Housing loan terminology decoded


In the case of part disbursement of the loan, monthly interest is payable only on the disbursed amount. This interest is called pre-EMI interest

When you are in the process of availing a loan to buy your dream home, financial institutions or banks usually use a number of technical terms which may sound new to you. The below article provides a list of number of technical terms used by banks when you avail a home loan.


Margin
When you borrow, the home loan company or the bank will not lend you the entire amount. It will lend you 80% to 90% amount of the cost of your home. You will have to pay the balance 20% to 10%. The balance amount which you pay from your porket is called the down payment or margin.

Resale
This is the term used when you are buying a home from someone who already owns it and is selling it. Hence, it is called resale. It indicates you are not buying a brand new home straight from the builder or buying one currently under construction.

Credit appraisal
A home loan companies or banks will consider a number of parameters before it sanctions a loan to you. They will check your savings, income, age, qualifications, nature of work and work experience, etc. They will also verify how many loans you are currently servicing. Taking all these factors into account, lenders will determine whether you are eligible for a loan or not and also what should be the amount to be lent to you. This process is known as credit appraisal.

Repayment tenure
Repayment tenure is the tenure for the number of year for which the loan gets sanctioned.

Pre-approved property
Before purchasing any property, the home buyer needs to ensure that the builder possesses the requisite approvals. It means that the titles and the documents of the property have been examined by a bank / financial institution (FI) on the request of a builder. Banks / FI's have the technical know-how, so their assessment will be a comprehensive one. It also takes into consideration things like the track record of the builder among several other things.

If everything is in order, the builder will get a stamp of approval. Also, the bank / FI will view the builder's ability and track record to complete the construction on time. However, this does not mean the home finance company is going to take any action or waive any charges if the construction is delayed. All it means is that the property falls within the legal purview and the builder has a good track record.


Equated monthly installments
An EMI is the amount of money you will have to pay every month in order to repay your loan. An EMI is an unequal combination of your loan amount (principal) and the rate of interest. The EMI remains constant throughout the repayment period. Let's say you have a five-year loan with an EMI of Rs 4,400. You will have to pay this amount for the next 60 months to the home loan company. To arrive at the EMI, the home loan financier will look at:

  • The principal (the actual loan amount).
  • The repayment period (the number of years you will take to repay the loan).
  • The rate of interest.
  • How the rate of interest is computed (monthly reducing, quarterly reducing or annual reducing basis).
Disbursement

Full disbursement
A full disbursement is when the entire cost is paid at one go; the home loan company hands over the entire payment to the seller. The cheque is disbursed (it is never in cash) only when you have submitted all the documents required and have made the down payment. If this is a resale, then the cheque is made out in the seller's name. If you are purchasing your home from a builder, then it is in the builder's name.

Partial disbursement
A partial disbursement is made in stages (not at one go as in the case of full disbursement). When purchasing an apartment from a builder and it is under construction, the home loan company will not release all the payment at one go. The money will be released in stages. For instance, after the completion of the first floor, 20% of the payment will be made, on the completion of the last floor, 40% and so on and so forth. Hence payment is construction linked and disbursed accordingly.

Advance disbursement facility
If the house is still under construction, then a partial disbursement is made. However, in some cases, the home loan company may be willing to make the entire payment even if the construction is not complete. This is known as an advance disbursement and will occur only in both these instances:
  • If the buyer requests the home loan company to do so.
  • If the home loan company is fairly convinced the builder will complete the construction on time.
Pre-EMI interest
In the case of part disbursement of the loan, monthly interest is payable only on the disbursed amount. This interest is called pre-EMI interest and is payable monthly till the final disbursement is made, after which the EMIs would commence.

Offer Letter
Once the loan is sanctioned, you will get an offer letter stating a number of details.
  • Loan amount
  • Rate of interest
  • Fixed/ flexible rate of interest
  • Tenure of the loan
  • EMI amount
  • If offered under a special scheme, details of the scheme
  • Any other conditions of the loan
This letter does not mean the loan is yours. It only means the home loan company has agreed to consider you as one of its customers. It will then look into the various property and legal documents as well as value the property you are buying. The loan will only be disbursed once these formalities are complete.

PDCs
Post-dated cheques are dated ahead of time and cannot be processed till the date indicated. Generally, the home loan company will ask for a year's supply of cheques or maybe even two or three years. At the end, you will have to replenish the supply for the following years. These cheques will be addressed to the home loan company, signed by you and will state the exact EMI to be paid.


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