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A Comprehensive Home Loan Guide For First Time Home Buyers In India.
Once your application for a home loan is approved by the bank following verification of documents, you need to execute a home loan agreement with the lender. The home loan agreement, a legal document, clearly specifies the terms and conditions for advancing money for house construction and mortgaging the home in favour of the lender. As a borrower, you need to have clear idea of some of the important clauses included in the mortgage agreement prior to putting your signature on the dotted line. Most home buyers consider signing an agreement as just a formality. It is not true. It is a key legal document and it specifies the rights as well as liabilities of the borrower. Some clauses in the home loan agreement can hurt home buyers in a big way. The important clauses in a loan agreement that you must definitely go through and understand clearly are as follows:
This is a very dangerous clause and it often works completely against your interests as the borrower. This is because the bank often retains the power to change the agreement if you happen to face any kind of difficulty in repaying the loan and release the mortgage on the property. You must make sure that your written consent is sought for altering any of the terms or conditions of the mortgage agreement you have entered into with the lender.
The provisions in the fluctuating interest rates clause empower the lender to change the payable interest rate based on a hike or reductions in the base rate that is applicable. Banks raise the interest rate when there is an increase in the market rate. When the interest rate keeps fluctuating, fixed rate loans often get converted to floating or variable rate loans. It is, therefore, important that you carefully read through the loan agreement to ensure that the terms related to the interest rate that have been negotiated are captured and incorporated in the agreement.
The provisions of this clause could work against the trust placed by the borrower on the lender. This is because as a borrower you agreed to deal with the bank that has provided the home loan but you may end up dealing or communicating with other parties. Many banks, non-banking financial companies, and home loan finance companies include this clause in the loan agreement which gives them the authority to share your details, even post-dated cheques, with a third party, without providing prior information to you, for the purpose of recovery in the event of a default in payment from your side. Many borrowers may not even be aware of this. You get annoyed when debt collection agents call you to collect the defaulted EMIs.
This clause empowers the lending bank to demand for more security if the property prices happen to fall. This demand is put forward by the lender irrespective of whether you have been very loyal with respect to your EMI payments or not. The bank demands a security cover that is higher in value than the home loan given to you. If you fail to provide the security cover as demanded, then you may be deemed to be a defaulter by the bank. In this clause, the banks normally mention that they are entitled to declare the amount outstanding under the loan (inclusive of the principal, interest, expenses, and charges) and it is immediately payable in the event of depreciation in the value of the security or the property itself.
It is in this clause that the conditions under which you could be considered to be a defaulter are specified. The implications of becoming a defaulter will also be clearly spelt out.
As far as a lay person is concerned, default often means not paying an EMI on time during the tenure of the home loan. However, the banks and other housing finance companies define default in a different manner. Some home loan finance providers define default in such a way that in the event of the death of the borrower or the borrower becoming a divorcee the loan gets extended to include more than one person.
Default might also mean a situation wherein a borrower or one of the borrowers gets involved in any kind of criminal offence or civil litigation. Therefore, it is very important that you clarify with the lender as to what they really mean by the term default.
The home loan agreement drafted by most banks and home loan financiers is likely to have this clause. It may have loopholes that allow the lender to increase the fixed interest rate if certain exceptional circumstances prevail. It is not easy to define the exceptional circumstances in a clear manner. However, if you scrutinise the agreement properly, you will be able to avoid ending up with a semi-fixed rate loan after starting off as a fixed rate loan.
The sanctioned home loan amount may not always be disbursed to you directly. Banks disburse home loans as per the provisions in the disbursement clause. If the clause says that it will be directly disbursed to the housing provider, then the payment will be made to the builder directly. In the case of balance transfer, the amount will be transferred to the other bank directly by your bank.
The payments being made by you in the beginning would be adjusted or offset against other dues, if any, that are outstanding as on that specific date.
You are obliged to inform the lender any change in your employment, business, profession, address, income levels, and residential status.
A mortgage agreement is not just a formality. Experts are of the opinion that you should never make haste in signing the agreement. In order to bag a good deal, you must, at the outset, negotiate all of the terms and conditions that form part of the home loan agreement, including the amount being sanctioned and the applicable interest rate.
What can you do if you feel that a clause in the home loan agreement is not appropriate? CEO of Muthoot Homefin India Ltd. opines that clauses in a mortgage agreement have legal implications and that they need to be clearly understood and complied with for the smooth execution of the agreement. It is, therefore, highly recommended that you go through your home loan agreement thoroughly. If you determine that some of the clauses are either not clear or inappropriate, you should get the same clarified by the lender prior to signing the agreement. Alternatively, you can seek a legal professional’s help who would represent you during the negotiation with the lender.
Home Loan Prepayment & conclusion
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