Buying your dream home is not just a financial decision; it’s an emotional milestone. However, navigating the home loan process can feel overwhelming due to various technical terms. Knowing these terms will help you make better decisions and avoid confusion. Here’s a detailed explanation of 15+ key home loan terms every borrower should know.
1. Principal Amount
The principal amount is the actual loan amount you borrow from a bank or financial institution. For instance, if you need ₹50 lakh to buy a home, this ₹50 lakh is your principal amount.
2. EMI (Equated Monthly Installments)
EMI is the fixed monthly payment you make to repay the loan. It includes both the principal and the interest.
- A higher loan amount or interest rate leads to higher EMIs.
- Longer tenure reduces the EMI but increases total interest paid.
3. Interest Rate
This is the cost of borrowing money from the lender. It is calculated as a percentage of the loan amount and can be of two types:
- Fixed Rate: Remains constant throughout the loan tenure.
- Floating Rate: Changes with market conditions, causing EMI fluctuations.
4. Loan Tenure
Loan tenure is the period during which you repay the loan. It usually ranges from 5 to 30 years in India.
- Shorter tenure: Higher EMI but lower total interest.
- Longer tenure: Lower EMI but higher overall interest.
5. LTV (Loan-to-Value Ratio)
LTV ratio is the percentage of the property’s value that the lender finances.
- Example: If the property costs ₹1 crore and the bank offers an 80% LTV, you can borrow ₹80 lakh, and the rest ₹20 lakh is your down payment.
6. Down Payment
The down payment is the amount you pay upfront from your own funds while purchasing the property. It typically ranges from 10% to 25% of the property value.
7. Processing Fee
Banks charge a one-time processing fee for loan application processing. It generally ranges between 0.25% and 1% of the loan amount and is non-refundable.
8. Prepayment and Foreclosure
- Prepayment: Repaying a part of the loan early to reduce interest and principal.
- Foreclosure: Paying the full loan amount before the tenure ends. Some banks may charge penalties for foreclosure.
9. Credit Score
Your credit score is a number that reflects your creditworthiness. It ranges from 300 to 900. A score above 750 helps you secure better interest rates and higher loan approval chances.
10. Margin Money
Margin money is the portion of the property cost that you fund yourself. If the lender offers 80% of the property value as a loan, you must arrange the remaining 20%.
11. Balance Transfer
A balance transfer allows you to shift your loan to another lender offering a lower interest rate. This helps in reducing your EMI or the total interest burden.
12. Stamp Duty and Registration Charges
These are government charges for registering the property in your name. While not covered by the loan, they significantly add to the total cost of purchasing a home.
13. Moratorium Period
This is the grace period during which you are not required to start repaying the loan. It is typically offered during the construction phase or shortly after loan disbursement.
14. Sanction Letter
A sanction letter is an official document from the bank stating the approved loan amount, interest rate, tenure, and other terms. It’s issued after evaluating your application.
15. Home Loan Agreement
The loan agreement is a legally binding document between you and the lender. It outlines all the terms and conditions, including repayment schedule, interest rate, penalties, and other clauses.
16. Fixed Obligations to Income Ratio (FOIR)
FOIR represents the portion of your income that goes toward fixed obligations, such as EMIs and other loans. Lenders use FOIR to assess your repayment capacity. A lower FOIR improves your chances of loan approval.
17. CIBIL Report
Your CIBIL report is a detailed record of your credit history, including past loans, repayments, and defaults. Lenders check this report before approving your loan.
18. Home Loan Insurance
Many banks offer home loan insurance to protect borrowers from financial burden in case of unforeseen events like death or disability. The premium can be included in your EMI.
19. Disbursement
Loan disbursement is the process of transferring the approved loan amount to the borrower or directly to the property seller. Disbursement may be in full or in stages, depending on the property’s construction status.
20. Legal and Technical Verification
Before approving the loan, banks conduct legal and technical verification to ensure the property has clear ownership and is free from disputes.
21. Top-Up Loan
A top-up loan is an additional loan provided over your existing home loan. It’s useful for home improvement or other financial needs.
22. Repayment Schedule
The repayment schedule is a detailed breakdown of your EMIs, including principal and interest components for the entire loan tenure.
23. Negative Amortization
If your EMI is too low to cover the interest, the unpaid interest is added to the principal, leading to negative amortization. This increases the loan amount over time.
24. Resale Property Loan
Loans for resale properties may have additional documentation requirements, such as property ownership records and chain agreements, to ensure clear ownership.
25. Builder Tie-Up Loans
Some banks have tie-ups with builders, offering pre-approved loans for their projects. These loans may come with faster processing and preferential terms.
By understanding these terms, you’ll be better equipped to evaluate loan options, negotiate with lenders, and manage your home loan efficiently. Knowledge is your best tool when making such a significant financial decision!
