If you are reading this, you have probably planned to avail a home loan to purchase your dream house. You might know that with home loans, you can fund your house purchase without exhausting your savings. However, for beginners, availing a home loan could be a complicated process with lots of documentation and paperwork. There are often some technical terms in the loan process, which can confuse you. Therefore, it is better to know about them before applying for a housing loan.
Here are some housing loan terms you must know about.
- EMI
EMI stands for Equated Monthly Instalments. It is the monthly payment you make towards the loan repayment. EMI value depends upon various factors like your credit score, interest rates, tenure and home loan amount. If you fail to pay EMI, the lender can charge you a penalty and late payment fee.
- Downpayment
The lender usually sanctions only 70-90% of the property value as a home loan. The remaining 10-30% has to be paid by you upfront while availing the loan. This remaining amount is called down payment. The more value you pay as a down payment, the lesser value you will need to borrow as a loan. Paying a higher down payment can reduce your EMI value and even interest rate.
- Credit score
Your credit score is one of the vital home loan eligibility criteria. Credit score is the numerical representation of your creditworthiness and repayment capability. The higher the credit score, the better chances of loan approval. In India, credit score is measured on a scale of 300-900, 900 being the highest. Ideally, you must have a credit score of 700 and above.
- Loan to value ratio
It is the percentage of property value that the lender can sanction as a home loan. For example, if your property is worth one crore and the LTV is 70%, the maximum amount the lender can sanction as a loan is Rs 70 lakhs.
- Sanction letter
Sanction letter is a document that confirms that the loan is granted to the borrower. It contains details of the loan like loan amount, interest rate, tenure and other terms and conditions.
- Collateral
The asset against which the lender sanctions the loan is called collateral. The amount of loan sanctioned is dependent on the collateral value. The documents of the collateral remain with the lender until the time you repay the entire loan. If you default on loan repayment, the lender can auction the collateral property to recover the dues.
- Interest rate
The percentage of money that the lenders charge you to lend you a loan is called the interest rate. Your EMI is dependent on this home loan interest rate. The higher the interest rate, the higher will be the EMI. You can avail a housing loan at a floating rate of interest or a fixed rate of interest.
The process to avail a home loan becomes easier when you have a clear understanding of all its aspects and terminologies. Now that you know the meaning of these home loan terms, visit the lender’s website and apply for home loan today.