Loans can be of two different types: secured and unsecured. Secured loans are secured by collateral. Unsecured loans, on the other hand, are sanctioned based on the credit profile of the borrower. Since secured loans are backed by collateral, the risk involved for a lender in lending money to the borrower is lesser as compared to unsecured loans. Therefore, lenders charge a lower interest rate on secured loans.
Loans against property are a type of secured loan. A property owner pledges a property they own – residential, commercial, or a piece of land – as collateral to avail of this type of loan. These loans offer several benefits. For instance, in addition to the lower interest rates, these loans come with a long repayment tenor, which helps ease the burden of loan repayment. They are one of the few loan options that give borrowers access to sizeable loan sanctions.
If you are planning to avail yourself of a loan against property, we recommend the use of a loan against property EMI calculator. The loan against property EMI calculator is an easy-to-use online tool that allows borrowers to figure out the right combination of loan tenor and principal for them, based on the EMIs they can comfortably repay. Further, all borrowers must familiarize themselves with certain terms that they will come across frequently when applying for a loan against property. Here, we discuss such terms.
Loan Against Property: Frequently Used Terms and Technologies
1. Mortgage Loan
A mortgage loan is a type of loan offered against a property. Further, in the case of these loans, the LTV ratio is decided based on the current market value of the property. Both home loans and loans against property are a type of mortgage loan.
2. LTV Ratio
LTV ratio refers to the ‘Loan-to-Value Ratio’. It is the percentage of a property’s total value that can be sanctioned as a loan. Under loans against property, borrowers can expect to typically get up to 75% of a property’s market value as a loan. This percentage may vary from lender to lender.
3. FOIR
FOIR refers to the ‘Fixed Obligation to Income Ratio’. FOIR tells lenders what percentage of a borrower’s total income is going towards the repayment of the loan money. Lenders check this ratio to ascertain a borrower’s repayment capacity. Borrowers are advised to maintain a low FOIR to enhance their loan against property eligibility.
4. Collateral or Security
The property against which the loan has been taken or the property that has been hypothecated is known as collateral or security.
5. Property Title
Property title refers to the name that appears on all the property papers. In other words, the owner of the property that is pledged as collateral has the property title. If there is more than one property title, one can avail of a loan against the property only if all the property owners permit to avail of a loan against the property.
6. Credit Appraisal
Credit appraisal refers to the process of verifying a property loan applicant’s repayment capacity. During the credit appraisal process, lenders check a borrower’s debt-to-income ratio, job and income stability, etc.
7. Offer Letter or Sanction Letter
A loan offer letter is a letter that serves as proof that the lender is interested in sanctioning a loan to the borrower. The loan offer letter contains details, such as the interest rate at which the lender wants to offer the loan to the borrower, the proposed loan amount and loan tenor, interest rate type, etc.
8. ESCROW Account
In the case of a financial transaction between a lender and a borrower, the sanctioned loan amount is held by a third party in an ESCROW account.
9. Amortization Schedule
The amortization schedule details the EMI payment schedule for a loan. By looking at this schedule, borrowers can know exactly how much loan have they repaid and what amount is still left to be repaid. Over and above this, they can also know what percentage of the loan principal and interest has already been repaid and what remains to be paid.
10. Balance Transfer
Balance transfer refers to the process of transferring one’s remaining property loan amount from the current lender to another offering better loan terms and conditions. Generally, borrowers opt for a balance transfer when another lender is offering a lower loan against property interest rates or when borrowers wish to avail themselves of a top-up loan. However, borrowers can also opt for a property loan balance transfer simply to benefit from better service. A loan against property balance transfer attracts a fee and therefore, borrowers must avail of these loans after proper deliberation and planning.
11. Pre-Approved Loan
Credit users who have an impeccable credit repayment record and borrowers who have availed of a loan in the past and have repaid it without missing any EMI payments ever, can usually get pre-approved for a loan. In the case of pre-approved loans, borrowers have a higher negotiating power and are, therefore, able to request lenders for better loan terms and conditions.
12. Insurance
If your credit score is low or if, for some reason, your lender thinks you cannot be trusted with timely repayment of loan money, they may ask you to buy insurance.
13. CERSAI Charges
CERSAI refers to the Central Registry of Securitization Asset Reconstruction and Security Interest of India. CERSAI charges are a government-mandated fee that loan borrowers have to pay.
14. Processing Fees
If you are applying for a loan against property, know that your lender may apply processing fees. The processing fee is a one-time, non-refundable fee. If you do not want to pay off the loan processing fee, talk to your lender. They might waive it off or reduce it. The chances of this happening are especially high during the festive season.
These are some of the terms that you will come across often when availing yourself of a loan against property. Having an understanding of these terms will make it possible for you to navigate the loan against property process in a simple and hassle-free manner. Loans against property are a safe way to borrow money. However, since these loans involve collateral, one must avail of these loans only when they are entirely convinced of their repayment capacity. Further, borrowers must check their loan against property eligibility to enhance their chances of loan approval. They can also use the loan against property EMI calculator to help them make the right decisions regarding their property loan.
