The cost of the property you are planning to buy has a direct impact on your home loan eligibility. Read on to find out how.
The bank which finances your house purchase naturally wants you to put in a contribution towards the cost of the house so that you have a stake in its continued maintenance.
This also ensures that if the value of the house goes down in future, the bank’s outstanding loan amount is lower than the market value of the property. Hence, if a house costs Rs 5 lakh, the bank may require you to fund at least Rs 50,000 to Rs 75,000 from your own sources, while the remaining Rs 4,25,000 – Rs 4,50,000 is provided as home loan subject to your eligibility. The amount you are expected to put in is called margin money or down payment.
Even if your income is enough to justify a higher loan, the bank will give a maximum loan based on its margin requirements. For instance, if your income justifies a loan amount of Rs 6 lakh, and you are buying a house that costs Rs 5 lakh, the bank may restrict the loan to between Rs 4.25 and Rs 4.50 lakh, depending on its down payment policy.
The down payment can also vary depending on the age of the property. If the property is older, the down payment requirement may be higher.
Age of the building: Most banks have a cap on the maximum age of the building at the end of the loan tenure. This would normally be 50 years. So, if you are buying a property on resale and the current age of the building is 38 years, the probability of getting a tenure higher than 12 years is very low, despite the fact that you may otherwise be eligible for a 20-year loan. This reduction of tenure would reduce the loan eligibility.
Unaccounted component: In some real estate transactions, a portion of the cost is not accounted for in any of the documents related to the purchase. Thankfully, this practice is on the decline, especially where the property is bought from reputed builders. No bank takes this unaccounted amount in calculating the cost of the property while determining the loan amount eligibility.
Amenities agreement: Some home buyers enter into a lower agreement value for minimising the payment of stamp duty that is applicable on transfer of property. They sign an amenities agreement or a furnishing agreement to account for the balance purchase price. However, such transactions have a direct bearing on the loan amount that a bank will be willing to provide. Most banks calculate the cost of the property after restricting the value of such an amenities agreement to 20% of the original agreement value of the property. However, if the amenities agreement is also stamped and registered, most banks will take into account the full amount of the amenities agreement. Amenities agreements are normally not taken into account at all if the property is purchased on resale.
Power of Attorney: In some northern states like the National Capital Region of New Delhi, many property transactions are done on the basis of a power of attorney. The seller of the property gives the buyer the possession of the property and the power to deal with the property as he (the buyer) may deem fit. This power of attorney would also give the power to the buyer to further provide such power of attorneys to other people (for other buyers in the future). Most banks do not encourage such transactions, since the ownership is itself suspect in such a transaction. Such transactions are normally entered into to save on charges payable to the development authorities as well as stamp duty and registration charges. Home loans to buy such properties may be available from a restricted list of home loan lenders, who may also lend at higher interest rates.