Your home is an asset that makes sure you are safe and secure. And to help most of us on our quest to buy a home, lenders offer home loan products tailored to meet our needs. That being said, all financial fields have their own jargon and home loans are no exception, and this could often confuse borrowers when they seek basic information. However, correctly understanding home loan terminology is of utmost importance if you want to make the right decision while opting for a home loan
Use this glossary of home loan terms to better understand the overall home loan process as well as any specific terms that may be unfamiliar to you.
A
Advance disbursement:
This refers to the entire disbursal before a project is completed. Advance disbursement is only done on request on the understanding that a builder will complete the project within the stipulated time frame.
Agreement
A document that legally transfers ownership of real estate from a seller to a buyer and delivered to the buyer at closing. Before making a home loan disbursement, a lender will usually require a title search or a title report to make sure the borrower legally owns the real estate that is being used to secure the loan.
Amortization
The gradual reduction in the principal amount owed on your home loan. During the earlier years of the loan, most of each payment is applied toward the interest owed. During the final years of the loan, payment amounts are applied almost exclusively to the remaining principal.
Amortization table or schedule
A timetable or schedule that gives you a breakdown of your monthly EMI payments into principal and interest. You can use this schedule to figure out the amount of principal you’ll be repaying during your home loan term.
Amortization term
The amount of time required to amortize (pay off) the home loan, expressed in months. For example, for a 15-year fixed-rate home loan, the amortization term is 180 months.
B
Balance Transfer:
A home loan balance transfer allows you to switch the outstanding loan amount to another lender who offers a lower interest rate and better terms and conditions.
Base rate:
The base rate refers to the minimum interest rate set by the lender. This is the benchmark rate below which the lender cannot offer a home loan. Each time the base rate changes, the floating rate is also changed.
Bridge loan
A type of home loan financing between the termination of one loan and the start of another loan. For example, a bridge loan might be taken out by a borrower and secured by that borrower’s present home so that the closing on a new house can take place before the present home is sold.
C
Chain of title
The history of all of the documents affecting title to a parcel of real property, starting with the earliest existing document and ending with the most recent.
Clear title
Titles that are marketable and are free of liens or disputed legal questions as to ownership of the property.
Co-borrower
An additional person who assumes equal responsibility for repayment of a home loan and is fully obligated under the terms of the loan. This person also has equal rights to the proceeds of the loan.
Collateral
An asset, such as a car or a home, used for securing the repayment of a loan. The borrower risks losing the asset if the loan is not repaid.
Credit report
A record of an individual’s debts and payment habits. It helps a lender determine whether or not a potential borrower is a good business risk.
Credit score
A three-digit number ranging from 300 to 900 that denotes your creditworthiness and your ability to repay the loan on time. In general, the higher your credit score, the more likely you are to be approved for and to pay a lower interest rate on your home loan. Call MoneyPlus to check your credit score absolutely free.
Credit Appraisal
Prior to sanctioning the loan amount, banks usually assess your ability to repay the debt on time, by taking into account factors such as your income, age, the order of assets and liabilities etc. Credit appraisal simply refers to the process that banks abide by in order to gauge your repayment capacity and make sure defaulting is not a possibility.
D
Debt-to-income ratio
The debt-to-income ratio is the percentage of your gross monthly income that goes to paying your monthly debt payments (loans, credit cards etc). The Debt-to-income ratio is one of the metrics that lenders use to measure an individual’s ability to manage monthly payments and repay debts.
Formula to calculate debt-to-income ratio: Your total monthly debt payments divided by your gross monthly income before taxes and expressed as a percentage.
Down payment
The amount of cash you pay toward the purchase of your home to make up the difference between the purchase price and your home loan. Down payments often range between 5% and 20% of the sales price depending on many factors, including your loan, your lender and your credit history.
Disbursement:
The process of releasing the loan amount from the lender to the borrower is regarded as disbursement. The loan amount is disbursed only after the lender receives all the documents and the loan is approved.
Default
This occurs in a case when the borrower fails to timely pay the EMI amount. Certain penal interest is levied by the lending institution on subsequent EMIs in case of default.
Deviation
Lenders have certain terms and conditions for extending the home loan facilities to their customers. If a customer is not able to comply the set terms and conditions of the lender than under discretionary powers Bank deviate from terms and conditions to grant the loan.
E
Eligibility
Home Loan eligibility is calculated after considering various factors including monthly income, fixed monthly obligation, current age, retirement age etc. Your home loan eligibility can also be considered an indicator of your home loan affordability. Your home loan eligibility can be further enhanced by including income of the co-applicant(s) of your Home Loan. Check your home loan eligibility
EMI
Inarguably the most talked about term within the loan scape, EMI (an acronym for Equated Monthly Instalments) refers to the monthly outlay you have to make towards repayment of your loan. EMI is pre-calculated on the basis of factors such as loan amount, tenure and rate of interest, and the borrower is intimated about the same at the time of loan disbursal.
F
Full disbursement:
When the lender disburses the entire amount of the loan in one go, it is known as full disbursement.
FOIR
The Fixed Obligations to Income Ratio (FOIR) is a metric used by banks and other financial institutions to assess an individual’s home loan eligibility FOIR is calculated by considering fixed monthly expenses and by keeping out statutory deductions, such as Provident Fund, Investment Deductions, and Professional Tax.
Fixed interest rate:
A fixed interest rate simply means that the borrower can repay the home loan at a fixed rate throughout the loan tenure. In such a situation, the monthly instalment amount remains the same for the entire loan tenure. This rate is ideal for meticulous budget planners.
Floating interest rate:
A floating interest rate fluctuates or changes along with market conditions. If one chooses a floating interest rate, he/she ends up paying a different EMI amount each month, based on the base rate.
Foreclosure letter
Foreclosure letter is a document given by the lender on request when a borrower wants to repay the full outstanding loan amount in a single payment instead of with EMIs.
G
Guarantor
A guarantor is someone who agrees to be responsible for someone else’s payment of debt if the latter makes a default on payments of loan.
J
Joint home loan:
When two people are named in a home loan, it is regarded as a joint home loan. You and your spouse could register as joint home owners and reap the benefits from tax deductions associated with home loan, if you are both listed as co-borrowers for a home loan.
L
Loan to value ratio:
Often abbreviated as LTV, the loan to value ratio simply implies that the amount of the loan is divided by the total value of property. So, if you take a home loan of 80 lakhs for a property worth 1 crore, the loan to value ratio will be 80%.
Loan agreement
Loan Agreement is a contract that documents a financial agreement between two parties, where one is the lender and the other is the borrower. This contract specifies the amount of the loan, any interest charges, the repayment plan, and payment dates.
Lien
The legal claim of a creditor on a borrower’s property, to be used as security for a debt.
LOD
List Of Documents (LOD) is a document given by the bank to the borrower at the time of loan disbursement. It consists a list of all the original documents like property agreement, NOC etc which are submitted to the bank for home loan or loan against property.
LAP
Loan Against Property (LAP) is a secured loan that is sanctioned against the asset pledged as collateral. This asset can either be an owned land, a house, or any other commercial premises. The asset remains as collateral with the lender until the entire loan against property amount is repaid.
M
Margin
It is the difference between the maximum loan amount offered by the lender and the actual market value of the property. In other words, Margin may also be understood as the own contribution payment to be made by the borrower.
N
No Dues Certificate:
legal document issued by a housing finance company or bank to a customer declaring that he/she has no outstanding dues towards the lender.
NOI
Notice of Intimation (NOI) is a part of the home loan registration process. It is submitted in order to inform the registrar office regarding the disbursement of a home loan.
NOC:
No Objection Certificate is issued by the society / builder to the borrower at the time of taking a home loan.
P
Parallel funding
Under parallel funding, the bank will disburse the loan amount in proportion to the buyer’s own contribution
Pre-approval
A lender’s conditional agreement to lend a specific amount of money to a homebuyer under a specified set of terms.
Prepayment
An amount paid to reduce the principal balance of a loan before the principal is due.
Principal balance
The unpaid portion of the loan amount. The principal balance does not include interest or any other charges.
Principal payment
Portion of your monthly payment that reduces the principal balance of a home loan. This term also refers to prepayments you make to the principal balance.
Pre-EMI
In the event of a partial disbursement of the home loan, the borrower would have to pay interest, but only on the amount that has been sanctioned by the bank. This sum is referred to as Pre-EMI and is scheduled for monthly payment, till the date of the final disbursement of the loan. Post that, normal EMI payments would commence.
Partial disbursement:
This is when the lender releases only a partial or limited portion of the loan amount to the borrower.
Pre-closure:
In case a borrower has adequate sums to close a loan before his chosen tenure he can opt for pre-closure or foreclosure. He can simply make a bulk payment to close off his home loan. Depending upon the loan amount he has repaid, he may or may not be eligible for a penalty fee for closing the loan before the stipulated tenure.
Processing fee
A Non-refundable fee charged to by lenders for processing a home loan request.
Pre-Approved property
Prior to approval, banks often verify the viability of a project or property that warrants the borrower to take out the loan in the first place. Some builders/promoters get this proactively done in order to use it as a pitch to promote the property.
However, one should check all the legal documents carefully before purchasing a property, irrespective of whether it is pre-approved or not.
R
Refinance
Paying off your existing home loan with the proceeds from a new loan, generally using the same property as collateral, in order to take advantage of lower monthly payments, lower interest rates or save on financing costs.
REPAYMENT TRACK RECORD:
The repayment track record (Ledger/ Loan Statement) can be viewed for the details of the repayment of loan towards interest, principal and outstanding principal for every month along with other details, i.e., part-payment and other charges, if any.
REPO RATE:
The interest rate that the RBI charges when commercial banks borrow money from it.
Reverse repo rate:
The interest rate that the RBI pays commercial banks when they park their excess cash with the central bank
S
Sanction letter
A sanction letter, containing details such as the home loan amount, interest rate, repayment tenure and EMIs, serve as a confirmation of the loan being granted to the borrower.
Security
The property that will be pledged as collateral for a home loan. If the borrower defaults, the lender can sell the property to recover the debt.
T
Top-up home loan:
In case you need more money exceeding your outstanding loan amount, you can opt for top-up home loan.
Title search
An examination of records used to determine the legal ownership of property and all liens and encumbrances on it. Usually performed by a title company or attorney.
TENURE:
A housing loan tenure refers to the time period that a borrower will take to repay the loan amount along with the interest. Usually, the minimum tenure for home loan is two years and it ranges up to 30 years, depending on the lender.
U
Unsecured loan
Typically used when referring to a loan that is not backed by collateral.
V
VALUATION of Property:
Property valuation is a process that determines the economic value of a real estate investment.
is probably one of the biggest loans, we as individuals take. Therefore, it is important that we measure every aspect carefully before making the final decision.
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