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Home Loan Guide

What is an EMI? How is it calculated?

EMI denotes Equated Monthly Installment. It comprises of the principal amount and payments of the interest on the outstanding amount of your home loan. Therefore, longer the loan tenure, lower will be the EMI. (Maximum period of 30 years)

The EMI of your loan depends on:
Amount of loan: The amount of loan you have borrowed from the bank.
Rate of interest: This is the interest, the bank charges on the loan.
Tenure: The time you have to repay the loan with interest.

The formula for calculating EMI is:
EMI = (P * I) * (1 + I) ^ N
[(1+I) ^ N - 1]
P = Loan amount availed from the bank
I = Interest rate charged by the bank per month
N = Number of installments

What is Fixed Rate of Interest?

A fixed rate of interest results in fixed EMIs over the entire period of the home loan. In this case, market fluctuations do not affect interest rates. Also, during the early part of the home loan, majority of EMIs will be used to service the interest and the principal is served in the later parts of the tenure.

What is Floating Rate of Interest?

As the name suggests, a Floating Rate of interest varies throughout the loan tenure depending on the prevailing conditions in the market. Home Loans under such a scheme, is charged according to the base rate of the lender. Hence, if there is a change in the base rate, the interest rate will vary accordingly.

What is down payment?

In India, banks are authorized to lend a maximum of 80% of the purchase price of a property. The borrower has to contribute the remaining 20%, which is termed as down payment. For example, for a home loan of 2cr, the borrower will have to pay 40 lacs as a down payment.

What is amortization?

Amortization happens when you pay off your home loan over time with regular, EMI. At the beginning of the loan, your interest costs are at their highest. As time goes on, more and more of each payment goes towards your principal (and you pay less in interest each month). Amortization refers to paying off your home loan over a period of time.

What is Pre-EMI?

In situations where you have availed only a part of your home loan, you would be liable to pay only the interest on the amount disbursed. Such an interest is called Pre-EMI Interest. Usually applicable in home loans granted for under-construction properties where money is disbursed as per construction-linked schedule.

Step 1 - Making an application

An enquiry/application can be directly done through a bank’s website which is the fastest and the easiest route. Another option is to visit the branch for filing an application. Most banks assign an executive to take things forward.

Step 2 - Submitting the documents

Once you have applied for a home loan, you are required to submit relevant documents for the bank to assess your eligibility. A list of such documents is mentioned below:

Common documents:

  • Application Form dully signed by all applicants
  • Pan Card, Aadhar Card
  • Proof of Residence/Office
  • Passport size photographs/ ID proof
  • Proof of Investments and other incomes, if any

For Self-Employed Persons:

  • Proof of business existence: License, if any
  • Business profile
  • Last 3 years of ITR with computation of income
  • Last 3 years CA certified/Audited Balance Sheet and Profit and Loss a/c
  • Last 1 year bank statements of Current A/c
  • Last 1 year bank statements of Savings A/c

For Employed Persons:

  • Salary slips – last 3 months
  • Form 16/16A for last 2 years
  • Bank Statement for last 6 months
  • Appointment Letter
Step 3 - Evaluation Period

Once you have applied for home loan along with submitting the relevant documents and payment of processing fees, the bank evaluates your application. Decisions regarding your eligibility and ability to pay EMIs are carefully monitored. You will be called for a personal discussion on a time and date comfortable to you. Satisfied by your application and interaction, the bank finally proceeds to confirming and validating everything stated in the application form.

Step 4 - Offer letter

The bank then prepares an offer letter which contains the following detail:

  • The amount of home loan sanctioned
  • The interest rate applicable on your home loan
  • Whether the interest rate is fixed or floating
  • Your home loan tenure
  • The mode of repayment of the home loan
  • If any special scheme applies to the home loan, its details
  • The terms and conditions associated with the home loan

If you find the offer attractive and agree with all the facts mentioned in the offer letter, you will have to provide an acceptance copy to the bank. This is generally a duplicate of the offer letter signed by you, provided to the bank for its records. If the bank charges any Administrative fee, it will have to be submitted at this stage.

Step 5 - Loan Sanction and Registration

Once the formalities are completed and the bank is satisfied with the legal, technical and financial valuation of the property, the registration process for the home loan begins. The legal documents are to be prepared on stamp papers of required denominations in a format approved by the bank's lawyer. The home loan agreement is then signed and you need to submit the post-dated cheques for the agreed term. .

Step 6 - Disbursement

After the home loan agreement the loan disbursal process begins. Depending on the home loan purpose, and the agreed type of disbursal (lump sum or in stages), banks disburse the home loan amount.

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