Thursday, 27 November 2014

Home Loan Jargon Explained

Here are a few technical terms that will enable a borrower to clearly understand the conditions and clauses connected with home loans:
Acceptance letter : Letter submitted by the borrower accepting the loan as per the terms mentioned in the sanction letter.
Advance EMI : Number of equated monthly installments in the form of post dated cheques, paid out in advance at the time of disbursement of loan.
Administrative fee : A onetime non-refundable fee, payable before the loan is disbursed. It typically ranges between one and two percent of the loan amount
Amortisation schedule : This gives details of the prin­cipal and interest payments and the amount outstanding at any given point during the amortization period. The period of time for which a bor­rower owes interest and prin­cipal to his lender is called the amortised period.
Annual rest : Here the EMIs are calculated on year­ly basis. The interest is cal­culated on the outstanding principal at the beginning of every year. Once the interest is calculated at the rate charged to the customer for the entire year it is deducted from the EMIs received dur­ing the year. The balance EMI is taken as principal re­paid during the year, and this is deducted from the opening balance of the principal of the current year to arrive at the opening balance of principal for the next year.
Appreciation: An in­crease in the value of a prop­erty due to changes in mar­ket conditions or for other reasons.
Asset: An immovable or movable property or any­thing with a rupee value that you own, which can be used as security against which credit can be offered.
Appraisal: A professional opinion of the current mar­ket value of a property.
Breach: Violation of any legal obligation is termed as breach.
Balloon loan : A loan that has a fixed rate of interest over a period of time. At the end of the balloon period, the borrower must refinance or pay off the remaining bal­ance.
Bounce charges : Charges levied by the housing finance company in case cheques submitted by the borrower get dishonored.
Collateral : Refers to an as­set that can be used to guar­antee the repayment of a loan. The borrower risks los­ing that asset pledged as col­lateral if he defaults on loan repayments.
Credit report : A report of an individual's credit history that is used by a lender to de­termine a loan applicant's creditworthiness.
Co-applicant : A co-appli­cant applies for the loan jointly with you. It is usually the spouse or parent, whose income can be clubbed with yours to enhance your loan eligibility.
Deed : A legal document used to transfer the owner­ship of a property.
Default : Failure to meet legal obligations in a con­tract, in this case, failure to make the monthly payments on a mortgage. If this hap­pens, the borrower can end up losing the property.
Down payment : Housing finance companies normally lend only 80-85 percent of the value of the property. The balance, known as down payment would have to be paid by the buyer, as a pay­ment before he draws the loan amount.
Eligibility : Amount that can be lent to you by the bank based on your repayment capacity. Your eligibility de­pends on the norms set by the bank and computation is based on any of the following : loan to value ratio, install­ment to income ratio or fixed obligation to income ratio.
Encumbrance certifi­cate : Contains details of transfer of ownership of a property in succession up to the current owner. It shows the date, the names of the parties involving the amount of consideration, the extent and schedule of the property. It can be procured from a sub-registrar's office for a fee.
Encroachment : An illegal intrusion onto someone else's property.
Equated monthly in­stallments (EMI) : Loan repay­ments are usually in equal monthly installments over the tenure of the loan.
Foreclosure : This is a le­gal process by which the lender or the seller forces a sale of a mortgaged property because the borrower has not met the terms of the mort­gage. This is a measure for repossession of prop­erty if the borrower is un­able to keep up his financial commitments.
Fixed rate of interest : An option where the rate of interest remains fixed over the tenure of the loan unless there are some clauses added. It is an ideal alterna­tive in situations when you expect the rates of interest to go northwards.
Guarantee : A guarantee is an assurance by someone to pay a debt contracted by another if the original party fails to pay according to a contract.
Income to installment ratio : Used to compute loan eligibility, this ratio signifies the percentage of the income that can be set aside for re­payment of the loan under the assumption that around 50 percent of the income is required by the person for his own sustenance.
Interest rate : Rate at which the lenders charge interest for the loan amount.
Insurance for property : The insurance company pro­tects the insured property against specified losses, such as fire, windstorm and floods.
IRR : Internal rate of re­turn is the rate at which the lender accounts for interest.
License for construc­tion : It is the permission in writing to construct that is issued along with the loan ap­plication.
Lien: A legal claim against a property.
Lease : Contract by which the owner of an asset lets it out for use to another for a specified time on payment of a specified amount called rental.
Loan to value ratio : The relationship between the amount of a loan and the ap­praised value of the property, expressed as a percentage of the value.
Margin money : The dif­ference in the total cost of the property and the loan amount sanctioned is termed margin amount. This money has to be invested by the bor­rower even before the loan amount is released.
Market value : Value of the property in accordance to the prevailing market rates.
Monthly rests : Here the balance amount is calculated on monthly basis. The EMI is broken up every month to arrive at the opening balance of the principal for the next month.
Mortgage: A legal document that pledges a property to the lender as security for payment of a debt.
Penal interest : Penalty in the form of interest charged on installments if it is not received as per the repay­ment terms by the end of the month.
Power of attorney : The power you can give a speci­fied person or persons to act for on your behalf. The per­son who is so represented is called principal. The person who is so authorized to do or represent is called agent.
Pre EMI : Monthly repay­ments to the bank in the form of EMI for the loan will begin only after the loan has been disbursed in full. Till such time the borrower has to pay interest for the loan amount disbursed. This amount of interest payable every month is called pre-EMI.
Prepayment: If a borrow­er has surplus funds he can pay back the loan ei­ther in parts or in full. This is called prepayment. Some banks charge a pre-payment penalty while others have a cap on the number of times that a person can prepay his loan amount during a finan­cial year.
Pre-payment penalty : This additional fee is charged by most banks in case the borrower decides to pre-pay the loan before the tenure is over.
Refinancing : The deci­sion to switch your loan from one lending institution to another is called refinanc­ing. People generally tend to switch when another lender charges a much lesser interest rate.
Registration Value : This is the value of the property at which the property is registered.
Sale deed : An agreement in writing which transfers the ownership of the proper­ty in exchange for a price paid. It is imperative that this document is registered.
Sanction letter : On ap­proval of the loan communi­cation is sent by the lender to the borrower. This letter con­veys the sanction terms and conditions.
Survey : The determina­tion of the exact boundaries and location of a property.
Tenure of loan : Number of years for which the loan is given.
Title: The right and inter­est over the property evi­dencing ownership. A ti­tle deed is a statement, which confirms that the current owner legally holds title to the property.
Valuation : Valuation is a professional assessment of the property's value, which is required by the lender.
Underwriting: The process of evaluating a loan application to determine if the loan is acceptable to the lender.

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