There are often times when a person requires funds on an immediate basis. In times of urgency, availing a mortgage loan is one of the easiest credit options available. These are secured loans provided against a house or a flat as collateral. Both loans against property and home loans are classified as mortgage loans.
The entire process of these loans may seem confusing for many. In this article, we have demystified the mortgage loan process with a detailed explanation.
What is a mortgage loan?
A mortgage loan is a type of credit facility offered by banks and NBFCs in which the borrower is required to keep an immovable asset of equivalent worth as collateral against the borrowed sum. Immovable collateral can be either a residential or commercial property. These secured loans can have repayment tenure of up to 20-30 years, depending on the financial institution.
Usually, all types of home loans are considered to be mortgage loans. Another type of mortgage loan is a loan against property. Here, a property is kept as a mortgage till the loan amount is paid in full. Unlike home loans, no end-use restrictions apply with loans against property.
Features of mortgage loan
Listed below are some of the features of the mortgage loan process:
- While availing a mortgage loan, one can choose from different interest rate options like floating interest rates, fixed rates, interest-only mortgages, and payment options.
- Mortgage loans typically have lower interest rates compared to other types of loans.
- Loan-to-value (LTV) ratio for mortgage loans typically ranges from 60% to 70%. However, this may vary among lenders.
- Purchasing a home with a mortgage loan is one of the most convenient options. Once the loan amount is repaid in full, the borrower retains full ownership of their home.
- Banks and NBFCs generally offer loans based on either the registered value or market value of a property, whichever is lower.
- The sanctioned loan amount obtained through a mortgage loan can be utilised for both personal and business needs.
- Mortgage loans usually have longer repayment terms, allowing flexibility in loan repayments.
- Mortgage loans typically offer higher amounts compared to other types of loans. This is because these loans are secured and provided against high-value collateral.
- One can get mortgage loans for various types of properties, including under-construction properties, freehold residential properties, fully constructed properties and commercial properties.
- It is important to ensure that the property is free from all sorts of legal issues and encumbrances. Borrowers also must have clear ownership of the property.
Types of mortgage loans
There are various types of mortgage loans available from a borrower’s perspective. Before availing a mortgage loan, one must know all the types and options available and make the best choice out of it.
- Simple mortgage
In a simple mortgage, if the borrower is unable to repay the loan, the lender has the right to sell the property provided as collateral to recover any outstanding dues.
- Usufructuary mortgage
In a usufructuary mortgage, the mortgaged property is transferred to the lender, enabling them to generate profits from it. This type of mortgage loan typically grants a temporary right of use rather than full ownership of the property.
- English mortgage
If a borrower fails to fully repay their loan within the originally agreed-upon timeframe, the lending organisation may take possession of the collateral provided.
- Sub mortgage
Financial institutions usually offer these loans at higher interest rates to borrowers with a low credit score or less favourable credit history. This mitigates the risk of non-payment and ensures that the lender can recover their funds.
Benefits of mortgage loan
There are several benefits of availing a mortgage loan, which makes it popular among customers. Here are some of these benefits:
- The borrower remains the legal owner of a mortgaged property and can occupy the property.
- These loans typically have a short processing time and are approved quickly as they are secured by collateral.
- Interest rates of mortgage loans are comparatively lower than unsecured loans like personal loans and credit cards.
Points to consider while applying for a mortgage loan
There are several key points to consider while applying for a mortgage loan. One must first understand the mortgage loan process and the following things:
- Tenure of the loan
A loan’s tenure is the most crucial aspect to consider. Lenders typically offer repayment tenure of up to 20 years. But this is based on certain parameters like the applicant’s age, income, and other eligibilities.
- Amount of the loan
The amount of loan can be bigger than other types of loans as it is backed by collateral i.e. mortgaged property. Before granting a loan, the lending organisation will conduct due diligence on the property and will assess its current market value. There are several other parameters which the lender will consider like an applicant’s age, income, etc.
- Rate of Interest
The rate of interest for mortgage loans is comparatively lower than for unsecured loans. This is due to the secured nature of these loans that allow lenders to recover any outstanding dues in the case of a default.
- Processing time
The processing time is comparatively faster than other unsecured loans. However, it can take up to 2 to 3 days as it involves certain evaluations like assessing the property’s market value. Some lenders provide faster processing time than others.
- Prepayment charges
Nowadays, many lenders do not levy prepayment charges, if the applicant has applied for a floating-rate mortgage loan.
A step-by-step guide to the mortgage loan process
Following is a step-by-step guide for the entire process of availing a mortgage loan:
Step 1: First, one must determine their financial capability and figure out the amount of loan he/she can truly afford.
Step 2: Select a lender and obtain pre-approval for a loan. Getting a preapproved quotation demonstrates the amount of loan the lender is willing to lend.
Several lenders provide pre-approved offers for financial products like home loans, loans against property, personal loans, etc. Such offers are given to existing customers to shorten the loan approval time. One can check property loan eligibility for such offers by providing some basic details.
Step 3: The applicant must find an ideal home that suits their needs and budget.
Step 4: Post finalising one’s dream home, an applicant should select a lender that provides the best deals.
Step 5: Submit the mortgage application with all the necessary documents.
Step 6: Undergo the mortgage underwriting.
Step 7: Prepare for a down payment and closing costs
Step 8: Complete the home closing process. The last step is attending the closing day meeting and officially becoming a homeowner.
Hopefully, this article has provided a better understanding and clarity about the mortgage loan process. Moreover, it is one of the most convenient ways of availing big loans quickly by producing all the required documents. The approved loan amount can be utilised for various financial needs and obligations.