first check if you agree with the loan amount or not. Suppose the maximum sanctioned amount you got is for Rs 40 lakh. But you may arrange around Rs 15 lakh of Rs 50 lakh from your source. So your requirement can be only for Rs 35 lakh. Although your eligibility is just for Rs 40 lakh. But it is the final loan amount that is not necessary.

So at the time of acceptance of the offer letter, you can mention that i need only Rs 35 lakhs. So you will mention the final loan amount here. After that, you will send a copy of the signed offer letter to the bank right. So you accepted that loan amount. After that there is a loan agreement. So loan agreement is signed by all the borrowers. If you are the single owner and you applied for the loan then you will sign that. In the case of a joint loan, every borrower will sign the loan agreement. After that bank collects PDCs, post-dated cheques. 

Bank takes one PDC for the total loan amount as security. And the rest PDCs there are, suppose you opted the option for PDC as mode of repayment then the bank also collects those PDCs at the time of signing of the loan agreement. After that, for under construction property the process is a little bit different after you sign the loan agreement. After that, a Triparty agreement is also signed between bank, borrower and builder. Because builder is also a party. In this case so a Tripartite agreement is signed additionally. 

If you have bought a house in an under-construction property. After that loan is disbursed, in this case, under-construction property because the sale deed is not registered here at this point. So the loan is disbursed as per the construction stage. Suppose 30% of construction is completed, so till that time whatever the loan amount is calculated the bank disburses that. That is directly paid to the builder and not to you. But directly to the builder. Then the bank will take all the original documents from you as soon as you take a loan for under construction property then you need to hand over the original documents at the time of signing the loan agreement. Then let's see what happens in a large case of ready-to-move property. 

That was for the case of under-construction property rights. Suppose you bought a ready to move property then there is a final step. Sale deed is signed and registered and on the same day of signing the sale deed the Demand Draft the bank pays completely because it is in the case of ready to move. So on the day of registration of sale deed the same day your documents are also handed over and the bank also hand over DD not to you but directly to the seller, right. So first of all your sale deed is registered at the Sub-Registrar office. 

After that bank ensures that if you have paid the down payment amount whatever is 20% or 10% amount you need to pay by yourself . Then finally once your sale deed is registered in the Sub-Registrar office. So the loan amount however it is supposed from Rs 50 lakh from the example we had, from Rs 50 lakh suppose you paid a down payment of Rs 10 lakh right. After that this DD of Rs 40 lakh. This is DD and this is DP (down payment) right. So the DD of Rs 40 lakh the bank will give it directly to the seller when the sale deed is registered on the same day. And then the bank will collect all the original documents as soon as the sale deed is signed and registered then the bank will collect all the original documents by itself from the office right. And along with that the bank also collects all the original property documents.

Finally, when you hand over these property documents to the bank so it is very important that you also take the receipt for the documents. That what all documents have you handed over, suppose the bank misplaces some of the documents then you won't have any proof. Therefore it is very important if the property documents get misplaced even by mistake then it is very hard to again get a copy from the Sub Registrar's office. And then they will not be the original documents you need to then work with the duplicated ones. So it is better to take a receipt of the documents the bank has collected from you. So this is the complete process for home loan.

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