Types of Home Loan

There are a variety of home loans available. They are:

HOME PURCHASE LOAN: This is the common loan for purchasing a home.
HOME IMPROVEMENT LOAN: This loan is given for implementing repair works and renovations to your home.
HOME CONSTRUCTION LOAN: This loan is available for the construction of a new home.
HOME EXTENSION LOAN: Home extension loans are given for expanding or extending an existing home. For example, addition of an extra room, etc.
HOME CONVERSION LOAN: Available for those who have financed the present home with a Home Loan and wish to purchase and move to another home for which some additional funds are required. Through a Home Conversion Loan, the existing loan is transferred to the new home, including the additional amount required, eliminating the need for pre-payment of the previous loan.
LAND PURCHASE LOAN: This type of loan is sanctioned for purchase of land, for both home construction or investment purposes.
BRIDGE LOAN: The Bridge Loan is designed for people who wish to sell the existing home and purchase another. The bridge loan helps finance the new home, until a buyer is found for the old home.
BALANCE TRANSFER LOAN: Balance Transfer loans help you pay off an existing home loan with a higher interest rate, and avail of a loan with a lower rate of interest.
REFINANCE LOAN: This loan helps you pay off the debt you have incurred from private sources such as relatives and friends, for the purchase of your present home.
STAMP DUTY LOAN: This loan is sanctioned to pay the stamp duty amount that needs to be paid on the purchase of a property.
LOANS TO NRIs: This loan is tailored for the requirements of NRIs wishing to build or buy a home in India


Tenure of the Home Loan
Tenure ranges between 5 to 25 years.
Costs involved in taking a home loan

Home loans are usually accompanied by the following extra costs:
  • Interest on the loan amount: Interest rates differ from institution to institution, however, they remain in a narrow range. They depend upon the overall economic environment, liquidity situation, interest rate and its expectations, supply-demand scenario, etc.
  • Processing Charge: It is the fee payable to the lender on applying for a loan. It is either a fixed amount not linked to the loan or may also be a percentage of the loan amount. The loan amount required by you cannot be less than the processing fee.
  • Pre-closure Charges: When a loan is paid back before the end of the agreed duration, usually a penalty is charged by some banks/companies, which is usually 1-3% of the amount being pre-paid. Few lenders may not charge this.

  • Types of Interest Rate on Home Loan
    Fixed Rate Home Loan:
    A fixed rate home loan, is a loan where the interest rate is constant over the entire loan tenure.

    Floating Rate Home Loan:
    A floating rate loan, is a loan where the interest rate payable is linked to the market rate like the bank's base rate. As the base rate changes, the interest rate payable on loan will also rise/fall. Hence, you will have to bear the risk of interest rate fluctuations. Usually, while taking a loan, the floating interest rate offered is lower than the fixed interest rate.
    Teaser Loan:
    In these loans the interest rate is fixed at a low rate during initial years. Thereafter, the interest rate is increased to match the then prevailing market rates and then continue to remain floating throughout the loan tenure.

    The interest on home loans in India is usually calculated either on monthly reducing, quarterly reducing or yearly reducing balance. In some cases, daily reducing basis is also adopted.

    Annual reducing: In this system, the principal, for which you pay interest, reduces at the end of the year. Thus, you continue to pay interest on a certain portion of the principal which you have actually paid back to the lender. This means the EMI for the monthly reducing system is effectively less than the annual reducing system.

    In Quarterly, Monthly & Daily reducing system the principal, for which you pay interest, reduces at the end of every quarter, month and day respectively. Daily reducing balance will be cheapest followed by monthly and then quarterly reducing balance if same rate of interest is applicable. If rate of interest are different then it is better to directly compare the EMIs and the tenures of the loans. The loan carrying the lower EMI for the same tenure is cheaper.

    Eligibility Criteria
    To be eligible for a home loan, the applicant must be at least 21 years of age with a regular source of income from employment or self-employment. The loan must terminate before or when the applicant turn 65 years of age.

    To be eligible for a commercial loan, the applicant must be at least 21 years of age with a regular source of income from employment or self-employment. The loan must terminate before or when the applicant turn 65 years of age. The loan can be for the purchase/construction/extension of a non-residential property. A loan for renovation will only be given at the time when the property has been acquired. Professionally qualified and self-employed individuals can apply but a minimum of 3 year's work experience is a necessary.

    Loan Amount
    The loan amount depends on a number of factors such as age, income, number of dependents, other assets and liabilities, credit history, etc. The lender’s assessment of your repayment ability is the key. There are ways in which to increase loan eligibility and amount. If a spouse is earning, applying together as co-applicants can increase chances of getting a larger loan amount. In such cases, proof of marriage must be submitted. On the contrary, if there are any co-owners they must necessarily be co-applicants. Providing additional security like bonds, fixed deposits and life insurance policies may also help to enhance eligibility. Apart from the above person-specific factors that decide your credit eligibility, the lender’s assessment of the property value and certain regulatory factors like Loan-to-Value Ratio (LTV) also impacts the loan amount.

    Securities and Guarantors
    n most cases, the property to be purchased becomes the security and is mortgaged till the entire loan is repaid. Some institutions may ask for additional security such as life insurance policies, FD receipts and share or savings certificates.

    Some institutions ask for 1 or 2 guarantors, others require no guarantor at all.

    Process of applying for the home loan
    Application needs to be made in the prescribed Application Form of the Bank/financial institution, along with relevant documents and Processing Fees. On Approval/ Sanction of the Application the Bank/financial institution forwards an Approval/Sanction Letter to the Applicant & Co-Applicant. On Receipt of the approval Letter, the property can be selected/ if selected the disbursement process can be initiated.

    Loan application approval may take anywhere between 5-21 days

    On an average, loans are disbursed within 3-30 days after satisfactory and complete documentation and completion of all relevant procedures, including proof that 15% of the cost has been paid upfront to the seller of the property.

    Documents required at the time of applying for a home loan

    For Salaried Person:
    • Last 6 months Salary Slip
    • A Xerox copy of Form 16 A (TDS Form) from the applicants Employer for the last 2 years
    • The original certificate from the applicant's employer for any other allowances that are not reflected in the applicants salary slip
    • A Xerox copy of the applicants bank statement for last 6 months
    • A Xerox copy of a valid identity proof like the applicants voter I.D. card or passport/ ration card
    • 2 passport size photograph of the applicant & co-applicant
    • Proof of age
    • Proof of residence

    For Self-occupied person:
    • Certified copies of balance sheet, profit and loss statement and tax challans for the previous 3 years
    • Xerox copy of the applicants bank statement for the past 6 months
    • A Xerox copy of the applicants ration card
    • A profile of the applicants business mentioning at least the nature of the business, client list, suppliers, employee strength, geographical spread, etc.
    • In the case of a business partnership a copy of the partnership deed, 3 years P & L A/C, B/S, computation of income certified by a CA and individual computation of income and tax returns for last 3 years is required
    • In the case of a proprietor or professional 3 years Profit & Loss Account, Balance Sheet, computation of income certified by a CA and an income tax return file statement for 3 years is required
    • If the company applying for a loan is a Pvt. Ltd. a remuneration certificate, the board resolution for fixing remuneration, the company's annual report and individual IT returns for last 3 years is required

    If a flat is purchased from the builder
    • Original copy of your agreement with the builder.
    • 7/12 extract or property register card of the land under construction.
    • Index II extract of your agreement with the builder.
    • Copy of N.A. permission for the land from the collector.
    • Search and title report (with the details of documents) for the last 30 years.
    • Development agreement between the owner of land and the builder.
    • Copy of order under the Urban land Ceiling Act.
    • Copy of building plans sanctioned by the competent authority.
    • Commencement certificate granted by Corporation / Nagar Palika.
    • Building completion certificate(if available).
    • The latest receipts of taxes paid.
    • Partnership deed or memorandum of association of the builders firm.

    If the property is being purchased is in a Cooperative Society
    • Original share certificate of the Society.
    • Allotment letter from the society in your name.
    • Copy of the lease deed, if executed.
    • Certificate of the registration of the society.
    • Copy of the byelaws of the society.
    • No objection certificate from the society.
    • 7/12 extract or property register card in the society's name.
    • Copy of N.A permission for the land from the collector.
    • Search and title report(with the details of documents) for the last 30 years.
    • Copy of order under the Urban Land ceiling Act.
    • Copy of the building plans sanctioned by the competent authority.
    • Commencement certificate granted by Corporation / Nagar Palika.
    • The latest receipts of taxes paid.
    • Original Agreement to assign / Deed of assignment.

    If constructing on own land
    • Original sale deed of land and extract of Index II.
    • 7/12 extract or property register card in your name.
    • Copy of N.A. permission for land from the collector.
    • Search and title report (with the details of documents) for the last 30 years.
    • Copy of order under Urban Land Ceiling Act.
    • Copy of the building plans sanctioned by the competent authority.
    • Building permission granted by Corporation / Nagar Palika.
    • The latest receipts of taxes paid.
    • Estimate of cost of construction certified by the architect

    Disbursement of Home Loan
    The loan will be sanctioned after the selection of property and submission of the required legal documents. The process might take some time as each document needs to be verified for the safety of the applicant. The 230 A Clearance of the seller and / or 37I clearance from the appropriate income tax authorities (if applicable) is also needed. Once the above has been submitted and verified, the registration of the conveyance deed and investment of the applicant's own contribution and the loan amount will be disbursed by the bank. The disbursement will be in favor of the builder.

    Documents required at the time of disbursement of a home loan
    • Loan Agreements
    • Disbursement requests
    • Post-dated cheques
    • Personal guarantors documents
    • Registered Property Agreement