The legalese of home loans

REALTY ZONE: Now, banks stop giving in-principle loan sanctions on central bank directive.

Don't be surprised if your neighbourhood banker suddenly starts asking more questions before sanctioning your housing loan.

Following a Delhi High Court order, the Reserve Bank of India (RBI) recently issued a directive asking banks to check the reasons a housing loans is being sought - particularly whether it is being sought for an authorised structure and whether it conforms to the approved building plan.

They have also been asked to ensure that the sanctioned building plan is attached to an undertaking from the loan seeker. Banks have been advised to comply with the directives with immediate effect.

According to the RBI directive, in case of an application for a loan for constructing a house, banks need to obtain a copy of the sanctioned plan from the competent authority in the name of the person applying for the loan and also seek an affidavit-cum-undertaking that the borrower shall not violate the sanctioned plan.

For a housing loan for purchase of constructed property/built-up property, banks are required to obtain from the applicant a declaration that the built-up property has been constructed in accordance with the sanctioned plan and/or building bye-laws.

Following the RBI's directives, bankers say that they have stopped the practice of granting an in-principle credit sanction and the borrower is given an eligibility statement that, prima facie, based on credit appraisal they are eligible for a loan.

Earlier, borrowers could approach a bank for a home loan without finalising the property and get an in-principle sanction for an amount based on credit appraisal. The loan would be disbursed subject to proper technical and legal evaluation of property.

"The practice of giving an in-principle credit sanction has been stopped and has been replaced by an eligibility statement," said a banker. Apart from this, there is no other change in the way the banks processed a home loan application and the time taken for disbursal remains the same as earlier.

RBI's guidelines for checking the credentials of builders and the necessary legal and technical evaluations have always been followed, say bankers.

"This is the basic security against which banks are lending. The RBI is looking to reiterate the process and make specific recommendations so that every banks follows the same process," said a banker.

What borrowers should look to do, says a private banker, is to organise all the necessary clearance documents of builder and other linked documents to facilitate the loan disbursement process.

Also, buyers that are not looking to go through a bank, which ensures that the legal and technical checks are conducted satisfactorily, should spend a few thousand more and get the necessary checks done independently.

What you should look for
Explains Mumbai-based real estate lawyer Anil Harish, "On the legal side, you have check if there is a certificate of title attached to the agreement - this is normally a part of the printed agreement that the builder will give you.

Ensure it is there. If it is a second sale, then you may want to make inquiries on you own to check that the property has a clear title. Banks will also make their own inquiries into this."

On the architectural side, Harish says a buyer should ensure that the builder has obtained the following from the civic authorities - the intimation of disapproval (IOD), the occupation certificate and the completion certificate.

"As a house buyer you need to check a few things before going to the bank for a loan. Before a builder commences building, the local civic authority will give him what is known as an intimation of disapproval or IOD, this means that he has complied with most of the requirements, bar a few minor things mentioned in the IOD and is ready to construct. Typically these get taken care of during the construction."

"Once the construction of the flats or house it self it is complete and the civic authorities are convinced it is ready to be occupied, they will issue the occupation certificate. Only after this certificate has been issued, you should move in. The completion certificate refers to other amenities like parking, perimeter and access. These may take longer time to complete."

Referring to the RBI directive, Hairsh said, "The directives should not make any substantive differences in the way loans will be disbursed. The form may have changed but the substance remains."

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Banks need to obtain a copy of the sanctioned plan from the competent authority in the name of the person applying for the loan and also an affidavit-cum-undertaking that the borrower shall not violate the sanctioned plan.

For a housing loan for purchase of constructed property/built-up property, banks are required to obtain from the applicant a declaration that the built-up property has been constructed in accordance with the sanctioned plan and/or building bye-laws.