Housing Loan Procedure

Owning a home is an important thing in life. It is a long cherished dream for many. These days, there is a great increase in the property prices in India. And so, buying a house in a single payment is difficult for many people. Therefore, many people go for housing loan and it makes the process of buying a home easier. Many nationalized and private banks offer housing loan. There are also some housing finance companies in India which offer Housing Loan. In India, the housing loan procedure includes few steps. It may be small process for few people, if they have all the documents required in the process. For others, it will be a long process.

Housing Loan Procedure in India

Choosing a Housing Loan

While choosing the best housing loan plan, you have to study a lot and figure out which housing loan plan fits best to your needs. Figure out your financial status in the coming few years so that you have a rough idea of your resources in the coming years and choose the housing plan that suits you.

Submission Of Application Form

Once you have figured out the plan you need, you have to submit the application form to the Bank. You will also be asked to submit some relevant documents along with the application form. These documents may vary for different banks. These documents are used to make sure of your income, age, residence, employment and many more. At this stage, you have to pay processing fee for the loan to the Bank. This processing fee is non-refundable. This processing fee will be about 0.5-1% of the loan amount.

Validation of the Information:

Once you have submitted the form and the relevant documents, the bank will start to validate the information provided by you in the application form. The bank will check your residential address, your place of employment and so on. The Bank performs a number of checks to ensure that you will be able to repay the loan amount.

Issue Of Sanction Letter

After these checks, the bank issues a sanction letter. This letter contains the details such as loan amount, rate of interest, monthly reducing balance, mode of repayment and general terms and conditions of the loan. This is the approval of the money lending procedure by the bank. But, the money will be sanctioned only after the documents and the property for which the loan is being granted is thoroughly verified.

Submission Of Documents

Once you get the sanction letter, you have to leave the entire set of original documents of the property being purchased with the Bank as security for the loan amount sanctioned. The bank will have all these documents until you totally repay the loan. Once you give the documents to the Bank, the Bank will verify all the original documents.

Validation of Property

At this stage, the Bank conducts a site visit to your property to ensure that there are no violations in the construction. Once the Bank has confirmed that the property is legally and technically clear, and if they are satisfied with the property, they will disburse the loan amount.

Registration of Property and Signing of Agreements

At this stage, the registration of your property takes place. And now it is time for signing the final agreement of the home loan. After signing the agreement, you must hand over a bunch of Post dated cheques as agreed on the agreement paper.

Payment Procedure

After the bank ensures that financing the property involves no risk, they pay the amount that is agreed upon. At this stage, the money is given to the builder or the owner of the property. The money will be disbursed based on the construction stages of the property. The payment may be full or part based on the construction stage of the property. In case of resale or a completed project, the loan will be disbursed in a single installment. If the property is under construction, then the loan amount will be disbursed in installments depending upon the construction stages.

Fixed Rate Housing Loans

Fixed rate housing loans are the most traditional type of housing loan that a bank can offer. Its feature is just like its name, meaning that the rate that you are being offered is fixed.

Fixed for how long? Generally, as a rule of thumb, the longer you fix your loan, the higher interest rate you will be charged. When interest rates are low, it makes much sense to lock into that rate for a couple of years. Having a fixed rate home loan has its benefits. You do not have to worry about fluctuating interest rates. You do not have to bother about writing in to CPF to adjust your monthly payment just because the interest rate shot up.

Fixed rate is especially suitable for those who want to be sure and certain of the future. Some of the clients that I have worked with needs to have a grasp of the future so they can do the precise calculation on how much they have to fork out for a certain period. For these types of people, the financial security of having a fixed set of payment over a certain period greatly outweighs what other types of mortgages offers.

At any point in time, fixed rate home loans will have higher interest than floating rate home loans. If you are planning to stay in your house for a long period of time, a fixed rate housing loan is pretty sensible to you. Your kind of job plays an important factor in determining if a fixed rate is for you. If you work in a relatively safe job and are looking forward to a promotion every one to three years, it makes sense to go for a fixed rate housing loan as well. With the increase in your paycheck, the burden of paying off a fixed rate housing loan gets smaller each year.

A fixed rate housing loan is also suitable for a person who is going to retire soon. Unless you have a lot of cash waiting for you, retirement requires careful planning. To ensure your finances do not deviate too far from your planning, it is better to fix your rates and know the exact amount of installment to work with every month. It is no joke missing out on your installments when you are in your retirement age. You risk having the bank foreclosing on your house and even if you declare bankrupt, it is pretty useless too. A housing loan does not get wiped out when you declare as a bankrupt.

Some people do not mind paying slightly more on their monthly installment as long as they have the certainty of having a set payment. If you feel you belong to these group of people, consider a fixed rate housing loan.

Tax Benefits Associated With Housing Loans

Multiple benefits – how?

EMIs (elementary monthly installments) consists of two parts – the interest portion and principal amount. Interest paid is allowed as a tax benefit under section 24(b) (subject to restrictions), while the principle amount repaid is allowed as a deduction under section 80C.

Maximum ceiling on tax benefit

Maximum tax deduction for repayment principal component of home loan can’t exceed Rs 1,00,000 under section 80C. One should keep in mind that other investments/contributions are also allowed as a deduction under section 80C, and this limit of Rs. 1,00,000 applies to all of them put together.

Housing loan interest deduction, on the other hand, is allowed up to a maximum amount of Rs 1,50,000 under section 24(b). However, the acquisition or construction of the house property should be completed within 3 years from the end of financial year in which loan was taken; otherwise, the amount of interest benefit allowed is only up to Rs 30,000.

Furthermore, the above tax deduction limit u/s 24(b) is applicable only for self-occupied house property. In case of let-out or deemed to be let out house property, interest is deductible without any limit.

Starting date for claiming tax benefit

Some say that deduction on principal component of home loan under section 80C is allowed as soon as one starts repaying the home loan. Some say deduction is allowed only once the construction is completed. The law isn’t clear on the matter; hence the ambiguity remains.

Interest deduction on housing loans under section 24(b) is allowed only on acquisition or completion of the house property. However, interest deduction for pre-acquisition or pre-construction period is also allowed but only after acquisition or construction is complete. It is allowed in 5 equal annual installments. But even after including the above, the total deduction should not exceed Rs. 1,50,000 per annum.

Source of home loan

Unlike section 24(b), Section 80C doesn’t allow tax deduction for home loans taken from friends and relatives. For claiming tax benefit on principal component of the home loan under section 80C, you need to borrow only from the lenders specified in that section. There is no such restriction under section 24(b) of the IT Act for claiming tax benefit on interest component of the housing loan.

Purpose of housing loan – Home purchase / construction vs.

Home improvement Deduction under section 80C for principal portion of the housing loan EMI is not allowed if the home loan borrowing is for the purpose of reconstruction, renewal or repair of house property. Put simply, tax benefit under section 80C is only allowed for buying or constructing a new home. In contrast, deduction for Interest is allowed under section 24(b) even for the loan taken for the purpose of repair, renewal or reconstruction of existing house property but subject to the limit of Rs 30,000 in case of self-occupied house property. In case of let out house property, actual interest is allowed without any ceiling.

Payment Basis – Due Basis vs. Cash Basis

Tax benefit u/s 80C can be claimed only when the actual payment is made. Interest deduction u/s 24(b), on the other hand, is allowed on accrual or due basis. Put simply, unlike principal portion, interest deduction can be claimed even if not paid.

Restriction on sale of house property

The tax benefit under section 80C is allowed subject to the condition that the said house property should not be sold before a period of 5 years. If you violate this, the deduction will be discontinued and the entire tax deduction claimed in earlier years under section 80C – for repayment of principal component of the home loan – will be deemed to be your income in the year in which you sell the property. However, the same doesn’t apply on the housing loan interest deduction claimed under section 24(b).

Home loan pre-payment: Original loan vs. Subsequent loan

Tax benefit on interest component of the home loans u/s 24(b) is allowed not only for original home loan but also for subsequent loan(s) taken to refinance the first loan. In other words, if the new housing loan is taken to pay off an existing housing loan, tax benefit under section 24(b) is allowed. However, unlike section 24(b), there is no specific mention under section 80C for prepayment of existing home loan by taking a fresh home loan.

So what it means is that when you repay the balance outstanding principal component of your existing home loan by taking a second home loan, you’ll be entitled for tax deduction under section 80C but within the overall limit of Rs one lakh. Further, when you subsequently start repaying your second housing loan, you’ll be entitled for tax benefit only on the interest portion u/s 24(b) and not on the repayment of principal component u/s 80C.