Owning a house probably tops the list of priorities for every Indian. With rentals rising and Real Estate prices rationalising themselves, this is the best time to buy that dream home. Even financing your home has become easier with most of the banks and lending institutions offering home loan with attractive interest rates and conditions.

It is pertinent to mention here that you must read the loan documents and conditions carefully before you choose the loan. Familiarity with the technical jargon that home loan documents use is important. Here we are discussing top 12 terms to understand the conditions of your loan clearly and correctly.

1. EMI (Equated Monthly Instalments)

It is a fixed amount that a borrower needs to pay to the lender at pre-specified date of every month. This amount includes interest as well as principal component, the portion of which is specified in the loan agreement; however the amount remains same through the tenure over months.

2. Down Payment

According to legal guidelines, only certain percentage of the total amount for buying a house can be financed through home loan, rest (which is a small portion of 10-15%) needs to be paid by the buyer as an upfront payment known as down payment or margin.

3. Disbursement

Disbursement means release of cash towards home loan. There are three types of cash releases- full, partial and advance.

Full disbursement: When the entire amount of loan is given to the borrower at one go.

Partial disbursement: When cash towards loan is released in parts according to completion of different phases of house construction.

Advance disbursement: When on request of the borrower entire amount of loan is released before the completion of the construction.

4. Pre-EMI

When the loan amount is released against an under construction property, then EMI consists of only interest component known as Pre-EMI. Since there is no principal portion in Pre-EMI, it tends to inflate the cost of your house property.

5. Offer letter

Once lender does a background check and decides to accept your home loan application , it issues an offer letter mentioning details like loan amount, tenure, rate of interest and general terms and conditions.

6. Sanction letter

After verifying the credit history and repayment capability of the applicant, lender issues a sanction letter which mentions the amount of loan for which the applicant is eligible subject to fulfilment of certain conditions mentioned therein.

7. Pre-approved property

In some cases the builder may submit his property related documents and title deed to get his project approved by lending institutions. This step not only adds to the credibility of the project but also makes it easy to avail loan for buying a home in the approved project from the approving institution.

8. Credit Appraisal

It is an assessment of the borrower’s repayment capacity done by the lender before approving the home loan. Old credit history, present income, Income tax returns, bank statements and other personal details are used by the lender to arrive at the credit profile of the applicant and thus the eligibility and eligible amount.

9. PDC (Post Dated Cheques)

PDCs are deposited by the borrower with the lender in advance for repayment of loan. On the due date, lender presents them to collect the EMI. This is basically done to ensure a hassle free loan repayment, however it does not guarantee the payment itself. For example, the cheque could return dishonoured for lack of sufficient funds.

10. Fixed and floating rate of Interest

Fixed rate remains unchanged through the tenure of home loan whereas floating rate varies from time to time depending on changing economic scenarios and RBI’s credit policy. This means that floating rate can dip as well as rise over the loan tenure.

11. Foreclosure

Sometimes if the cash flows are healthy and enough, a borrower may decide to pay up the entire amount of loan before the tenure and close it. This step helps in saving interest but it comes at an extra cost. This is why borrower must check the terms and conditions of the loan to see if the option of foreclosure exists and the charges for the same before taking the loan.

12. Administrative Charges and processing fee

In short, administrative charges are levied for back-end processing of loan application whereas the processing fee relates to direct charges and needs to be paid along with application. Both of these expenses vary from bank to bank and are sometimes also defined as a percentage of the loan amount.

These were the 12 most used terms in a loan agreement that one must get familiar with. A home loan is not only a way to your dreams but also a financial commitment which can come in the way to your dreams if not understood correctly.

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