The approval of a Home Loan brings a lot of joy to the family. Naturally, everyone would like to own a house. On receipt of the sanction letter, you have to accept the terms and conditions of the sanction. The execution of the Home Loan agreement is the next step. Banks have a set of documents for the borrowers to sign. It is difficult to read and understand every clause of the Home Loan agreement. We shall concentrate on seven essential provisions that the borrower should know in any case.
- Security cover
- Utilization of payments
- Assignment of the loan to the third party
- Prepayment clause
- Notifying the lender clause
- Definition of default
- Conditions for amendment
Retention of Security Cover
The loan should have sufficient cover for the entire tenure. Usually, real estate is an appreciating asset. The banks maintain a Loan to Value (LTV) ratio of up to 80% at the time of the approval of the loan. Over a period, the value of the asset appreciates while the loan amount reduces due to repayment. It ensures that the security is sufficient. However, there can be a fall in the market prices of the property. There are also chances of the destruction of the property. Under such circumstances, the value of the property can become less than the loan value. The Home Loan agreement has a protection clause whereby the lender has the right to call upon the borrower to provide additional security to meet the shortfall. You should be aware of this security cover clause.
Utilization of Payments
In the ordinary course, you will be repaying the EMI (Equated Monthly Instalment). The EMI comprises of interest as well as the principal component. The banks expect you to pay the installments on time. In case there is a delay, the banks have the right to charge penal interest. There can be other debits to the loan account such as processing or transaction fees. You have to pay these amounts when the bank debits them. The Home Loan agreement has a clause that empowers the banks to appropriate your EMI towards satisfaction of these charges first before applying the same towards the repayment of the loan.
Assignment of Home Loan to Third Parties
The Housing Loan agreement is a long-term contract extending to even thirty years. In this age of merger and acquisition, there is no guarantee that the lending institution will remain in its original form throughout its life. There can be a merger necessitating a change in the name of the entity. Such circumstances result in the transfer of all assets and liabilities of the lender to the new entity. It can also happen that the borrower could default on the repayment of the loan. Such a situation can result in the lender offloading the loan to a third party entity. It is commonly known as securitization of debt. The Home Loan agreement has a clause that the lender has the right to transfer your liability to a third party without seeking your approval.
A borrower has the right to pay any amount more than the regular EMI towards the repayment of the Home Loan. In the ordinary course, the banks adjust this excess repayment towards the outstanding principal amount. You have a right to make a complete or partial prepayment. The prepayment clause stipulates how you can make the advance payment. It also clarifies the charges that you can incur during prepayment.
We have seen that the Home Loan agreement is a long-term contract. The borrowers can also undergo various changes in their constitutions from the time when they Apply for a Home Loan such as change of employment/business/income levels. The borrower can also change the resident status from that of a resident to a non-resident Indian. Under the notification clause, the borrower must inform the lender about any changes to the constitution that can affect the performance of the loan.
What constitutes a default? The default is when the customer fails to meet their repayment obligations as laid down in the terms and conditions of the sanction. The default definition clause lists out the circumstances under which a default can occur and its financial implications.
The lenders have the right to amend any clause of the Home Loan agreement at any time. The amendment clause specifies the rights of the lender to make such amendments. It also lists out the obligations of the borrower under such circumstances.
These are seven essential clauses of any Home Loan agreement that every Hoe Loan borrower must read and understand before signing up.
To apply online for Credit Cards, Secured Loans and Unsecured Loans, visit www.mymoneymantra.com, the leading online lending marketplace that offers financial products from 60+ Banks and NBFCs. We have served 2 million+ happy customers since 1989.
Talk to our Loan Specialists toll-free at 1800 103 4004 to know more about our products and offers.