Sunday, November 1, 2009

Home Loan - A fact file

A General review based on my experience in availing a home loan.

Dreaming about a house !!!!

Well we all are sure to dream about it at some point of life.




But how to make moolah or the money. Most people, if not all depends on Bank loans for constructing a house. I am no expert in analysing or evaluating the existing housing loan schemes from various banks, But I can very well share my considerations based on the loans which I have taken and the sequence of events leading to taking a bank loan.

Right from the moment we decided to buy land and construct house, we were in search of a loan , since we needed loan for purchasing the land as well and only based on the loan amount eligible we were able to fix a budget.

The question which I asked the banks and the conclusions based on the answers arrived at were the following.

  1. What will be the Equated Monthly installment (EMI) per lakh for a period of 20 years / 10 years / 5 years.
  2. How much loan amount am I eligible for based on my monthly income?
  3. How much loan amount will I get based on the estimate of the house which I am going to buy?
  4. Can I get a loan for the land before purchasing a house?
  5. When will I get the loan amount for the land purchase?
  6. Is there any stipulated time before which I should finish my construction once I avail the land purchase component of the loan?
  7. When should I start repaying my loan? or when should I start paying my EMI?
  8. What will be the initial processing charge for the loan availed?
  9. Is there any penalty for premature closure of the loan? If yes what's the rate?
  10. What are the documents needed by the bank for sanctioning the loan and how much time it will take?

Also please note that I got all these answers as emails or in writing so that I have an quantitative and authoritative answer rather than an aribitrary answer from some marketing guy of the bank.

1. What will be the Equated Monthly installment (EMI) per lakh for a period of 20 years / 10 years / 5 years.

Eventhough there are many EMI calculator websites around, I found out the actual rates vary based on some calculation methods.
EMI shall be calculated based on the fixed interest rates and also based on the floating rates for all the tenures mentioned here. The interesting thing is that the emi varied from bank to bank eventhough they quoted the same interest rate. So this step is a must. Also you can decide what is the tenure that you have to opt.

2. How much loan amount am I eligible for based on my monthly income?
Found out that this varies from bank to bank. They also take into consideration whether you are a government employee or a private sector employee.

3. How much loan amount will I get based on the estimate of the house which I am going to buy?
This figure also varies from bank to bank. Banks quoted in the range of 80 to 90%. Some banks offered full amount also, but for that I have to increase the estimate by including the estimate for furniture, gardening etc.
Answer to questions 1, 2 and 3 will help you to arrive at the budget that you can fix for the purchase/constrution.


4. Can I get a loan for the land before purchasing a house?
Yes almost all banks includes value of land also. But the amount sanctioned for land purchase depends on the amount which we show in the records during transactions. Usually people show only less amount in the records just to evade from the land registration tax. In some cases the land seller itself tells to show only less money in the records so that he can evade from paying tax on the profit earned by him in selling the land. This might be a factor to consider while buying the land. Tell the land seller in advance that you may have to put either the actual amount of the purchase before finalising on the deal and paying the advance for the land.

5. When will I get the loan amount for the land purchase?
Getting an answer to this is important as some people need to get the loan amount for completing the land deal. Many banks issue the cheque in the name of the seller, before we complete the land deal. The banks might require the duplicates of land documents well in advance. We have to submit the originals of the land documents immediately after the deal.

6. Is there any stipulated time before which I should finish my construction once I avail the land purchase component of the loan?
Yes, Once the deal on the land is done using the loan from bank, there will be a minimum period of time before which we should complete the construction. Usually this ranges from 2 years to 3 years.


7. When should I start repaying my loan? or when should I start paying my EMI?
This is a very very important question as this can save you a lot of money. There are 2 options available
Option 1. Some banks ask you to pay the Pre EMI. That is you have to pay the interest on the amount which has been sanctioned to you. Usually banks allot amounts in different stages like, during land purchase, before start of basement, after finisihng first floor, after finishing second floor and then final disbursement. After each amount is availed we have to pay the interest for the said amount each month. This interest will not be counted upon when we start to pay the EMI after final disbursement. So if your construction is delayed you end paying Pre Emi for months.
Option 2. Some banks offer you that you can start repaying the EMI of the loan right after the first disbursement. If this option is available, it is the best, because then you are starting to repay your loan irrespective of there is a delay in construction or not.
In the case of private banks, if you keep on asking for option 2, before taking the loan, they might give it. So ask for it.


8. What will be the initial processing charge for the loan availed?
This also varies hugely between banks. Some banks even offer zero processing charges. Some cases it can go upto to 1%.


9. Is there any penalty for premature closure of the loan? If yes what's the rate?
For some banks yes and for some banks no. In some cases it varies from customer to customer. Most of the people don't ask about this while going to take a loan, hence the bank will remain silent about this and when the customer comes to prematurely close the loan, bank will ask for 2% of the remaining loan amount, which can be a huge sume. Now why should we plan for prematurely close a loan, when we know that we won't be able to raise this much sum during the next 10 to 20 years. This need can come for anybody.
Usually some banks comes up with offer for taking up existing housing loans at a much reduced interest rates. In such cases we can close the loan of the existing bank by availing loan from the new bank which has come with the offer. Then our existing bank will tell us to pay 2% more than what need to be repayed.
So try to bargain with the bank before taking the loan itself, and get a 0% premature closing offer. This is something we can get by asking. So ask ask and ask.


10. What are the documents needed by the bank for sanctioning the loan and how much time it will take?
The documents needed by bank will stated clearly in some of the instructions given by the bank. But the major thing is that how much time will be taken by the banks to verify these by the banks before sanctioning the loan.
Quite obviously private banks does this pretty quickly (1week to 1 month), but nationalized banks just eats up loads of your time (1 month to 6 months or more). So take this time into consideration and approach the banks quite early.
For getting an answer to this question, try to approach atleast one of the recent customer of the concerned bank and get feedback from him. In some cases some of the documents required by the bank will be very hard to get. So be well informed about the related documents and how to get it before finalising the decision.



Once you get an answer to the above questions, you will understand that there are lot of differences in the approach of private banks and nationalised banks. Some of the their advantages and disadvantages based on my experience are given below


Advantage of private banks

1. Very very customer friendly
2. Ready to wait till late in night to talk with us (saves us from taking off during office hours, I benifitted a lot because of this)
3. Documents needed are easy to get.
4. No need to run around after submitting the documents
5. Gets answer to all our doubts very promptly
6. Loan disbursement process is very smooth


Disadvantage of private banks
1. Generally rates and charges will be high. (this will not be clearly evident, but once you get answer to all the queries which I posted above, do a simple work out and this will be evident)
2. Default penalties will be more.
3. Tends to hide some of the hidden costs involved. Will get those information only after repeated prompting. Also will try to make us feel that such costs are highly unimportant.


Advantages of nationalized banks
1. All operations will be transparent.
2. All rates and information will be provided.
3. Generally rates will be low, eventhough not quite evident.


Disadvantages of nationalized banks
1. Very customer unfriendly. (One of the SBI branch manager here in my state was trying to scare away from taking a loan citing the difficulties involved)
2. Verification process is quite cumbersome. (We may have to run around for getting some documentation straight)

Ask for information. note it down, be very well informed and then decide.

You will not go wrong.




1 comment:

Manisha Dhumal said...

I read your blog today. You provided very useful information. I am from maharashtra. heavy rainy area..is that ok if we construct house like yours[interlock bricks] . help me in this. my email.id is mdhumal2009@gmail.com

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