Housing Loan

GIVEN THE BOOM IN REAL ESTATE in India, housing/home loan has become the most popular form of loan for the middle-class buyer. But before a common man decides to choose from the various home loans available in the market, he should know a few things. Here are some basic guideline: 

The “Home Loan” concept
A home loan is basically a monetary assistance offered by a bank or other financial institution to fulfill your need of buying a residence. In this transaction, the purchased home itself stands as ‘security’, until you pay back the entire loan amount with interest. 

The basic requirements
Banks and other financial institutions have various rules concerning this factor. These rules may differ from institution to institution. However, the very basic requirements are as follows:-

  • Have a fixed, dependable source of income (employed/self-employed)
  • An acceptable financial record extending to at least six months of active banking
  • The age limit of 21-60 years of age if employed, or 21-65 years, if self-employed
  • The budget for your home

The first step before embarking on a home-loan application is to decide on your budget. A standard home loan will cover up to 85 per cent of your requirement (the overall cost of the property). You will need to raise a minimum of 15 per cent and also separately, take into account stamp duty, registration charges, brokerage etc. 

Eligibility factor
This step is crucial in deciding the loan amount for which you are eligible. The eligibility criterion is calculated based on your total income and overall liabilities (other financial commitments such as car loan, etc). In case, your spouse also has an active income he/she can be included in the proceeding as a joint applicant- this increases your eligibility for a higher loan amount. Usually, your EMI (Equated Monthly Installment) for the loan can be up to 40 per cent of your monthly income.  

Calculating interest rates and fees
An ‘interest rate’ is additional payment that a bank/financial institution charges over the granted loan. These rates vary from institution to institution and through certain periods of time through the year, when special promotional offers and discounts are in place.

As a thoughtful consumer, consult various banks/financial institutions, research through media like newspapers- television and the internet before zeroing in on a provider with the interest rate that’s just right for you. Beware of such banking terminology as ‘fixed rate’, ‘floating rate’ and ‘reducing balance’.

Discuss these factors thoroughly before deciding on an option that suits you best. Also, banks charge separate charges such as processing fee, commitment fee. These must be ascertained by you and used as a factor when deciding upon a bank/financial company for the loan.   

Documents needed
You will need papers like:

  • Photo identity proof
  • Passport-size photographs
  • Copy or your PAN Card
  • Address proof
  • Proof of your age
  • Last six months bank statements,
  • Copy of the Property Title Deed,
  • From 16 for the last three years (for salaried persons),
  • Last six months’ salary slips (for salaried persons),
  • Copy of OT Returns of last three years (for business men/self employed people),
  • Copy of audited balance Sheet and P&L statements of last three years (for business men/self-employed people),

Decoding ‘pre-payment’ option
Pre-payment is an option afforded by your loan provided wherein, after a specific number of EMI payments, you can clear the entire pending amount thereby enforcing an early closure of the loan. Through this method you can save a lot of money towards the interest payments. Always keep this option as an important prerequisite when choosing a bank for your home loan.

Tax benefits
This is actually one of the best things about taking a home loan- the tax benefits. You will be eligible to claim both the interest and principal components of your repayment during the year.

Important points to remember

  • Try keeping the repayment period as low as possible. More EMIs equals to more interest paid.
  • Judge the reputation of the home loan provided. Bad service quality could also mean that the loan may cost you more and you might not get the proper customer support.
  • Always remember to avail of the applicable income tax benefits.
  • Ask as many questions as possible. Question and seek advice from friends who have taken similar home loans.
  • Some banks/financial institutions offer incentives or other freebies with their loan package. Check them out.

Simple checklist

What’s the interest rate

  • Basis of EMI calculation- daily, monthly or annual
  • Reputation and quality of service
  • Other applicable fees- what are they
  • Is pre-payment option available? Is there a penalty involved?

What to do if you can’t pay your home loan EMI?
Here’s how the bank will react to the situation and how you can negotiate to resolve it.

Buying a house is the most expensive purchase you are likely to make, so you may need help in funding it in the form of a loan. What if you take a home loan, but after some time, find yourself unable to pay the EMIs? There could be several reasons for this, from losing your job to depleting your savings for a medical exigency. Will the bank seize your property if you miss 2-3 mortgage payments? No, not immediately, but if you continue to default for six months, the bank will take over your house.

Lenders are willing to negotiate

Attaching a property is the last thing a lender wants to do. Though banks have the power to enforce the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (SARFAESI) to recover non-performing assets without the intervention of a court of law, this is the last step they prefer to take.

A bank usually lets one mortgage payment default slip by, but for the next one, it will mail you a reminder to inform you that your payments are late. After three defaults, the bank will send a demand notice, asking you to pay your dues as soon as possible. “If the borrower doesn’t respond to any of the mails, the bank sends a legal notice through its legal department,” says VN Kulkarni, chief counsellor at Abhay Credit Counselling Centre, which is sponsored by the Bank of India. A bank waits for three months before declaring an asset a non-performing one. “After the end of this period, the bank can officially term the home loan an NPA and start the process of recovering the property through the SARFAESI Act,” says Kulkarni.

Even after invoking the Act, the bank gives the borrower a 2-month notice period to repay the dues. “Finally, five months after the first default, the bank sends a notice, stating that it has valued the property for a certain sum and that it will auction the house on a particular date. This is usually set for a month from the date that the bank mails you the auction notice,” adds Kulkarni.

Says Pankaaj Maalde, head, financial planning, Apnapaisa.com: “Banks and financial institutions are more interested in recovering the money than in starting legal proceedings as the procedure of attaching and auctioning a house is lengthy and takes time. So, they will pursue the matter for at least six months before taking legal action.” The last stage is usually when a borrower gets a notice from the Debt Recovery Tribunal (for loan amounts of more than 10 lakh). It is compulsory for you to attend the hearing that is set by the tribunal, where you can reach an agreement with the bank.

If you are serious about paying your dues and have a good repayment track record, the bank will be willing to offer a leeway. The first step that the bank takes is to understand the reason for the default since a home loan is a secured one, with the bank having more control over the asset. “If a bank is satisfied that the problem is genuine and that the borrower will start paying the EMI soon it will be willing to wait for some more time. However, banks take such decisions on a case-to-case basis,” says Maalde.

Adds Rajiv Raj, director of CreditVidya: “Most lenders take a practical view of the situation and understand how critical the house is for the individual. So they will closely interact with the borrower to understand the reason for the financial hardship.” In fact, a bank will allow you to reclaim your property even after it has seized it, though this has to be done before the auction takes place. Says Kulkarni: “Even if the auction date has been announced, the borrower can come in at any stage and pay the dues to save his property. However, if the bank has incurred any charges for announcing the auction, the borrower will have to pay these.”

What are your options?

If you’ve lost your job, but are confident of getting a new one within six months, you can ask the bank to offer you a moratorium for this period. However, if your finances are strained due to some other reason, such as the EMI going up because of a hike in interest rates or increase in personal expenses, ask the bank to restructure your loan. To either reduce the EMI or keep it at the same level despite a higher interest rate, you could increase the loan tenure.

If you have taken an insurance product, which also provides a cover for loss of job, the insurance company will take care of the EMIs for three months from the date that you lost your job. For instance, ICICI Lombard’s Secure Mind Health plan provides a cover for nine major medical illnesses and procedures, death and permanent total disability due to accident and loss of job. Under the plan, the insurer will pay three EMIs on any loan that you have taken if you lose your job. The hitch is that the job loss should be due to retrenchment, layoff or health reasons, and not because you were fired. Also, though you can take a cover equivalent to your outstanding loan amount, the policy tenure is only five years.

The main reason you need to start paying the EMI again, other than avoiding possession of your home by the bank, is to ensure that your credit score is not adversely affected. About 30% of your credit score is based on repayment history and a significant part of this usually depends on how regularly you repay your home loan, if you have taken one. Even one or two missed payments can negatively impact your credit score, and a continuous default will dent it severely, making it difficult to get loans or credit cards in the future. Since this is a dire circumstance, you could dip into your savings and retirement kitty and redeem your investments to pay the EMIs.

However, if it seems that the situation may not improve even after six months, a better idea may be to sell the property. You can talk to the bank about this and use the sale proceeds to prepay the loan. However, ensure that while the sale negotiations are on, you continue paying the EMIs. This will prove to the bank that you aren’t taking it for a ride and will ensure that your credit score doesn’t dip.

Steps to take if you miss the EMIs
Call your lender and find out the options available to you. If the default is due to a hike in interest rates, ask the bank to reschedule the loan—increase the tenure to keep the EMI at the same level or reduce it. You can ask the bank to restructure your loan payment by taking into consideration the future income or by offering your savings as collateral. Make a file that includes all your monthly mortgage payments. This will convince the bank that you have been a good customer who has been forced to default due to circumstances beyond your control.

Rights of the Borrowers under

The SARFAESI Act being made with the sole intention of speedy recovery of the debts to the Banks and Financial Institutions there are few provisions giving a right to the borrowers to submit their version.

Important Definitions
“Borrower” means any person who has been granted financial assistance by any bank or financial institution or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any bank or financial institution and includes a person who becomes borrower of a securitization company or reconstruction company consequent upon acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance:

“Secured Creditor” means any bank or financial institution or any consortium or group of banks or financial institutions and includes.

(i) debenture trustee appointed be any bank or financial institution; or
(ii) securitization company or reconstruction company; or
(iii) any other trustee holding securities on behalf of a bank or financial institution; in which favor security interest is created for due repayment by any borrower of any financial assistance;

“Non-Performing Asset” means an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or under guidelines relating to assets classification issued by the Reserve Bank;

“Secured Asset” means the property on which security interest is created;

“Security Agreement” means an agreement, instrument or any other document or arrangement under which security interest is created in favor of the secured creditor including the creation of mortgage by deposit of title deeds with the secured creditor.

The Borrower always face lot of problems when he takes loan from any Bank, or financial institution. If any disputes arises between borrower and Bank or financial institution the borrower approaches a professional asking for legal advice, the professional may not be in a position to give clear suggestion to the borrower.

It is very clear that the borrower may not be in a position to get any relief from the Debt Recovery Tribunal under section 17 i.e. Right to appeal under the SARFAESI Act, 2002 when there is no ground. Professionals may usually put some grounds and file an appeal on the request made by the borrower. If Appeal filed by the borrower under section 17 and without even listing to the reply or the version of the Bank, the Debt Recover, Tribunal used to grant an interim-stay subject to few conditions like depositing some ‘nominal amount’.

The usual grounds of an appeal under section 17 of the Act can be as follows:

1. If there is error by Bank in calculating the outstanding due and the Bank has also not provided the statement of accounts from time to time despite a written request.
2. The Bank has no right to proceed against the ‘Secured Asset’ as the borrower is not a ‘willful defaulter’.
3. The Bank has not appraised the borrower while classifying the account as ‘Non-performing Asset’. Had the Bank informed the borrower about classification, the borrower should have taken appropriate steps.
4. The Bank has promised to regularize the account upon the payment of some substantial amount and even after the payment; the Bank has not regularized the Account and as such the account can not be treated as ‘Non-performing Assets’.
5. If the Borrower has not received any notice under section 13(2) of the Act buy the Bank and the borrower has come to know about the Bank’s action only when few officials of the Bank inspected the property and wanted the borrower to vacate it.
6. The Auction process is unfair and illegal.
7. The Bank has not responded to the objections raised by the borrower under Section 13(3-A) of the Act.
8. The Bank has failed to proceed against the borrower and instead harassing the guarantor.
9. If the Bank illegally proceed against the property of the guarantor without proceeding against the borrower first.
10. If there was no ‘valid mortgage’ with the Bank at all.  
11. The Bank is preparing to sell the valuable property of the borrower/guarantor at pittance and the Bank is colluding with the bidders.  

No purpose will be served by filing an appeal mechanically unless the intention of the borrower is bonafide and unless there is arguable case against the Bank. The borrower may be genuine in his grievance against the Bank and he may simply want to fight for his rights against the Bank.

It is an allegation that the Debt Recovery Tribunals do favor the Banks and do not even listen to the borrowers even when there is a good case for the borrowers.

Sometimes the borrowers/guarantors and public get troubled with this recovery system. It is true that every borrowers has to pay money to the Bank or financial institution which is taken as a loan but under a recovery proceeding against the borrower there is a law and if the borrower raises a considerable legal point the same is to be considered.

Section 13(2)
Where any borrower who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any installment thereof, and his account in respect of such debt is classified by the secured creditors as non-performing asset, then, the secured creditors may require the borrower by notice in writing to discharge in full his liabilities to the secured creditors within sixty days from the date of notice failing which the secured creditors shall be entitled to exercise all or any of the rights under sub-section (4). The Madras High Court in W.P. No. 6710 of 2011 reported in CDJ 2011 MHC 4916, it was held that notice under Section 13(2) is issued giving sixty days time to the borrower for repayment of the debt or in installment thereof. The said notice is not appealable under Section 17 of the Act, as that section provides an appeal only against the measures taken under Section 13(4) of the Act.

Under Sec. 17 any person (including borrower), aggrieved by any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor or his authorized officer under this Chapter, may prefer an appeal to the Debts Recovery tribunal having jurisdiction in the matter within forty-five days from the date on which such measure had been taken.

In one another case Mardia Chemicals Ltd., and others v. Union of India and others, wherein the Supreme Court held as follows:

It must be consider as to what forums or remedies are available to the borrower to ventilate his grievance. The Supreme Court in Mardia Chemicals Ltd., very clearly stated that before proceeding to take measures under Section 13(4) of the Act the borrower should be apprised of the reasons for not accepting their objections or points raised in their reply to the notice served upon them under Section 13(2) of the Act.

The observation made by the Supreme Court with respect to the reply has to be considered in the light of the challenge made by the borrower against taking drastic measures under Section 13(4) without an opportunity to submit their version. Therefore, the Supreme Court very categorically stated that before proceeding to take measures, the reply notice must be served. Parliament by prescribing a short period of seven days to give a reply, wanted the Banks to Act swiftly so on to enable them to take further proceedings under Section 13(4) of the Act. the Supreme Court also stated that reasons given by the Banks for not accepting the objections raised by the borrower would not be a ground to challenge the proceedings.

The Supreme Court further held that it is necessary to communicate the reason for not accepting the objections raised by the borrower in reply to notice under Section 13(2) of the Act. in the said case two substantial contentions were raised on behalf of the borrowers before the Supreme Court the first being the absence of an adjudicatory mechanism available to the borrowers and the second relates to the denial of an opportunity to state their case before issuance of a notice under Section 13(2) of SARFAESI Act. The Parliament wanted the Banks and Financial Institution to recover the dues after giving a reasonable opportunity to the borrowers.

Section 13(3-A) inserted by amending Act 30 of 2004 after the judgment of the Court in Mardia Chemicals (supra). in Transcoder. Union of India and another, wherein the Supreme Court has held that the borrower is permitted to make representation/objection to the secured creditor against classification of his account as NPA. He can also object to the amount due if so advised. Under Section 13(3-A), if the bank/FI comes to the conclusion that such objection is not acceptable, it shall communicate within one week the reasons for non-acceptance of the representative/objection. The scheme of sub-section (2). (3) And (3-A) of Section 13 of. NPA Act shows that the notice under Section 13(2) is not merely a show cause notice, it is a notice of demand.

The SARFAESI Act made for speedy recovery of the debts to the Banks and Financial Institutions. Section 13(3-A) is one such provision which mandates consideration of their objections. The borrowers must be in a position to know the reasons which made the Bank to reject their objections on proposals. Section 13(3-A) if considered in the light and in the factual background of the judgment in Mardia Chemicals Ltd., would lead to no other conclusion that the requirement of sending a reply within a period of one week is mandatory in nature.