Pre-disbursal Home Loan Terms You Must Know

There are many technical terms you will come across when applying for a home loan. For instance, words like credit appraisal, underwriting, and loan-to-value are common terms used by lenders before disbursal of loans. Here we describe these terms to help improve your understanding of the home loan process.

1. Credit appraisal: This is the process which determines the credit worthiness of a borrower. It is a part of the verification process wherein officers from the loan provider verify details like your employer, your income, number of dependents, your loan history and review documents such as your bank statements and salary slips. Every lender has its own appraisal officers for this purpose.

In order that you get a clean chit at the end of this process, its best if you have a maintained a clean credit history on any existing loans and borrowings.

2. Underwriting: Like credit appraisal, underwriting too forms a part of the verification process and also involves an assessment of the loan eligibility of a customer. During this process, the lender evaluates whether it wants to "underwrite" the loan or not, i.e., does it want to take the loan on its own books or not.

An important analysis that underwriters conduct is calculating the Fixed Obligation to Income Ratio (FOIR). This is calculated by taking into account all fixed obligations of a borrower relative to the income that the borrower has. Typically, most home loan lenders would not like to see a FOIR of greater than XYZ%.

For instance, Shanti has an income of Rs. 48,000 per month and is interested in taking a home loan. She has the following monthly instalments:

• Car Loan EMI: Rs. 8,000
• Personal Loan EMI: Rs. 5,000
• Proposed Home Loan EMI: Rs. 14,000

In this case, her total EMI comes to Rs. 27,000 and the FOIR is 56.25% (i.e., her monthly fixed obligations of Rs. 27,000 divided by her monthly income of Rs. 48,000). Usually, lenders accept a FOIR up to 50%. So, in this example, unless Shanti's income were to go up, or she reduces the amount of the home loan thus reducing her home loan EMI, the lender will reject her application.

For this reason, its best not to have too many fixed obligations and too many different types of EMI. You never know how it might harm your chances of taking a home loan if you have not been able to fully repay your previous loan obligations.

3. Valuation check: A valuation check is carried out on the property for which the home loan is being taken. Property surveyors and valuators prepare a valuation report of the property to the lender which include details on the following items:

• a. Check on the quality and satisfactory progress of work in case of an under-construction property.
• b. Verify the builder's reputation.
• c. Check the age, maintenance level and quality of the building and estimated value of the property.

4. Loan-to-value (LTV): LTV is the amount of the value of the property up to which the lender will offer you a loan. Typically, LTV is around 85%, i.e., the lender will give you only 85% of the value of the property as a loan. The remaining 15% will have to come out of your own pocket. Usually, no lender in India will offer a 100% loan-to-value to borrowers because they want borrowers to also put some of their own money into the property purchase transaction as a signal that they are willing to share in the risk of the transaction. If, however, the lender sees a borrower as risky, then the lender might not give the borrower a LTV of as high as 85%, but rather offer a much lower amount.

The home loan process can be time consuming because there are a lot of checks and different types of documentation involved. You are best off if you start the process early, so as to avoid any delays that might delay your property transaction, causing you a lot of emotional or financial distress.