PROPERTY KNOWLEDGE

Have you ever wondered if the House you staying presently or the assets you own today, which was either bought by your father, grandfather or yourself years back, what is the value of the same today and you will get the answer to the above question to a good extent.

Real Estate - Tangible Asset

Real Estate is a tangible asset class and unlike other investments like stocks, bonds and other mutual funds etc. you can feel and use it. Most of the financial products available in the market are bound by a certain amount of projected or fixed returns and they may be even 100% safe. Stock markets we all know there is volatility and you can be up or down and there is no guarantee of returns or safety of your principle neck down to zero. On the other hand, if the real estate market falls, it will fall at max not more than 20-30% in any grave eventuality and too the factors pulling it down should be grave like a Government Collapse, Bankruptcy of the City Council or poor infrastructure and a socio economic collapse. In today's date and time, there are so many buyers waiting on the fence that the moment they hear of a 20-30% discount, they want to sign up immediately. So no worries on that end at least in the Indian Economy.

Capital Gains + Lease Rent Returns

An investment in Real Estate should always be considered for more than 3 years and better to sell the property either before possession but after 3 years so that you have the right in property intact and save on Capital Gains tax and reinvest the proceeds into the next property. If one is able to do this and revolve the funds around in a strategic way then all is good, in a matter of 7 years you could at least triple your base investment that too with a SIP (Staggered Investment Plan), this is a term we use, when you are making the payments over a period of time. Sometimes, Capital Gains + Lease Rent Returns can give you a far more yield on your Invested Capital.

Portfolio Diversification

Each one of us understands that we cannot put all eggs in one basket. So advisable would be to be liquid as to what you require say in the next 1 year as your expenses, travelling, car buying, home renovation and some more and balance you stack it away in Real Estate, Fixed Income Bonds, Fixed Deposits etc. This way you are not stressed.

Inflation Hedging

The inflation hedging capability of Real Estate stems from the positive relationship between GDP growth and demand for real estate. As economies expand, the demand for real estate drives rents higher and this, in turn, translates into higher capital values. Therefore, real estate tends to maintain the purchasing power of capital, by passing some of the inflationary pressure on to tenants and by incorporating some of the inflationary pressure, in the form of capital appreciation

Exit Issues

Real Estate as a category to sell when you really want to, can be a little tiring. It all depends on the cycle of Demand and Supply, Time of the Year, Bullish or Bearish Stock Markets, Liquidity Crunch position or New Developments in the area taking being preferred. There could be factors, which could be beyond your imagination and hence it also advisable to take max bank loan permissible on the property and use a Smart Home, HSBC Mumbai offers an exciting proposition for people who want to buy property and yet stay liquid.

Buying property anywhere in the world can be a long and drawn out experience. However in India, buying property is a particularly demanding task with several possible hurdles along the way such as inexperienced brokers, title defects, complicated tenancy laws, the condition of the property itself, and financing, to name just a few. It is therefore important that the entire procedure be dealt with systematically to reduce the hassles that accompany it.

Identifying a Realtor

A realtor can assist in locating and evaluating the right property, providing useful market information and resources, and eventually guiding the buyer through the whole process until the purchase is complete. However real estate broking firms in India are often not institutionalized, and therefore it is essential that the buyer proceeds cautiously and chooses a broker who is experienced and knowledgeable about the market, transparent and informative through the entire process, and objective while providing information.

Budgeting

While determining the budget for the purchase of property, there are several expenses besides the purchase price that must also be accounted for, such as: ? Stamp duty ? Registration fees ? Legal fees ? Brokerage fees ? Society transfer charges (in buildings with societies) ? Cost of renovation/improving the property ? Cost of furnishing the property ? Future house tax/property tax payments ? Maintenance fees, whether at actual or in the form of monthly payments to a society For newly constructed properties, it is also possible that the builder/developer may not be fully transparent at the time of booking with regards to the gross pricing of the property. The gross price should typically be a sum of the base price, external development charges (EDC), infrastructure development charges (IDC), preferential location charges (PLC), car parking charges, club membership if applicable, electricity and water connection charges, maintenance charges service and any other applicable taxes, etc. While external development charges are levied by the developer on the buyer for developing infrastructure within the complex, infrastructure development charges are levied by the government on the developer and, in turn, passed by the developer on to the buyer. This charge includes development charges for water supply, sewerage, storm water drainage, roads, street lighting, community buildings, horticulture, public health, road maintenance, and street lighting maintenance. Electricity and water connection charges are levied by the developer on the buyer for availing of electricity and water connection on behalf of the buyer.

Identifying a Property

There are numerous factors a buyer might consider while purchasing property, each with its own benefits and disadvantages. Independent House vs. Apartment in a Co-operative Housing Society: Setting aside advantages related to independence and privacy, some of the most important factors to consider while making this decision in India are maintenance costs and responsibilities, amenities that may be provided by housing societies such as swimming pools, health clubs, and gardens, and arrangements for parking, security, power backup, etc. Old vs. New construction: Sale price is generally determined on the basis of built-up area i.e. the measurement of the residential unit at floor measurement, including projections and balconies, and is measured from the external perimeter of the walls, whereas the carpet area i.e. the total area of a premises measured from the internal walls, is the area that is actually usable. In new constructions, the difference between the two might be substantial, and a buyer can end up paying a hefty sum for a smaller apartment, whereas in old constructions this difference is far lower. Further, property and municipal taxes on new constructions are assessed at a higher rate and therefore the monthly outgoings would be higher. However, maintenance standards of new buildings are generally better than those of old buildings, and new buildings often provide amenities such as swimming pools, health club, garden, earthquake resistant designs, etc. which an old building might not possess. Location, Location, Location: This is an oft-repeated mantra, which in India is taking on new meaning with the construction of new infrastructure such as highways, bridges and metros which has generally resulted in appreciation of values in neighborhoods being served.

Investigate before executing sale deed:

? Title is free from defects ? There are no encumbrances on the property ? Property is not locked in litigation ? Inherited property has a probated will ? Utilities ? Property Tax ? No Objection Certificate (NOCs)

Assessment of Value

Another factor while choosing a property is whether the price is commensurate with existing market values. Information on previous transactions can be obtained from the market (brokers, residents of the neighborhood/complex, registrar's office, etc.), but the best option would be to consult a good realtor for advice on the last transacted sale price, comparable sale transactions etc. However it is pertinent to state that brokers may be motivated to inflate prices, and it is therefore not always easy to accurately determine the value of a property in India.

Legal Aspects of Purchasing Property

When a buyer has found the property that is the right fit for his needs and budget, there are several legal intricacies that must be dealt with to complete the purchase. It is highly recommended that the buyer instruct a good lawyer while purchasing property. Once the buyer has agreed upon a price with the seller, the rest of the process should be handled by his lawyers. Buying property in India involves lots of paperwork and diligence, and the lawyers should be well equipped to handle the entire process. To that end, the lawyers should ideally be those who are proficient in transactions in the region of India in which the property is located as rules, regulations and procedures can vary between states and also between districts.

Buying from a Developer

There are several factors to consider when buying property that is still under construction. Reliability of the developer is paramount, and the buyer should enquire as to his reputation and record before committing to buying any property still in development. Financial institutions and banks funding the developer can help the buyer with his enquiries and to gain a better understanding of the developer's financial status. It is important that the buyer look into aspects such as timely possession, quality of construction, compliance with the buyer's agreement (especially penalty clauses), providing the amenities mentioned, etc. It is also important for the buyer to gain first-hand knowledge and the perspective of a previous buyer who has dealt with the developer. If the buyer is convinced that the developer is reputable, a lawyer should be instructed to commence a search of necessary documentation, such as: ? An approved plan of the building along with the number of floors, and that the floor on which the apartment intended to be purchased is approved or not, as sometimes developers exceed the permissions granted to them. ? Whether the developer owns the land on which the building is located, or whether he has undertaken an agreement with a landlord. If so, the title of the land ownership, development agreement with the landowner, and power of attorney executed by the landowner in favour of the developer must be checked. ? That the land is not designated as agricultural land, else the construction will be illegal. ? The building byelaws as applicable in that area and whether the builder is not in violation of front setback, side setbacks, height, etc. ? Whether the specifications given in the "agreement to sell" or the sale brochure correspond with the plans of the construction. ? Whether urban land ceiling NOC (Non Objection Certificate), if applicable, has been obtained, and whether NOC from water, electricity and lift authorities has been obtained. As the property being purchased is as yet incomplete, there are several options a buyer can choose from as far as the remaining payment is concerned. Down Payment Plan: In a down payment plan, the buyer would be required to make a payment of 10% of the purchase price upfront with another 85% within 30 days of the booking date. The remaining 5% has to be paid at the time of possession, which could take several years. The advantage to this plan is that the buyer would almost certainly avail a discount of 10 to 12% on the Basic Sale Price. However, a down payment plan is not generally recommended as construction - and consequently possession - might be delayed, but the buyer would have already parted with the bulk of the purchase price. Construction Linked Payment Plan: In this plan, payments are made to the developer in installments over a period of time spanning the time taken for construction of the building. The buyer pays 10% at the time of booking and another 10% after 30 days from the booking date, and thereafter installments of 8 to 10% at each stage of construction. This is the most practical payment plan as the installments are linked to stages of construction, and therefore the buyer's capital is not blocked if the developer delays construction. Time Linked Payment Plan: This plan is also based on payment in installments, usually with payments being made approximately every 2 months over a period of 20 to 24 months. However, the payment schedule is decided by the builder and is structured based on time and not the stages of construction, and the buyer would have to pay the installments on schedule irrespective of whether the construction is proceeding on schedule or not. This option is not as viable as opting to pay under a construction linked payment plan and should ideally be avoided. Flexi Plan: The flexi plan includes features from both the down payment and the construction linked payment plan. Under this plan, the buyer would, as in a down payment plan, have to pay 10% at the time of booking and another 30-40% within 30 days. Thereafter the payments are structured as with the construction linked payment plan. A flexi plan can earn a buyer a discount of 5 to 6% of the purchase price.

Due Diligence

Once the property has been identified, and a price agreed with the seller, the buyer's lawyer will conduct a 'due diligence' or a search of all the documents related to the property to ensure that there are no deficiencies with the property that will hinder the proposed sale. Prior to due diligence the buyer and seller may sign a letter of intent or memorandum of understanding, accompanied by 'earnest money' or deposit. Title: Probably the first - and most important thing - the lawyer will check is the title of the seller with respect to the property. It is essential to know that if the seller does not have perfect title, he cannot transfer the same to the buyer. For example, if the seller is not listed as the owner of the property, he cannot sell it. Similarly, if the property is jointly owned by more than one person, each joint owner would be required to sign the agreement to sell and sale deed, unless any one of them is authorized to act on behalf of the others by way of power of attorney. A title search is taken at the office of the local sub-registrar. The buyer should ask for all title documents (and copies of the same) right from the first owner of the property or, in the case of property that is extremely old, title documents thirty years prior to the search. This process can take between 8 and 10 days. The lawyer should also ascertain the survey number, village and registration district of the property as these details will be required for registration. Encumbrances: The office of the local sub-registrar would also have to be searched to see if there are any encumbrances on the property, such as a mortgage, lien, or claim from a third party. Although mortgaging properties is not an exceptional practice, one needs to consider the implications of purchasing a mortgaged property very carefully. In case the seller defaults in paying his debt, the mortgagee - usually a bank - can attach the property and sell it to recover the debt, despite the fact that the mortgagor/seller no longer owns the property. Also, the mortgage deed might contain a stipulation that the property cannot be sold unless the mortgagee gives a no objection certificate and in the case of mortgaged property the buyer must insist that the seller clears the mortgage or obtains a NOC from the bank. Alternatively, the buyer may contract with the seller to make payment directly to the bank and remove the encumbrance. Property Tax: The lawyer must also check tax receipts for the past three years to determine whether the seller has paid the requisite property tax to the housing society or, in the case of independent houses, to the municipal authority. Litigation: It is also essential to ensure that the property is not the subject-matter of any litigation, as cases pending before the courts can take several years, if not decades, to be finally decided. Probated Will: In case of property that the seller has inherited, the lawyer must check the will by way of which the property was acquired. Although Indian law does not require a will to be probated (i.e, authenticated by a court), this is preferable as a probate ensures legitimacy of the will and is valid against any claims thereafter made against the seller's right to inheritance of the property. Although challenging a probated will is not unheard of, it is extremely difficult for someone to do so successfully if the will is not fraudulent. A buyer must also release an advertisement in a newspaper stating his intention to buy the property from the seller, and for our sale properties Cushman and Wakefield will assist with this. This is done so that any objections to the proposed sale are raised in advance and may be dealt with accordingly. The objections may bring to light certain hidden facts, such as an encumbrance, or title defect which might significantly impact a buyer's decision to purchase the property. In case there is a defect in the title, the entire sale can fall through if not rectified. Buyer may back out of the final sale for the following reasons: ? Defect in title ? Non-payment of property tax (if not remedied) ? Material structural defects in the property ? Zoning/ land use related issues ? Constructing unsanctioned floors ? Unsanctioned construction on agricultural/coastal land ? Unsanctioned construction plan ? Previously undisclosed encumbrances on property such as mortgages, liens, or claims ? Absence of probated will (if previously undisclosed) Note that the seller has the right to back out of the final sale if the buyer delays the process unnecessarily. Once the buyer's lawyer is satisfied that the seller's title is free from defects, he will issue a title certificate, which is a document stating that the seller has the necessary title to sell the buyer his property.

Buyers' rights:

? To examine all documents of title that the seller possesses or can produce ? To be informed of any material defect in the property of which the seller is aware ? To the execution of a proper conveyance upon payment of purchase price ? To possession of the property as per the agreement of sale Once the buyer's lawyer is satisfied that the seller's title is free from defects, he will issue a title certificate, which is a document stating that the seller has the necessary title to sell the buyer his property.

Agreement to Sell

After the buyer's lawyer has issued the title certificate, the seller's lawyers will draw up a document known as an 'agreement to sell' (in certain geographies like Mumbai, a deposit may be required from the buyer prior to the title search and agreement to sell; the buyer's lawyers will furnish the exact details). The agreement to sell will contain the terms and conditions of the sale, and while there is no standard format for the same, it usually contains the following vital information: Description/location of the property ? The purchase price for the property ? The amount of deposit payable by the buyer - usually it would be in the range of 10% to 20% of the purchase price to be paid in advance ? Date of closing - the date on which the purchase price is to be fully paid to the seller and the sale deed executed and registered by him ? Date on which the buyer will be given possession of the property The agreement to sell might also contain provisions to deal with breach by either party - e.g. forfeiture of deposit in case of buyer's default, or return of deposit along with interest in case of seller's default - an arbitration clause or a clause specifying the court which would have jurisdiction in case of a dispute, and provisions for inspection or investigation of title, such as the time in which this is to be completed. The agreement to sell must be attested by the signatures of at least two witnesses and must be registered by the seller's lawyers. It is imperative that a buyer not sign any documents unless both he and his lawyer are satisfied with its contents.

Sale Deed

When the agreement to sell is duly registered and the purchase price (or a portion thereof, if so agreed upon), the seller's lawyer will draw up a document known as a sale deed. This is the document by which the buyer will acquire ownership of and title to the property. There are certain fees that are required to be paid with respect to the sale deed. Stamp duty, a levy imposed by the government on certain instruments, is payable on the property under the Stamp Act of the state in which the property is located (see box for the applicable stamp duty in various states). The stamp duty is payable either by printing the sale deed on stamp paper of the appropriate value or by franking of the sale deed for the value. In case the buyer has paid the stamp duty and the sale falls through, he would need to apply for a refund, which could take 4 to 6 months. Like the agreement to sell, the sale deed too is required to be attested by two witnesses and registered, and the PAN cards of the buyer and the seller will be required. Registration of the sale deed is carried out by lodging the original stamped agreement with the relevant registration office. Registering the sale deed is crucial as the title to the property does not pass to the buyer unless it is duly registered in accordance with the Registration Act. Please bear in mind that stamp duty and registration fees are two entirely separate costs, both of which are to be borne by the buyer unless otherwise agreed between the buyer and the seller If the property purchased is in a housing society, the buyer would need to complete certain forms of the society once the property is registered in his name. Once the forms are submitted the society president will raise the issue in the next AGM and admit the buyer as a member. In certain cases, a NOC (no objection certificate) from the society may be required.

Q.1. What is the difference between Built-Up Area, Super Built-Up Area, and Carpet Area?

Ans. Carpet Area: This is the area of the apartment/building that does not include the area of the walls i.e. the area of the apartment that a carpet can cover. Built-Up Area: This is the area of the apartment that includes the area covered by the walls. Super Built-Up Area: This includes the built up area, along with the area under common spaces such as the lobby, lifts, stairs, etc. This term is therefore only applicable for multi-dwelling units, such as flat complexes.

Q.2. What is the difference between Agreement to sell and Sale Deed?

Ans. Agreement to sell is a legal document which is executed between the builder and the customer, after the customer has paid 20% of the agreement value of the apartment. This document will have the terms and conditions of the seller and the buyer after the purchase of the property. This is a basic document on which the bank or any financial institution will lend money to the customer. But this is not considered as the final document when it comes to the title of the property. Sale deed is the final and very important document which authenticates that the title of the property is conveyed to the buyer.

Q.3. What is e-stamping/Franking/Notarizing?

Ans. Any legal document which is not executed on a stamp paper has to be registered with the Government by paying the necessary judicial charges. This is called e-stamping/franking. Though printed on the stamp paper, some documents need to be authenticated by a legal person or an advocate who is called a notary and the process is called notarizing. Documents such Power of Attorney, Affidavit, etc. need to be notarized.

Q.4. What is meant by valuation of property?

Ans. Valuation of property simply means arriving at the actual prevailing cost of the property. It could depend upon number of parameters, location of property being the most important one. One needs to consider other parameters such as age of property, projects available, facilities offered and the sizes available in that project. The latest transaction price of a similar property needs to be considered to arrive at the closest value of the given property.

Q.5. How does property valuation help?

Ans. Typically, if a real estate agent is asked to judge the value of a piece of property, he would do so based on information of recent sales or purchases of similar properties in that area. Though this may give a fair idea of the property's market value, an official property valuation would carry more weight. For example, if you need to use a piece of property as a security against a loan, the bank's loan approval process would be faster and smoother if the property is certified by an official valuation. Many banks now insist on valuation certificates before issuing loans using properties as security. The value thus certified may also have chances of getting a higher amount of loan sanctioned. Another benefit of official valuation is that it is a useful negotiating tool when selling the property. Such certification also becomes essential in situations where the correct value of the property has a legal bearing - such as, a will statement, insurance papers, business balance sheets etc.

Q.6. Who is the appropriate authority for knowing the market value of the property?

Ans. It is ideal to get the valuation done by a certified valuer for the house as per the ongoing rates. The property valuation reports can be obtained from the architects or a certified valuation expert. The Sub-Registrar of the area in whose jurisdiction the property is located is the appropriate authority for knowing the market value of the property.

Q.7. What is meant by the market value of the property and is stamp duty payable on the market value of the property or on consideration as stated in agreement?

Ans. Market value means the price at which a property could be bought in the open market on the date of execution of such instrument. The Stamp Duty is payable on the agreement value of the property or the market value whichever is higher.

Q.8. Who is the appropriate authority for knowing the market value of the property?

Ans. The Sub-Registrar of the area, in whose jurisdiction the property is located, is the appropriate authority for knowing the market value of the property. In addition to this, financial institutions do also assess market value of the property through their own empanelled valuation agencies.

Q.9. What are the important documents one should check before buying any property?

Ans. If you want to purchase a property, you must see the approved layout plan, approved building plan, ownership documents, carryout search, etc. Consult an advocate before you purchase a property so that he can advise you.

Q.10. Upon buying a property from a builder under construction, what are the permissions and papers should check with the builder, so as to ascertain the genuinity of the builder?

Ans. When you are buying a property from a builder in a building under construction, you have to check the following: 1. Approved plan of the building along with the number of floors. 2. Ensure that the floor that you are buying is approved. 3. Check if the land on which the builder is building is his or he has authority under an agreement with a landlord. If so, check the title of the land ownership with the help of an advocate. 4. Check the building by-laws as applicable in that area and ensure that the builder is building without any violation of front setback, side setbacks, height, etc. 5. Check specifications given in the agreement to sell of the sale brochure. Is he providing the same actually on the ground or not? 6. Check the reputation of the builder. 7. Ensure that urban land ceiling NOC (if applicable) has been obtained or not. 8. Permissions from water and electricity authorities also have to be obtained. 9. Permissions from lift authorities and other Government agencies as applicable.

Q.11. How to verify the authenticity of the various documents submitted by the seller of the property, particularly with regard to the possibility that property has not been sold earlier to a third party?

Ans. Regarding authenticity of documents, again, you have to take the help of an advocate.

Q.12. What is Stamp Duty? Why should Stamp Duty be paid?

Ans. It is tax, similar to sales tax and income tax collected by the Government, and must be paid in full and on time. If there is delay in payment, it attracts penalty. A stamp duty paid instrument/ document is considered a proper and legal instrument/ document and such gets evidentiary value and is admitted as evidence in courts. Instruments /documents not properly stamped are not admitted as evidence by the court.

Q.13. I want to gift a property in a Co-Op Housing Society . What are the legal formalities?

What about stamp duty?

Ans. Gift of an immovable property is considered as a 'transfer' under the provisions of the TOP Act and you have to have the transaction registered through a Gift Deed and pay stamp duty as per provisions of the relevant State's Stamp Act depending in which state the property is situated.

Q.14. Which are the instruments that attract the payment of stamp duty?

Ans. The instruments that attract Stamp Duty on market value of the property are: 1. Agreement to Sell 2. Conveyance Deed 3. Exchange of property 4. Gift Deed 5. Partition Deed 6. Power of Attorney settlement and Deed 7. Transfer of lease

Q.15. When is the stamp duty payable?

Ans. It is payable before execution of the document or on the day of execution of document or on the next working day of executing such a document. Execution of the document means putting signature on the instrument by the person's party to the document.

Q.16. Who is liable to pay stamp duty, the buyer or seller?

Ans. The liability of paying stamp duty is that of the buyer unless there is an agreement to the contrary.

Q.17. In whose name are the stamp papers required to be purchased?

Ans. The stamp papers are required to be purchased in the name of any one of the executors to the Instrument.

Q.18. Which documents must be compulsory registered? When and where should a document be registered?

Ans. The Registration Act, 1908 came in the year 1908 and made compulsory registration of the deed. You have a property of the year 1978. Therefore, it should be registered. Since the agreement is unregistered, it is not valid and does not transfer the ownership to you. Before you make a gift deed, you need to register the sale deed in your favor as you are not the legal owner yet.

Q.19. Does a foreign citizen of non-Indian origin require permission from the Reserve Bank of India (RBI) for acquisition of immovable property?

Ans. Yes. The RBI may grant permission to a foreign citizen of non-Indian origin/foreign companies if the property is purchased for residential use and the consideration is paid by way of foreign exchange.

Q.20. Why is it considered necessary to register a property? What is the purpose of registration?

Ans. By registering the transaction of an immovable property, it becomes permanent public record. Title or interest can be acquired only if the deed is registered.

Q.21. What is Capital Gain?

Ans. Capital Gain will accrue from the date of Sale Deed or possession or whichever is earlier and if the property is sold within 3 years of the above date, the same will be treated as Short Term Capital Gain and if this period is more than 3 years from the above dates, the same will be treated as Long Term Capital Gain.

Q.22. I have a flat which I want to sell and buy a new flat bigger in area. What are my tax implications with regard to capital gains?

Ans. If you purchase a new flat within two years of the date of sale of the original flat and invest the entire amount of capital gained into the new flat, you will not have to pay any capital gains tax.

Q.23. What is the difference between GPA and POA (specific)?

Ans. General Power of Attorney (GPA) is an authorization given by the customer to a person if he is, owing to his professional commitments, unable to personally attend to the purchase, negotiations, registration and complete other formalities pertaining to the apartment he has bought. He will appoint and constitute one person known to him as agent and attorney in his name and on his behalf to do any of the following acts deeds and things; this is given in general to do all the activities on his behalf. Power of attorney given to a person only for a specific purpose, for example, possession or registration purposes is called Specific Power of Attorney.

Q.24. Is a POA revocable?

Ans. Yes, a POA can be either revocable or irrevocable, depending on what sort of a POA one has made.

Q.25. What exactly do we mean by a Free Hold Property? what are the advantages and disadvantages , if any?

Ans. A freehold property (plot or a property) is one where there is a whole and sole owner(s), ownership is full and unconditional (within the provisions of the laws of the land) and there is no lessor/lessee involved.

Q.26. How to convert a POA property into Free Hold?

Ans. POA cannot be converted into anything. Leasehold properties of DDA in Delhi can be converted to freehold, as per provisions.

Q.27. Should I take a home on rent or should I buy?

Ans. There is no harm in renting a property till you are ready with enough finances to buy. If you find a place where you want to stay and can manage to get enough formal finance, look at buying as your monthly outflow will lead to creating an asset. But make sure your EMI is not more than 35-40 per cent of your monthly salary.

Q.28. What is the difference between a builder floor apartment and a multi-storey apartment?

Ans. A single floor apartment is one where the builder buys a piece of land, often old plots which are up for redevelopment, constructs flats on each floor according to the permissible Floor Area Ratio (FAR) and building byelaws and sells them as independent units within the same building. The land belongs proportionately to all the buyers of single floors. Since there are smaller numbers of units than in a multi-story apartment, these lack economies of scale and so have fewer common facilities such as maintenance and back-ups compared to larger multi-storey apartments. But these are newer apartment units in downtown or preferred areas and come at a price lower than multi-storey units. A multi-storey remains the most preferred housing units in metros and large cities today. It is a cluster of apartments in a high-rise building developed in a plot with all amenities available within a gated community. These units can be aggregated and constructed by developers or in the cooperative mode as Cooperative Group Housing Societies (CGHS).These need good common facilities management to take care of aggregating services and providing them to individual units for a fee. This fee is levied as monthly maintenance charges. They cover water and power supply, including back-ups, lift and common area maintenance and landscaping. Many developments also provide plumbing and electrical services for a fee.

Q.29. How do you choose the right type of property?

Ans. Depending on the chosen budget, one can decide the type of property. If you are an end-user, the size of your family, along with the budget can be a determining factor while choosing the type of house you need. There is a wide range to choose from today as the market abounds in various housing formats from 1, 2, 3 and 4BHK apartments, to studios, villas and row houses, to builder floors and independent houses. Multi-storey projects and township with all amenities in one project clubhouse, swimming pool, meditation center, health clubs, departmental stores, schools, cinemas, sports facilities and banquet/party halls are what most end-users are looking at today.

Q.30. What is your recourse in case of a delayed project?

Ans. Until the draft real estate regulation bill outlines the obligations of project delivery, buyers will have to rely on their rights laid out in their booking agreements. First and foremost, buyers should scrutinize the project and the background of the developer. If possible, they must hire a real estate consultancy firm who has market expertise and is known for unbiased consulting. In addition, an investor has the right to ask for the copies of approvals of the project, if not buying during a soft launch stage. You must ask for detailed construction schedules and negotiate for penalty clause in case of delay of project. Refunds can be claimed if a project is delayed beyond the period stipulated in the Builder Buyer Agreement by filing a case in the consumer court.

Q.31. How to appeal for reduction of property tax if you are an individual in a society?

Ans. If property tax has been levied which you feel ought to be reduced, you should write to the society stating your reasons for the same. The society would take up the matter with the Municipal Authorities and have the same reduced if the same is justified.

Q.32. Whether incidental charges like brokerage, registration fees, stamp duty and other charges arising out of sale of house property deductible from profit arising on sale?

Ans. These expenses are allowable expenses from the full value of consideration of the sale of house property.

Q.33. Who can claim deduction for interest on housing loan ?

Ans. A person may claim deduction from income (under the head "house property") for interest payable in India on housing loan, if such loan is taken for acquiring, constructing, reconstructing, repairing or renovating a property. However, if the property is used for business carried on by the assessee, he may claim deduction for such interest from income under the head "business or profession". In both cases, property would include residential as well as commercial property.

Q.34. Is it necessary that the loan should be taken only from housing finance companies ?

Ans. No, it is not necessary that the loan should be taken only from housing finance companies. One may take loan from any company or person, even from family members.

Q.35. Can the loan be taken for renovation or repairs of the house ? Can interest be allowed for purchasing an open plot of land ?

Ans. Loan can be taken for renovation or repairs of the property. But if taken for purchasing an open plot of land, interest may be allowed only if construction of property is started on it, such interest to be deducted after the construction is completed. But if open plot is purchased in the name of an existing business, interest may be allowed under the head "business income" in the respective year even if construction is not commenced.

4.Home Loan Guide

One of the prerequisites of buying a new property is a home loan. The process of acquiring a home loan can be confusing and tedious. Below comprehensive guide that offers information on home loans to take the right decision.

Home Loan: New borrowers

If you have been planning to buy a home from quite some time now, this is the most appropriate time to buy one. Though the interest rates are rising, but rise may be quite steep in the near future. Thus, all you new home aspirants don't wait. In case you want to opt for a home loan to buy your dream home, the best thing to do now is to take the teaser loan being offered by some of the banks. The teaser loans offer you fixed EMI for the initial 13 to 36 months depending on bank to bank. Earlier many banks were offering teaser loans, but most of these banks have discontinued them recently. . Other than that, banks have normal home loan products � Floating home loan interest rate and Fixed home loan interest rate product. Floating home loan interest rates, as the name suggests, keep on changing as the in accordance with the change in base rates or the BPLR(whatever the case maybe). There are two types of fixed home loan interest rate products, fixed for the entire tenure or fixed for a certain period of time. In case the interest rate is fixed for the entire tenure of the loan, then the EMI of your housing loan will be fixed for the entire tenure of the loan. But in case the interest rate is fixed only for a specific tenure say 5 years, this means, the bank can change its interest rate every 5 years.

Home Loan: Existing borrowers

If you are an existing home loan borrower with a good track record, you should think about shifting to a teaser rate scheme. The time and effort you will devote on shifting your existing loan to the new teaser home loan will be worth every effort. Along with that the first thing you should do is to shift from the old BPLR system to the new base rate regime. This base rate system is not automatically applicable to the existing users and for this you will have to apply to the concerned bank. The banks will change the base rate and this system of setting up the base rate is more transparent than the system of fixing up BPLR. Thus consider converting your existing home loan to a base rate system which will be much more beneficial to you then to stay in the old BPLR system.

Home Loan Application Process

The process of taking a home loan can be daunting, especially if you have never applied for any loan earlier. And ignorance on your part can not only make it an unpleasant experience, but also prove to be costly. Here is a step by step guide to equip you with the right info, so you know what to expect. From applying for a home loan to getting it involves various stages. These are:

Step 1:

Application form

Step 2:

Personal Discussion

Step 3:

Bank's Field Investigation

Step 4:

Credit appraisal by the bank and loan sanction

Step 5:

Offer Letter

Step 6:

Submission of legal documents & legal check

Step 7:

Technical / Valuation check

Step 8:

Valuation

Step 9:

Registration of property documents

Step 10:

Signing of agreements and submitting post�dated cheques

Step 11:

Disbursement

1. Applying for a loan:

Filling up the application form is the first step. The look of an application form may differ from bank to bank, but nearly 80 per cent of the information they need is similar. Most of this is basically your personal and professional information, details of your financial assets and liabilities and the details of the property (if finalized) including the estimated cost and the means of financing the same.

Documents to submit

While submitting the application form, every bank asks for several documents. And most banks these days provide doorstep service, so that you don't have to spend time visiting their office to submit the documents. However, some banks still insist on the customer visiting their offices at least once.

Proof of income:

This will need to be backed up by proof such as copies of last three years' Income Tax returns (along with copies of Computation of Income/Annual accounts, if any), Form 16/Form 16A, last three months' salary slips, copies of the last 6 months' statements of all your active bank accounts in which your salary/business income details are reflected, etc. Other documents that you need to provide with your application form include age proof, address proof and identification proof. You may also be asked to give your employment details.

Age proof:

Copy of your school leaving certificate/Driving licence/Passport/ration card/PAN card/Election Commission's card/etc.

Address proof:

Similar documents need to be provided to prove that you are actually staying at your current address.

Identification proof:

Same as above, but with photograph. Sometimes, the same document if it contains a photograph, the current residential address and the correct age can be the proof for all 3 things.

Your employment details:

If your company is not well�known, then a short summary about the nature of the company, its business lines, its main customers, its competitors, number of offices, number of employees, turnover, profit, etc may be needed. Usually, the company profile that is available on the standard website of the company is enough.

Financial check

All the income�related documents you submit serve a specific purpose. The lending institution uses them to study your financial status. The bank statements you submit are scrutinized for:

Level of activity in the case of self�employed persons, this gives a very good clue about the extent of business activities.

Average bank balance a cursory glance at the average bank balances maintained in a savings bank account speaks volumes about the spending/saving habits of any individual.

Cheque returns a small charge debited by your bank in the statement indicates that a cheque issued by you was returned by your bank. Many such cheque returns can have a negative impact on your loan sanction.

Cheque bounces if cheques deposited by you are returned by the issuer's bank, they will be visible in your bank statement and again, banks have specific norms as to how many such returns are acceptable in a period of one year.

Regular periodic payments the existence of periodic payments to other finance companies/banks etc. indicate an existing liability and you will need to provide full details to the lender.

Your investments also come under the scanner. This helps the bank to estimate your ability to pay the down payment as well as your savings habit.

Processing Fee

Along with the application form and the credit documents, banks ask for a processing fee. This fee varies from bank to bank, but is usually around 0.25% to 0.50% of the total loan amount. For instance, if you take a loan of Rs 10 lakh, you will have to pay around Rs 2,500 to Rs 5,000 as processing fee. The agent dealing with you earns a commission from the bank, which to some extent is also affected by the amount of fees paid by you. Most banks have flexible fee structures, and it is advisable that you negotiate hard to find out the bank's minimum possible fees though it is unlikely that a bank will agree to provide a loan without any upfront fee at all. Some banks have zero upfront fee loans, but that advantage may be negated as their other charges such as "legal charges" and "stamp duty" are normally higher. This fee is collected to maintain your loan account, and includes work like sending Income Tax certificates every year, maintaining post�dated cheques, etc.

Quick tips

When applying for a loan, it will help to keep copies of your income proof handy. For self�employed persons, if the income has increased dramatically in the past year, have your explanation ready as to why you think this is a permanent increase in your income rather than just a one�time aberration which might be reversed in later years. If the bank is convinced with your explanation, then the loan eligibility can be considered in relation to the latest income rather than considering the much lower average income.

2. Personal discussion: Face to face

After you have formally and successfully completed the application process, all you have to do is wait till the home finance institution evaluates your papers. The wait normally lasts only a day or two or sometimes even less. However, some banks insist on meeting you after receiving the application form, and before the loan sanction. This is to gather more details about you that may not be mentioned in the application form and to reassure them of your repayment capacity. Again, this stage is insisted upon only in very few cases these days.

Quick tips

While going for the personal discussion, carry all the original documents pertaining to the information provided on the application form for the personal discussion. Avoid submitting any fake documents and do not lie about the financial details requested; banks process home loans only after they are convinced about your credentials.

3. Field Investigation: Checking you out

Thousands of people apply for loans every day. And however eager a bank is to complete its targets, every loan is a risk. So, it is only natural that it confirms or validates the details you provide. The bank checks all your information including your existing residential address, your place of employment, employer credentials (if you work for a small organization), residence and work telephone numbers. Representatives are sent to your workplace or residence to verify the details. Even the references you have provided in the application form are checked out. While this may sound irritating and an invasion of your privacy, banks are forced to undertake validation in the absence of any credit bureau. Once your credentials are validated, it helps establish trust between you and the bank.

Quick tips

The address and telephone number verification work is usually outsourced to small firms and the ability of the representatives is often uneven. Hence, interaction with them may not always be smooth. When the validation process starts, expect to reschedule some of your other work for being available to furnish details required.

4. Credit appraisal and loan sanction: Getting the node

This is the make�or�break stage. If the bank is not convinced about your credentials, your application may get rejected. If it is satisfied, it sanctions your loan. The bank or the home financier establishes your repayment capacity based on your income, age, qualifications, experience, employer, nature of business (if self employed), etc, and based on these, works out your maximum loan eligibility, and the final loan amount is communicated to you. The bank then issues a sanction letter. This letter may either be an unconditional letter, or may have certain terms and conditions mentioned, which you have to fulfill before the loan disbursal.

Quick tips

Final loan amount and your loan eligibility are two different things. Once you know what you are eligible to get, you can decide on the loan amount. Just because you are eligible for a huge sum does not mean you should borrow heavily. The sanction letter is an important piece of document and you should keep it safely.

Offer letter: I do...

Once the loan is sanctioned, the bank sends you an offer letter mentioning the following details:

Loan amount

Rate of Interest

Whether fixed or variable rate of interest linked to a reference rate

Tenure of the loan

Mode of repayment

If the loan is under some special scheme, then the details of the scheme

General terms and conditions of the loan

Special conditions, if any

Acceptance copy

If you agree with what is mentioned in the offer letter from the bank, you will have to sign a duplicate letter of the same for the bank's records. Earlier, banks used to charge administrative fees along with the offer letter. However, with rising competition, administrative fees have virtually disappeared from the home loan market.

Quick tips

Check if the rate of interest mentioned and the loan amount on the letter is the same that was discussed and agreed upon. Home loan rate of interests can be negotiated, use the fact to your advantage.

6. The legal angle: Property and papers

Now, the focus of the bank's activities shifts from you to the property you intend to buy. Once you select your property, you need to hand over the entire set of original documents pertaining to your property to the bank so that it can keep them as security for the loan amount given to you. These normally include: The title documents of your seller, which prove the seller\'s title including the chain of title documents if he is not the first owner. NOCs from the legal owners such as cooperative housing societies, statutory development authorities, the lessor of the land in the case of leasehold land, etc. NOCs are not required where the property is situated on freehold land and the entire land is being transferred along with the structure. These documents remain in the bank's custody until the loan is fully repaid.

Legal check Every bank conducts a legal check on your documents to validate their authenticity. Even the draft sale documents that you will be entering into with your seller will be scrutinized.

The documents are sent to a lawyer in their panel (either in�house or outsourced) for a thorough scrutiny. The lawyer's report either gives a go�ahead if documents are clear, or it may ask for a further set of documents. In the latter case, you are expected to hand over the additional documents to the bank for a clear title. So, if a bank decides to disburse your housing loan, you have every right to smile, since you can safely assume that your property documents are clear and the transaction is safe.

Quick tips

Sometimes the bank may ask you to pay for the legal verification. However, most banks cover the costs in the upfront (processing) fee that you pay. Property documentation in India is non�standard and non�transparent. Hence, it helps to buy property from a reputed developer since they know the process inside out, and keep all the documents ready. Due to the heavy transfer charges on sale of property and/or very heavy stamp duties, some people conduct sale of property by showing "lower consideration" than agreed for, with the balance being paid either on an amenities agreement or in cash. Also the concept of sale by executing "irrevocable power of attorney" has gained ground especially in the National Capital Region. All this could restrict the choice of your lenders and may therefore increase the cost of the loan, which you might want to keep in mind while finalising such properties.

7. Technical / Valuation check: Making doubly sure

Banks are extremely careful about the property they plan to finance. They send an expert to visit the premises you intend to purchase. This expert could either be a bank employee or he could belong to a firm of architects or civil engineers.

Site visit

The site visits to your property are conducted to verify the following:

In case of under construction property

Stage of construction is the same as that mentioned in the payment notice given to you by the builder.

Quality of construction

Satisfactory progress of work.

Layout of flats and area of property is within permissions granted by the governing authority.

The builder has the requisite certificates to start construction at the site.

Valuation of the property in relation to other deals in the surrounding areas.

In case of ready/resale construction

External / internal maintenance of the property.

The age of the building.

Will the building last the loan tenure? This has a direct bearing on your loan eligibility, since the loan tenure will be restricted to the maximum age of the property as decided by the bank's engineer and this will impact your loan eligibility.

Quality of construction.

Surrounding area (development).

Whether the builder has received the requisite certificates for handing over possession of the flat.

There is no existing lien or mortgage on the property.

Valuation of the property in relation to other deals in the surrounding areas.

These inspections are carried out to protect consumer interests in terms of construction quality, adherence to local laws, approved building plans, etc. A technical inspection also lets the bank understand the progress of construction so as to release the staggered disbursements.

Quick Tip

Do not circumvent or skip this stage and ensure that it is completed as early as possible. As a buyer, it gives you confidence that your property has been inspected by experts and that you are buying an asset that is legally clear and technically sound. The fee for this service, like the legal check, may either be built into your upfront fee or be charged separately by the Bank

8. Valuation: Reality check

Since housing loans are cheaper than other loans, there have been cases where individuals have shown purchase of properties from related entities at inflated prices to obtain cheap loans. Since the risk associated with diversion of funds is higher than if the loan was used for genuine purposes, banks carry out an independent valuation to find out whether the transaction is in line with the existing market price of the area. Valuation has become a key parameter in determining the loan amount that can be sanctioned by the bank. The valuation process is quite subjective and depends on the quality and ability of the person sent by the bank for valuation. Valuation of real estate as a profession is still in its infancy in India and is still non�standardized. In many cases, the valuer determines the value of the property at an amount that is lower than the documented cost of the property and this would result in the loan amount being lower, since the bank funds a certain percentage of the cost or valuation of the property, whichever is lower. This practice has led to severe consumer issues in an increasing number of cases, as the valuation is normally done only after the consumer takes a sanction (by paying a fee) and after identifying and committing to buy the property. The valuation issue rarely arises when a property is purchased through a reputed builder directly or if the property is pre approved. In both the cases, the banks would have already completed the valuation and therefore, you can safely assume that there is no difference between the documented cost of the property and the bank's valuation amount.

Quick tip

Some banks will charge a special fee to cover these costs or may ask you to pay the valuer directly, though for most banks, the upfront fee covers these fees as well. Approach banks which are willing to do the valuation even before the sanction process and before you pay any fee to the bank.

9. Registration: Sealing the deal

After the legal and technical / valuation check, the draft documents as cleared by the lawyer need to be finalized and signed and the stamping and registration of the documents need to be done. Also, if any NOCs are pending, these need to be obtained in the format approved by the bank's lawyer.

10. Signing the home loan agreement: In black & white

All borrowers need to sign the home loan agreement. You also need to submit post�dated cheques for the first 36 months (if that is the agreed mode of repayment). The original property documents have to be handed over to the bank at this stage. Some banks also create a document recording the handing over of the property documents to them as security for the due repayment of the home loan. This document is also called a memorandum of entry and attracts significant stamp duty depending on the amount of the loan in some states. The stamp duty payable on such a memorandum is naturally recovered from you. Not all banks create this memorandum and hence the stamp duty may or may not be payable, depending on the practice of the specific bank. However, even where no such memorandum of entry is created, the state government concerned may, in the future, demand a stamp duty on the loan transaction, which naturally is recoverable from you as per the home loan agreement signed by you.

11. Disbursement: The big payout

After the bank has ensured that the property is legally and technically clear, all the original documents pertaining to transfer of ownership of property in your favour have been submitted and all the necessary loan agreements have been executed, finally, it is payment time! You will now actually receive the cheque in your hand. Time to celebrate! But hold on a second. Before the big moment arrives, you need to submit documents to prove that you have paid your personal contribution towards the property, since banks normally finance only up to 85�90 per cent of the total cost of the house. In case you are expecting money from other sources to fund your own contribution, you need to provide sufficient evidence for the same. It is only after submitting this proof that the bank will release part�disbursement of the loan. The cheque will be in the name of the reseller (for resale flats), builder, society or the development authority. It is only in exceptional circumstances, that is, if you provide documents to support that you have made an excess payment from your own account that the cheque will be handed over to you directly by the bank.

Quick tips

All banks charge interest on the loan amount from the day on which the cheque has been made and not from the day on which the cheque is handed over to you/seller. So, take delivery of the cheque the same day or the very next day to avoid paying extra interest on money.

Disbursement in stages

Usually, loans are disbursed on the basis of the stage of construction of the property. So, in case of resale or ready possession properties, the disbursement is full and final. However, in case of under�construction properties, the payment is made in parts, also known as part�disbursement. Each option would have different disbursement processes.

Part disbursement:

When a loan is partly disbursed, the bank does not start EMIs immediately, since it is calculated on the total loan amount at a particular rate of interest and for a given tenure. Moreover, it normally does not start breaking up the installments into its principal and interest components until the entire loan amount is disbursed. To overcome this difficulty, banks charge simple interest on the partly disbursed loan amount. For instance, if you have a sanctioned loan of Rs10 lakh, but the property is under construction and the bank has disbursed only Rs4 lakh, you will be charged a simple interest only on the disbursed amount. This process continues until the final disbursement takes place. The simple interest paid is called Pre�EMI interest or Pre�EMI. At this stage, banks may take only around three to six post�dated cheques on account of Pre�EMI.

Quick tips

Always ensure that the amount of simple interest is available in your bank account to avoid dishonour of the cheque.

The systems of most banks do not track Pre�EMI payments as effectively as EMI payments. However, as per the loan agreement, your liability to pay Pre�EMI is absolute and without receiving any reminder from the bank. You may have to pay a delayed payment charge if your Pre�EMI is delayed. So, it is in your own interest to keep track of the number of PDCs given to the bank for Pre�EMI and replenish them, should the need arise.

Submit the demand letter from the builder as and when raised, to ensure that the balance disbursement can take place.

Collect the receipt from the builder for the part�disbursement and hand it over to the bank.

Ensure all the above are complied with till the final disbursement of the loan.

Full and final disbursement: If it is a ready�possession property, the bank disburses the entire loan amount in favour of either the reseller or the builder.

Quick tips

Take time to fill in the loan documents before you sign them. Some columns may have to be kept blank as the exact amounts may not be known, but this should be limited. The bank is supposed to return a copy of the loan documents signed by its authorised signatory but that rarely happens in practice without sustained follow�up. Keep photocopies of all documents/agreements/letters submitted to the bank to avoid any misunderstandings later.

The relationship continues...

The final disbursement does not end your relationship with the bank. In fact, it is just the beginning. And there are various issues / situations that arise in between the beginning of the relationship and its end. These include:

Post�disbursement documents

Repayment

Income tax certificate

Prepayment

Loan pre-closure/satisfaction

Post�disbursement documents

Payment receipt:

Once the bank hands over the pay order to you, you in turn are expected to hand it over to the reseller or the builder. You should get a receipt from them for the payment and hand it back to the bank, as it will become part of your mortgage documentation. Share certificates: In case your property is part of a society, you will need to get the flat transferred to your name by asking the society to issue the share certificate in your name and recording the transfer of ownership in their books. This normally happens at the first AGM/EGM after the sale transaction. This transferred share certificate also happens to be a part of the mortgage documentation and has, therefore, to be handed over to the bank after the transfer takes place.

Repayment The loan is generally repaid by equated monthly installments, using post�dated cheques. Banks usually ask for 12, 24 or 36 PDCs, after which you need to repeat the process until you have repaid the loan. Some banks may also insist on a cheque for an amount equivalent to the loan outstanding at the end of PDC period to ensure timely replenishment of PDCs for the next 12, 24 or 36 months as the case may be. In case your installments are to be deducted against your salary, you need a letter from your employer accepting this arrangement and directly remitting the amount to the bank every month. This is possible only if your organization has an arrangement with the bank for all employees. Some banks allow you to give standing instructions to the bank where you have your savings/current account to deduct money each month crediting your home loan account. Some banks allow the monthly installments to be paid by convenient ECS facility. Another possible mode of payment is by cash or demand draft (not all banks offer this). You can deposit the EMI every month at the bank's office.

Income Tax certificate

Every bank issues an income tax certificate that serves as requisite proof to let you avail of tax benefits that accrue on repayment of a home loan. This will typically contain the total amount of interest and capital repaid during the year. This is mandatory to claim the tax benefit in respect of self�occupied property. You will have to file this with your tax returns and submit this to your employer or chartered accountant to calculate your tax liability.

Prepayment

You can prepay a loan either in part or in full at any given point of time. You can also prepay it even when it is only partly disbursed. However, most banks have an upper limit on the number of times a person can prepay his loan in a year as well as on the minimum amount you can prepay each time. Until recently, banks charged a penalty for part or full prepayment. But increased competition has forced most banks to allow partial prepayment at nil charge. Most banks levy a prepayment charge if you make full repayment and ask for release of your property documents.

Loan pre-closure/satisfaction

You also have the option of completely repaying the loan at any time. Of course, each bank has its conditions for pre-closure. Also, the loan will get completely paid off on the expiry of the tenure of the loan if you have paid all your installments on time. Once you have completely repaid your loan, ensure that the entire set of original property documents is handed back to you. You should also ask the bank for a No�Objection Certificate saying the account has been cleared. As an option, the bank may issue a consent letter stating that the property is now free from mortgage. If you have guarantors, the bank will issue a separate letter for each of the guarantors stating that their liability has come to an end. Only after you receive these documents can you say that the property is now completely free of mortgage. At this stage, in some cases, you may discover that the original documents have yet not been received by the bank from the registrar. In such cases, you will need to follow up with the registrar and get the documents from them directly by showing them a copy of the bank's clearance certificate. Sometimes, (and we must stress only sometimes) the bank may misplace your original property documents leading to avoidable stress. In fact, the bank may claim that these documents were never given to them at all. Hence the importance of insisting on a proper receipt of title documents while handing them over to the bank. Remember that receipt will come in very useful when the loan is fully paid off. Also, it is extremely useful when you want to shift your loan to a new lender.

5.Home Loan FAQs

Q.1. For what purposes can I seek a first time home loan?

You can generally seek a first time home loan for buying a house or a flat, renovation, extension and repairs to your existing house. Most banks have a separate policy for those who are going for a second house. Please remember to seek specific clarifications on the above-mentioned issues from your commercial bank.

Q.2. How will your bank decides your home loan eligibility?

Your bank will assess your repayment capacity while deciding the home loan eligibility. Repayment capacity is based on your monthly disposable / surplus income, (which in turn is based on factors such as total monthly income / surplus less monthly expenses) and other factors like spouse's income, assets, liabilities, stability of income etc. The main concern of the bank is to make sure that you comfortably repay the loan on time and ensure end use. The higher the monthly disposable income, higher will be the amount you will be eligible for loan. Typically a bank assumes that about 55-60 % of your monthly disposable / surplus income is available for repayment of loan. However, some banks calculate the income available for EMI payments based on an individual’s gross income and not on his disposable income. The amount of the loan depends on the tenure of the loan and the rate of interest also as these variables determine your monthly outgo / outflow which in turn depends on your disposable income. Banks generally fix an upper age limit for home loan applicants.

Q.3. What is an EMI?

You repay the loan in Equated Monthly Installments (EMIs) comprising both principal and interest. Repayment by way of EMI starts from the month following the month in which you take full disbursement. (For understanding how EMI is calculated, please see annex).

Q.4. What documents are generally sought for a loan approval?

In addition to all legal documents relating to the house being bought, banks will also ask you to submit Identity and Residence Proof, latest salary slip ( authenticated by the employer and self attested for employees ) and Form 16 ( for business persons/ self-employed ) and last 6 months bank statements / Balance Sheet, as applicable . You also need to submit the completed application form along with your photograph. Loan applications form would give a checklist of documents to be attached with the application. Do not be in a hurry to seal the deal quickly. Please do discuss and seek more information on any waivers in terms and conditions provided by the commercial bank in this regard. For example some banks insist on submission of Life Insurance Policies of the borrower / guarantor equal to the loan amount assigned in favour of the commercial bank. There are usually amount ceilings for this condition which can also be waived by appropriate authority. Please read the fine print of the bank’s scheme carefully and seek clarifications.

Q.5. What are the different interest rate options offered by banks?

Banks generally offer either of the following loan options: Floating Rate Home Loans and Fixed Rate Home Loans. For a Fixed Rate Loan, the rate of interest is fixed either for the entire tenure of the loan or a certain part of the tenure of the loan. In case of a pure fixed loan, the EMI due to the bank remains constant. If a bank offers a Loan which is fixed only for a certain period of the tenure of the loan, please try to elicit information from the bank whether the rates may be raised after the period (reset clause). You may try to negotiate a lock-in that should include the rate that you have agreed upon initially and the period the lock-in lasts. Hence, the EMI of a fixed rate loan is known in advance. This is the cash outflow that can be planned for at the outset of the loan. If the inflation and the interest rate in the economy move up over the years, a fixed EMI is attractively stagnant and is easier to plan for. However, if you have fixed EMI, any reduction in interest rates in the market, will not benefit you.

Determinants of floating rate:

The EMI of a floating rate loan changes with changes in market interest rates. If market rates increase, your repayment increases. When rates fall, your dues also fall. The floating interest rate is made up of two parts: the index and the spread. The index is a measure of interest rates generally (based on say, government securities prices), and the spread is an extra amount that the banker adds to cover credit risk, profit mark-up etc. The amount of the spread may differ from one lender to another, but it is usually constant over the life of the loan. If the index rate moves up, so does your interest rate in most circumstances and you will have to pay a higher EMI. Conversely, if the interest rate moves down, your EMI amount should be lower. Also, sometimes banks make some adjustments so that your EMI remains constant. In such cases, when a lender increases the floating interest rate, the tenure of the loan is increased (and EMI kept constant). Some lenders also base their floating rates on their Benchmark Prime Lending Rates (BPLR). You should ask what index will be used for setting the floating rate, how it has generally fluctuated in the past, and where it is published/disclosed. However, the past fluctuation of any index is not a guarantee for its future behavior.

Flexibility in EMI:

Some banks also offer their customers flexible repayment options. Here the EMIs are unequal. In step-up loans, the EMI is low initially and increases as years roll by (balloon repayment). In step-down loans, EMI is high initially and decreases as years roll by. Step-up option is convenient for borrowers who are in the beginning of their careers. Step-down loan option is useful for borrowers who are close to their retirement years and currently make good money.

Q.6. What is monthly reducing balances method?

Borrowers benefit more from a loan that's calculated on a monthly reducing basis than on an annual basis. In case of monthly resets, interest is calculated on the outstanding principal balance for that month. The principal paid is deducted from the opening principal outstanding balance to arrive at the opening principal for the next month and interest is computed on the new, reduced principal outstanding. In case of annual resets, principal paid is adjusted only at the end of the year. Hence, you continue to pay interest on a portion of the principal that has been paid back to the lender.

Q.7. How does tenure affect cost of loan?

The longer the tenure of the loan, the lesser will be your monthly EMI outflow. Shorter tenures mean greater EMI burden, but your loan is repaid faster. If you have a short-term cash flow mismatch, your bank may increase the tenure of the loan, and your EMI burden comes down. But longer tenures mean payment of larger interest towards the loan and make it more expensive.

Q.8. What is an amortization schedule?

This is a table that gives details of the periodic principal and interest payments on a loan and the amount outstanding at any point of time. It also shows the gradual decrease of the loan balance until it reaches zero.

Q.9. What is pre-EMI interest?

Sometimes loan is disbursed in installments, depending on the stages of completion of the housing project. Pending final disbursement, you may be required to pay interest only on the portion of the loan disbursed. This interest called pre-EMI interest. Pre-EMI interest is payable every month from the date of each disbursement up to the date of commencement of EMI. However, many banks offer a special facility whereby customers can choose the installments they wish to pay for under construction properties till the time the property is ready for possession. Anything paid over and above the interest by the customer goes towards Principal repayment. The customer benefits by starting EMI payment earlier and hence repays the loan faster. Please check with your banker whether this facility is available before availing of the loan.

Q.10. What security will you have to provide?

The security for a housing loan is typically a first mortgage of the property, normally by way of deposit of title deeds. Banks also sometimes ask for other collateral security as may be necessary. Some banks insist on margin / down payment (borrowers contribution to the creation of an asset) to be maintained / made also. Collateral security assigned to your bank could be life insurance policies, the surrender value of which is set at a certain percentage to the loan amount, guarantees from solvent guarantors, pledge of shares/ securities and investments like KVP/ NSC etc. that are acceptable to your banker. Banks would also require you to ensure that the title to the property is free from any encumbrance. (i.e., there should not be any existing mortgage, loan or litigation, which is likely to affect the title to the property adversely).

Q.11. What precautions do you need to take if you are purchasing a property that is not a newly built one?

Ensure that the documents being provided to you are not colour photocopies. Check the internet for other modus operandi to fraud and ensure clear title to the asset. Seek advice only from authentic sources such as your bank. Get the no encumbrance certificate to find the true title holder and if it is mortgaged to any financier. Obtain all tax papers to ensure that all documents are up to date.

Q.12. What should be your strategy in dealing with the banks?

Give yourself comfortable time. Do not hurry your purchase or loan in any case. Shopping around for a home loan will help you to get the best financing deal. Shopping, comparing, seeking clarification and negotiating with banks may save you thousands of rupees.

a) Obtain information from several banks

Home loans are available from mainly two types of lenders--commercial banks and housing finance companies. Different lenders may quote you different rates of interest and other terms and conditions, so you should contact several lenders to make sure you’re getting the best value for money. Find out how much of a down payment you are required to pay, and find out all the costs involved in the loan (including processing fees, administrative charges and prepayment charges levied by banks). Knowing just the amount of the EMI or the interest rate is not good enough. Similarly, ask for information on loan amount, loan term, and type of loan (fixed or floating) so that you can compare the information and take an informed decision. The following is some important information that you will require.

i) Rates

Ask your lender about its current home loan interest rates and whether the rate is fixed or floating. Remember that when interest rates in the economy go up so does the floating rates and hence the monthly re-payment. If the rate quoted is a floating rate, ask how your rate and loan payment will vary, including the extent to which your loan payment will be reduced when rates go down by a certain percentage. Ask your lender to what index your floating home loan is referenced / linked and the periodicity of updation of that index. Also ask your bank whether the index is internal or external and how and where it is published. Ask about the loan’s annual percentage rates (APR). The APR takes into account not only the interest rate but also fees and certain other charges that you may be required to pay, expressed as a yearly rate. Banks are obliged to reveal the APR if requested for by the customer.

ii) Reset Clause

Check the reset clause, especially in the case of fixed interest rate loan as the rates will not be fixed throughout the tenure of the loan.

iii) Spread/Mark up

Check if the margin in the case of the floating rate is fixed or variable. The rate of interest you have to pay will vary accordingly.

iv) Fees

A home loan often requires payment of various fees, such as loan origination or processing charges, administrative charges, documentation, late payment, changing the loan tenure, switching to different loan package during the loan tenure, restructuring of loan, changing from fixed to floating interest rate loan and vice versa, legal fee, technical inspection fee, recurring annual service fee, document retrieval charges and pre-payment charges, if you want to prepay the loan. Every lender should be able to give you an estimate of its fees. Many of these fees are negotiable / can be waived also. Ask what each fee includes. Sometimes several components are lumped into one fee. Ask for an explanation of any fee you do not understand. Also, remember that most of these fees are perhaps negotiable! Do negotiate with your bank before agreeing to a particular fee. See how the all inclusive rate compares with the all inclusive rates offered by other banks. While planning your finances, don't forget to include the costs of stamp duty and registration.

v) Down Payments / Margin

Some lenders require 20/30 percent of the home’s purchase price as a down payment from you. However, many lenders also offer loans that require less than 20/30 percent down payment, sometimes as little as 5 percent .Ask about the lender’s requirements for a down payment and also negotiate with him to reduce the down payments.

b) Obtain the best deal

Once you know what each bank has to offer in terms of rates, fees and down payments, negotiate for the best deal. Ask the lender to write down all the costs associated with the loan. Then ask if the bank will waive or reduce one or more of its fees or agree to a lower rate. Do make sure that the bank is not agreeing to lower one fee while raising another or to lower the rate while raising the fees. Ask for clarification in case you do not understand any particular term. All banks are obliged to explain the most important terms and conditions of the home loan in detail. Once you are satisfied with the terms you have negotiated, please do obtain a written offer letter from the lender and keep a copy with you. Read the offer letter carefully before signing.

Q.13. Can you repay your loan ahead of schedule? Is pre-payment of loan allowed?

Yes, most banks allow you to repay the loan ahead of schedule by making lump sum payments. However, many banks charge early repayment penalties up to 2-3% of the principal amount outstanding. Prepayment penalty may vary according to the reasons and source of funds - if you obtain a loan from another bank for pre-payment the charges are usually higher than when you pay from your own sources. However, you may credit more than your EMI amount into your loan account on a periodic basis and bring down your interest burden as and when funds are available with you. Most banks do not charge a pre-payment penalty if you deposit more than your EMI payable on a periodic basis. Please check such stipulations while availing the loan.

Q.14. What are Switch over charges/ balances transfer charges?

When other banks reduce the interest rate, you may prefer to close your account with the bank with whom you are banking, to avail of the loan from the bank offering reduced rates of interest. You have to pay pre-payment charges for doing so. In order to ensure that their customers do not approach other banks for availing reduced interest rates, banks allow customers to switch over from a higher interest loan to a lower interest loan by paying a switch over fees which is lesser than the pre-payment charges. Generally switchover fee is taken as percentage of the outstanding loan amount. Keep up-dating yourself on various changes in the home loan market. Visit the branch, discuss with the officials to get the best out of any changes in the home loan scenario.

Q.15. Do you get a tax benefit on the loan?

Yes. Resident Indians are eligible for certain tax benefits on both principal and interest components of a loan under the Income Tax Act, 1961. Under the current laws, you are entitled to an income tax rebate for interest repayment up to Rs. 1,50,000 /- per annum. Moreover, you can get added tax benefits under Section 80 C on repayment of principal amount up to Rs. 1,00,000 /- per annum.

Q.16. What are the minimum standards that banks are required to follow when they sell you a home loan?

(a) At the time of sourcing the loan, banks are required to provide information about the interest rate applicable, the fees / charges and any other matter which affects your interest and the same are usually furnished in the product brochure of the banks. Complete transparency is mandatory. (b) The banks will supply you authenticated copies of all the loan documents executed by you at their cost along with a copy each of all enclosures quoted in the loan document on request. A bank cannot reject your loan application without furnishing valid reason(s) for the same.

Q.17. What do you do if you have a grievance?

If you have a complaint against only scheduled bank on any of the above grounds, you can lodge a complaint with the bank concerned in writing in a specific complaint register provided at the branches as per the recommendation of the Goiporia Committee or on a sheet of paper. Ask for a receipt of your complaint. The details of the official receiving your complaint may be specifically sought. If the bank fails to respond within 30 days, you can lodge a complaint with the Banking Ombudsman. (Please note that complaints pending in any other judicial forum will not be entertained by the Banking Ombudsman). No fee is levied by the office of the Banking Ombudsman for resolving the customer’s complaint. A unique complaint identification number will be given to you for tracking purpose. (A list of the Banking Ombudsmen along with their contact details is provided on the RBI website). Complaints are to be addressed to the Banking Ombudsman within whose jurisdiction the branch or office of the bank complained against is located. Complaints can be lodged simply by writing on a plain paper or online atwww.bankingombudsman.rbi.org.in or by sending an email to the Banking Ombudsman. Complaint forms are available at all bank branches also. Complaint can also be lodged by your authorised representative (other than a lawyer) or by a consumer association / forum acting on your behalf. If you are not happy with the decision of the Banking Ombudsman, you can appeal to the Appellate Authority in the Reserve Bank of India.

REVERSE MORTGAGE LOAN

Q.18. What is reverse mortgage loan? What is my eligibility and how I will get back the title deeds?

The scheme of reverse mortgage has been introduced recently for the benefit of senior citizens owning a house but having inadequate income to meet their needs. Some important features of reverse mortgage are:

A homeowner who is above 60 years of age is eligible for reverse mortgage loan. It allows him to turn the equity in his home into one lump sum or periodic payments mutually agreed by the borrower and the banker.

The property should be clear from encumbrances and should have clear title of the borrower.

NO REPAYMENT is required as long as the borrower lives, Borrower should pay all taxes relating to the house and maintain the property as his primary residence.

The amount of loan is based on several factors: borrower’s age, value of the property, current interest rates and the specific plan chosen. Generally speaking, the higher the age, higher the value of the home, the more money is available.

The valuation of the residential property is done at periodic intervals and it shall be clearly specified to the borrowers upfront. The banks shall have the option to revise the periodic / lump sum amount at such frequency or intervals based on revaluation of property.

Married couples will be eligible as joint borrowers for financial assistance. In such a case, the age criteria for the couple would be at the discretion of the lending institution, subject to at least one of them being above 60 years of age.

The loan shall become due and payable only when the last surviving borrower dies or would like to sell the home, or permanently moves out.

On death of the home owner, the legal heirs have the choice of keeping or selling the house. If they decide to sell the house, the proceeds of the sale would be used to repay the mortgage, with the remainder going to the heirs.

As per the scheme formulated by National Housing Bank (NHB), the maximum period of the loan period is 15 years. The residual life of the property should be at least 20 years. Where the borrower lives longer than 15 years, periodic payments will not be made by lender. However, the borrower can continue to occupy.

From FY 2008-09, the lump sum amount or periodic payments received on reverse mortgage loan will not attract income tax or capital gains tax.

Note- Reverse mortgage is a fixed interest discounted product in reverse. It does not take into account the changes in interest rates as yet.

Important –This part is fine printed to help you practice reading the fine print. The loan agreement documentation runs into nearly 50 pages and its language is complex. If you thought everyone signs the same agreements with the bank, where is the need to read? You are not taking an informed decision. If you thought somebody would have pointed this to me if there was any problem, then maybe they did but you could not read or listen to it. Think again! Borrowers' and lenders' rights may not be expressed clearly in a transparent manner in all the loan agreements. The home loan agreement may not be provided to you in advance so that this could be read and understood before you sign the agreement. Every method may be used to delay handing over a copy to the borrower in sufficient time. Some areas you may focus are a) check the “reset clause� incorporated by some banks in their home loan agreements that allows them to change the interest rate in the future, even on fixed rate loans. Banks may set their reset clauses for 3 or 2 year intervals. They say a lender cannot have an agreement that a fixed rate is set for the entire tenure of 15 to 20 years as this will cause an asset-liability mismatch. Talk to your bank. b) Please seek clarifications on the term “exceptional circumstances� (if stated in the loan agreement) under which loan rates can be unilaterally changed by your bank. c) A common person thinks that default ideally means non-payment of one or more loan installments. In some loan documentation it can include divorce and death (in individual case) and even involvement in civil litigation or criminal offence. d) Does the loan agreement say that disbursement of the loan may be made directly to the builder or developer and in the case of a ready-built property to the vendor thereof and/or in such other manner as may be decided solely by bank? It is the borrower whose original property papers are retained with the bank, so why disburse to the builder. Possession of property has been delayed in some cases when the cheque was issued in the name of the builder and the builder refused to pay delay penalty to the borrower e) Does the agreement enable assignment of your loan to a third party? You take into account reputation and credibility of the bank before entering into a loan agreement with it. Are you comfortable with third party takes over or should you also be allowed to move your home loan from one bank to another in that case? Look for ambiguous clauses and discuss with the banker. Some agreements say changes in employment etc. have to be informed well in advance without quantifying the term “well in advance�. f) In one case the loan documentation says “issuance of pre-approval letter should not be construed as a commitment by the bank to grant the housing loan and processing fees is not re-fundable even if the home loan is not processed. This is never ending it seems. The above are only indicative instances of what has been observed / reported/ indicated by various sources. However, our main objective was to get you into the habit of reading the fine print. If you have read this, you would have understood the importance of reading fine print in any document and we have achieved our objective. I only wish I could have made the print smaller as in the real cases.













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