Home Loan - Glossary

Acceleration Clause A proviso in an agreement that confers upon the owner the right, while keeping the agreement alive, to recover from the defaulting hirer the entire unpaid balance of the loan amount. In such case, on default in payment of any one installment, the full outstanding balance of the price shall immediately become due. Acceptance Letter The letter submitted by the loan applicant indicating his willingness to accept the loan as per the terms of issue mentioned in the sanction letter. This letter is normally sent out within a particular time frame varying between 1-3 months from the date of the sanction letter. Adjustable Rate Home Loan This is a loan where the rate of interest is linked to the Prime Lending Rate (PLR) and the gains/ losses arising out of fluctuation in the interest rate are borne by the borrower. The rate on loan is generally revised at regular intervals. If there is a change in RPLR (Retail Prime Lending Rate), although the EMI (Equated monthly installment) on the home loan disbursed to the customer will not change, the tenure will increase or decrease depending on whether the interest rates rose or fell from their previous level. Agreement to Sell A preliminary agreement, secured by an earnest money deposit, through which the buyer offers to purchase the property. Amortization: Amortization is the method or the calculation by way of which the entire principal / loan amount is paid through the tenure of the loan. This helps a customer to know what his outstanding principal is at any point in time. Amortization Period This refers to the period of time for which you will owe interest and principal to your lender - the bank or HFC (housing finance company). Amortization Schedule This is a schedule that details the principal and interest payments and the amount outstanding at any given point during the amortization period. Annual Rests In an annual rest the EMIs (equated monthly installments) are calculated on an annual basis. The interest is calculated on the outstanding principal at the beginning of every year. Once the interest is calculated at the rate charged to the customer for the entire year it is deducted from the EMIs received during the year. The balance EMI is taken as principal repaid during the year and this is deducted from the opening balance of principal of the current year to arrive at the opening balance of principal for the next year. Under this method, typically the component of interest in the EMI is higher for the first few years and later on the component of principal increases and the interest keeps reducing year after year. In other words, the interest in the EMI will keep reducing year after year and the principal component in the EMI keeps increasing. This is commonly known as Annual Reducing Balance of the principal amount lent to you. Application This refers to the entire process of applying for a loan starting with the submission of the application form used to apply for a loan, which contains relevant information about you to enable the HFC or bank to process your loan. Appraisal An estimate of the value of the property/ asset, made by a qualified professional called an "appraiser". A credit appraisal is carried out by your HFC or to determine your repayment capacity on the basis of which the loan amount and terms will be decided. Appraised Value An opinion of a property's fair market value, given by an appraiser, whose job it is to evaluate such things. Appreciation An increase in the value of a property due to changes in market conditions or for other reasons. Asset An immovable or movable property or anything with a rupee value that you own, which can used as a security against which credit can be offered. Balloon Mortgage Also known as Payment mortgage, this is usually a short-term fixed-rate loan, which involves small payments for a certain period of time, and one large payment for the remaining amount of the principal at a time specified in the contract. Bonafide In good faith, real, not fraudulent. Borrower One who applies for and receives a loan in the form of a mortgage, with the intention of repaying the loan in full. The borrower is also known as the mortgagor. Breach A violation of any legal obligation. Broker An Individual who arranges deals or negotiating contracts on behalf of a client. Mortgage brokers usually charge a fee to the loan applicant or receive a commission for their services from the loan provider. Property or Real Estate brokers helps clients find a house and charge a fee (usually a percentage) for their services. Bounce charges These charges are levied by the HFC (housing finance company) if your cheques get dishonoured due to some reason. ' Capital Expenditure The cost of an improvement made either to lengthen the useful life of a property or to add value to it. It's a fancy term for the money you spend for improvements (see capital improvement). Capital Improvement Any structure which is a permanent improvement to the property. Carpet area Carpet area is that covered area of all usable rooms at any floor level. This is worked out as the plinth area minus the area occupied by the walls. City survey numbers This is a number given to plots of lands falling within the purview of urban development plans of the Town Planning Authority. Chain of Title The history of all of the documents that transfer title to a piece of real estate. Clear title It is a title, which is free from any reasonable doubt and also free from all encumbrances or liens. Closing Also called settlement, this refers to the meeting between the buyer, seller and lender or their agents at which the property and funds legally change hands. Closing Costs Expenses incurred by buyers and sellers in transferring ownership of a property. These may include registration charges, the costs of obtaining title insurance, transfer fees, etc. They can often total several, or many, thousands of rupees. Close relatives As per section 6 of the Companies Act, a close relative acceptable as guarantor is any of the following: - Father, mother (including step mother), son (including step son), son's wife, daughter (including step daughter), son's son, son's wife, son's daughter, son's daughter's husband, daughter's husband, daughter's son, daughter's son's wife, daughter's daughter, daughter's daughter's husband, brother (including step brother), brother's wife, sister (including step sister), wife/husband and sister's husband. However for consideration of these relatives as guarantors for the loan they should comply with the age and other norms of the company. Co - applicant As a customer you have an option of having a co - applicant to your loan. The co - applicant cannot be a minor and most HFCs allow for only brother - brother, parent - son and husband - wife combination for a co - applicant. Collateral An asset (such as a car or a home) that can be used to guarantee the repayment of a loan. The borrower risks losing that asset pledged as collateral if the loan amount is not repaid in a timely fashion. Collection The process of forcing a borrower to pay what he owes on a loan and, if required, to proceed with foreclosure. This happens in case of the borrower not making his payments in a timely fashion. Common areas It is actually the covered area of the common spaces and areas meant for use by the occupants of the building. These areas may include staircase, lifts, lobbies, ducts for sanitation, electrical and air conditioning areas etc. This area is generally divided proportionately in relation to the size of the apartment and charged accordingly. Compound Interest Interest charged or paid on the principal and the accumulated interest, unlike Simple Interest, which is paid only the principal. Construction Loan Also known as interim loan, this provides the funds necessary to pay for the construction of buildings or homes. The lender advances funds to the builder at periodic intervals as the work progresses. Contingency A specified stipulation that must be met before a contract is legally binding. The two most common contingencies in home purchasing are that: 1. The house must pass the home inspection, and 2. The borrower must get the loan. Contract Sale (or Deed) A contract between a buyer and a seller, which conveys title after certain conditions have been met. It is a form of installment sale. Conveyance Deed A written document that transfers title to the property. Cooperative (co-op) The residents of this type of housing complex own shares in the cooperative corporation that owns the property, and each has the right to occupy a specific dwelling. They don't actually own the dwelling, only own shares in the corporation. Credit Limit The maximum amount that you can borrow. Credit Appraisal/Personal Interview An appraisal conducted by the HFC's panel of credit appraisal officers who process the loan application. They take into account factors like income of the applicants, number of dependents, monthly expenditure, repayment capacity, employment history, number of years of service left over and other such factors, which affect the credit rating of the borrower. Proof of income will also be verified for the purpose of approval of the loan. The loan officer will also request applicants to the branch for a credit interview. Credit Report A report documenting the credit history and current status of a borrower's credit standing. If there are debts you owe which you never paid, or times in which you've been delinquent in paying, these items will presumably show up on your credit report and can hurt your chances of getting approved for a loan. Default Failure to meet legal obligations in a contract, in this case, failure to make the monthly payments on a mortgage. If this happens, the borrower can end up losing the property. Delinquency Failure to make payments on time is called delinquency. This can lead to fore-closure. Depreciation A decline in the value of property or asset over time as opposed to appreciation Documentation The papers to be signed in connection with the loan at the HFC, i.e., the loan papers, is called documentation. The section on basics of housing loans deals with documentation. Down Payment Money paid to bridge the difference between the purchase price and the mortgage amount. Down payments usually are 10-20% of the sales price on conventional loans.   Earnest Money Money given by a buyer to a seller as part payment of the purchase price, in order to bind a transaction or to assure payment. Eligibility This is the loan amount that you are eligible to based on your repayment capacity. Your eligibility depends on the norms set by the HFCs. Typically, the eligibility computed would be lower of the Loan to value ratio (LTV), Installment to Income Ratio (IIR) and Fixed Obligation to Income Ratio (FOIR) as per the norms of the HFC. Equated Monthly Installment (EMI) This is the installment amount the borrower has to make towards repayment of his loan. The EMI comprises of both the principal and interest. HFCs charge an Equated Monthly Installment from the borrower that is calculated on the basis of loan amount and the interest rate charged for the same. Repayment by way of EMI generally commences from the month following the month in which one takes disbursement. It can be calculated either on the basis of annual reducing rest, monthly rest or daily rest. In the annual rest, interest is calculated on an annual basis on the outstanding at the beginning of the year. In this case EMI becomes 1/12th the Equated annual installment. In the monthly rest, principal repayments are credited at the end of every month and interest is calculated on the outstanding principal at the end of every month. In the daily reducing principal repayments are credited at the end of the day an installment is paid. Encumbrance This records details of transfer of ownership of a property in succession upto the current owner. It shows the date, the names of the parties involving the amount of consideration, the extent and schedule of the property. This certificate can be obtained from the sub registrar's office for a payment of fee from any previous year till date. This certificate is also useful in establishing the events as to how and when the present owner came into possession of the property. Encroachment An improvement that intrudes illegally on someone else's property. Equitable Mortgage In this case, the customer has to just pledge the documents with the HFC and he can get a loan against them. He is not required to get the mortgage registered. First Mortgage The mortgage, which is the primary lien against a property. Fixed rate of interest An option where the rate of interest remains fixed over the tenure of the loan after the final disbursement has been made. This is an ideal option for situations when you expect the rates of interest to go up in the future. Hence the fluctuation in the rates does not affect you adversely. In case of Home Loans where the disbursement takes place as per the stages of construction of the property, the interest rate in the market may change during this period. Irrespective of the fact that you may either be under the fixed rate or the variable rate scheme, the new rate of interest would apply to the extent of undisbursed portion of your loan amount. The rate of interest remains fixed at the final weighted average rate at which the loan is disbursed. Foreclosure Also known as a repossession of property, this is a legal process by which the lender or the seller forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage. Gross Monthly Income (GMI) The Gross Monthly Income of an individual as considered by an HFC to calculate his loan eligibility. For a salaried customer GMI would indicate the Monthly Income on his salary slip including any Fixed Income generated regularly from a fixed source. For Self-employed professionals who are practicing on their own, GMI would reflect their Gross Professional Receipts while for self-employed non-professionals; GMI stands for Net profits that they earn from their business. Guarantee A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract. The party that promises to do so is called guarantor. Hidden Charges The effective rate of interest might work out to be different from the rate announced by Housing Finance Companies. This could be due to several costs that are not apparent, up-front. Some of these are processing or administrative charges that may be payable by the loan applicant during the processing of the loan. Administrative charges levied, are generally taken as a percentage of the loan amount, subject to a maximum and minimum amount. Some HFCs also levy pre payment charges to dissuade borrowers from pre-paying their loans when interest rates are on a decline. Some HFCs follow annual rest for taking into account the reduced principal whereas other Housing Finance Companies follow the monthly rest in which case, the customer benefits. HFCs may levy a commitment charge on the un-drawn amount of the loan a few months from the date of sanction till the borrower withdraws the funds. This charge covers this cost of liquidity they have promised to maintain to lend you the funds when you desire. Finally the borrower might be asked to bear the insurance premium expenses of the property being funded. Therefore the interest charges are not the only outflow that the borrower has to shell out for a housing loan. There are other charges also which have to be taken into consideration by the borrower, which ultimately affects the effective rate of interest charged to the borrower. The borrower should do a comparative analysis of the different schemes. IIR (Income to Installment Ratio) This ratio signifies the percentage of the income that can be set aside for repayment of the loan under the assumption that 50-60% of the income is required by the person for his own sustenance. In Principal Approval A written agreement from the lender to offer a specified interest rate if the mortgage goes to closing within a set period of time, (usually 3 months) subject to the legal and technical clearances and the creation of a valid and equitable mortgage over the property. Inspection of property Inspection of property intended for purchase/construction is done at regular intervals, both before and after disbursement of the loan. Post sanction inspection of the property is done at each stage of the disbursement to ensure that the borrower invests the margin money and the progress of work is as per schedule. Insurance (Property) A form of insurance in which the insurance company protects the insured property against specified losses, such as fire, windstorm and the like. Interest The amount of money, expressed as a percentage of the principal, charged for the use of the money borrowed. Khata, Chitti, Adangal These are basic documents called by different names in different places indicating the ownership of property as entered in the register of the Government authorities.   Lease A Contract by which the owner of an asset lets it out for use to another for a specified time on payment of a specified amount called rental. Legal scrutiny report This refers to the report prepared by the by legal personnel of the HFC after they have scrutinized the legal documentation (property documents) to ensure that you are buying a property that is clear and marketable. This is one of the first criteria to take care of, so that the transaction is proper and the property can be passed onto your legal heirs. Lending Rate The rate at which the financier charges interest on the amount financed. License for construction An authorization in writing issued along with the sanctioned plan that permits the builder to construct as per the plan. Lien A lien is a claim upon a piece of property for the payment or satisfaction of a debt or obligation. A clause of Acceptance of Lien states that you have accepted to mortgage your property and can not sell it to any one else without the consent of the HFC. Loan Against Property When the borrower takes a loan against existing property, this is considered as a loan against property. In this case, the existing property is mortgaged with the lender. The rate of interest for loan against property is generally higher than the interest on home loan as the end use of the funds cannot be monitored. Late Charge This is a charge payable by the borrower as penalty for making late payments. Since this could be a hidden charge and not mentioned up front, make sure you know when you would incur such a charge. Loan Tenure The time duration for which loan has been provided. LTV (Loan to Value Ratio) This ratio denotes the percentage of value of the property that is financed by the company. This ratio usually ranges between 80-85% of the property. Margin amount The difference in the total cost of the property and the loan amount sanctioned is the margin amount. This money has to be invested by the borrower of the property prior to the release of the loan amount in case of construction of a house. In case it is for purchase of a ready house, the loan amount is released on the day of registration of the property and the margin money has to be invested by the borrower prior to the release. In case of purchase of flats also, the release will be made only on investment of the margin money by the borrower. Marketable title When the title to the property is clear and the person has the right and capacity to transfer the same then he is said to have a marketable title. Market value It is the value of the property as per the prevailing market rates. Maturity The date on which the principal balance of a loan is due and payable. Monthly Rests This is also called Monthly Reducing Balance of principal. The calculation in this method remains the same as above except that the balance is calculated on a monthly basis and the EMI is broken up every month to arrive at the opening balance of principal for the next month. Mortgage A legal contract that is registered against the title to a property in order to guarantee that a loan will be repaid. This is a form of hypothecation of the property to the HFC where, if the borrower defaults in paying the installment on the home loan and he has filed for bankruptcy, the HFC's claims will lie in precedence to other creditors' charges. Mortgage by way of Memorandum of Entry In this case, you have to sign a declaration stating that you are mortgaging the property to the HFC. This declaration is then entered into the Memorandum of Entry of Mortgage that can be enforced in case you default in the payment of installments. Mortgagee The HFC or bank that provides credit or finance against the title to the property. Mortgagor The borrower or homeowner who applies for a loan against the title to the property to guarantee that the loan will be repaid. Obligation of the borrower The borrower in terms of the agreement will be obligated to keep up the schedule of repayment, to deposit the post dated cheques periodically and to keep the property free from encumbrance. Origination Fee The fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property, usually computed as a percentage of the face value of the loan. It is also known as mortgage origination fee. Penal interest Interest charged on the installments by the lender if the installments are not received as per the repayment terms by the end of the month. Personal Guarantor Some HFCs insist that you provide for 1 or 2 Personal Guarantors. The guarantor is required to meet the norms specified by the HFC, which is similar to the norms of an applicant Plinth area Area measured externally of the whole building. This includes balconies, however this will not include common areas in apartment blocks/commercial buildings and spaces. Power of attorney It is an instrument empowering a specified person or persons to act for and in the name of the person executing it. The person for whom the act is done or who is so represented is called principal. The person who is so authorized to do or represent is called agent. It may be either notarized or registered depending on the transaction. Pre - approval In a Home Loan, you have a facility to apply for a loan before you decide on the property. The loan is sanctioned however, disbursement takes place only after the property is selected and is technically and legally cleared. Such cases are called Pre - approvals as the loan is approved before the customer selects a property. This helps you to decide on a budget to buy a property of your choice. Pre-EMI The EMI for the loan will begin after the loan has been disbursed in full. Till such time the borrower has to pay the interest for the loan. The amount of interest payable every month is called pre-EMI. Prepayment It is the amount paid towards principal ahead of the prescribed repayment schedule. The benefit of interest is given to the party in such cases as per the norms of the company. Pre-sanction inspection of property Immediately on receipt of the application of the loan application, a loan officer from the HFC will conduct an inspection of the property to ascertain the location of the property, verify the technical details of the house like structural stability etc and the stage of construction, if the loan is for construction. Property tax This is the tax levied on the property by the local authority such as Corporation, Municipality, etc to the person in whose name the property stands. Post-Dated Cheques Housing Finance Companies follow the policy of asking the borrower for 12 or 36 Post Dated Cheques which the HFC presents at the end of every month thus relieving itself of the botheration of collecting cheques at the end of every month. Principal The amount of debt, not counting interest, left on a loan. Refinance / Balance transfer If you are an existing home loan customer and you have availed of the loan at a higher ROI then you have the option to switch to a lower rate of interest. You could do this either from the same HFI or from a different HFI. Kindly go through the Switch product for more details. Obtaining a new mortgage loan on a property already owned, often to replace existing loans on the property. Registered Mortgage In this case, the borrower is required to get the mortgage in favour of the company registered by paying the registration charges. Retail Prime Lending Rate It is the rate being offered to the prime borrower (retail) by the HFC. HFC cannot lend at a rate lower than this rate. Registered Owner Name of the person in whose name the property is registered. Registration value It is the value of the property at which the property is registered. Generally the rate for the value for registration is fixed for specific areas by the authorities in many places. Rentals The repayment amounts paid in a lease contract. Repayment The payment of EMI or pre-EMI as applicable is called as repayment of the loan. In case of NRIs, this amount should come from Non-Resident (External) Account/Non-Resident (Ordinary) Account in India. Returns Yields or Profits made in a financial transaction Role of guarantor Commitment by way of agreeing to the terms and conditions of the loan and liable to the extent of the loan/liability together with the interest and other charges. Risk Chance or danger of a loss of capital and or interest in financial transaction.   Sale agreement An agreement entered into between the parties for dealing with the property which creates a right to obtain a sale deed mentioning the property. Normally it fixes a time for completion, payment of earnest money or part payment of purchase consideration. Generally this document precedes a sale deed and in such cases does not require registration and will also not confer any charge or right on the property. However in some states the sale agreement itself will be registered and will act as a sale deed. Sale Certificate Certificate issued by the dealer on the sale of a car, which is required to be submitted to the RTO for registration. Sale deed It is an instrument in writing which transfers the ownership of the property or properties in exchange for a price paid/consideration. This is a document that requires to be registered compulsorily. Sanction letter Once the loan is approved, a letter communicating the sanction terms and conditions will be issued to the borrower. Sanctioned plan A drawing containing the plans, section of elevations of areas along with detailed schedules, specifications and area statements on which the sanctioning authorities grant permission to carry out work as regulated in the byelaws. Security The asset that can be mortgaged with the HFC against which a loan is sanctioned. Typically, the security is the house for which a loan is given. At times it can also be security by way of Fixed deposits, Bonds, Shares, etc. and personal guarantees. Stamp duty It is the duty/fee payable on the different instruments/documents as per the prescribed rate. This differs from state to state. The adequacy of stamp duty should be ensured to make a document valid and enforceable. Statement of account The statement indicating the outstanding loan amount, the amount paid by the borrower, the appropriations made towards interest and principal, etc. at the end of the financial year. Submission of loan application form The loan application form asks for information of the borrower, his family, details of his income and expenditure and his financial history, cost of the property, availability of resources, details of personal finances including bank account numbers, details of property proposed to be purchased etc. Super built-up areas Plinth area + proportionate share of 'Common Areas'. Tenure The term used to represent the number of years for which the loan is given. The loan amount gets amortized over the period of the loan. Title It is the right and interest over the property evidencing the ownership. Title Deed A statement, which confirms that the current owner legally holds the title to the house. Title Search An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company Urban land ceiling and regulation The Urban Land (Ceiling & Regulation) Act 1976 for the imposition of a ceiling on vacant land in urban agglomeration, for the acquisition of such loan in excess of ceiling limit, to regulate the construction. Weighted Average Rate of Interest In case of Home Loans where the disbursement takes place as per the stages of construction of the property, the interest rate in the market may change during this period. Irrespective of the fact that you may either be under the fixed rate or the variable rate scheme, the new rate of interest would apply to the extent of undisbursed portion of your loan amount. The final rate of interest that would be applicable to your loan would be an average of the different rates at which your loan has been disbursed.