Home Loan FAQ
Buying a home can be an expensive affair, but with a little help from financial institutions, you can avail of a home loan to assist you. However, to become eligible for housing finance with good home loan rates, you will need to have a decent CIBIL score of 750, provide proof of income stability, and necessary loan documents, and be within the age bracket of 18 to 60 years during the loan tenure. You will also need to have filed taxes for the past two years if you are a resident Indian and have a steady source of income.
Everyone needs a home of their own and sometimes assistance is needed from financial institutions for a home loan. Some of the documents required include the past 6 months of income proof including bank statements, the last 2 years proof of filing tax returns, credit history, ID proof, address proof, photographs as well as a guarantor. All these are needed to ensure you are capable of paying your monthly EMIs without defecting. For NRI home loans, additional loan documents required include visa copies, work permits, and attested income-related documents.
People who have taken housing finance need to know that there are certain tax benefits associated with home loans. The principle portion of EMI paid for the year is allowed as deduction under Section 80C up to Rs.1.5 Lakhs. The interest portion of the EMI paid for the year can be claimed as a deduction from total income up to a maximum of Rs. 2 Lakhs under section 24. And for those people who have moved into the home, they are entitled to tax benefits of up-to Rs.2 lakhs on the interest paid. Likewise, stamp duty and registration charges are also deductible. And if it’s a joint home loan, then both applicants can file separately for tax relief for same loan.
Applying for housing finance with a low credit score can be daunting, but not undoable. CIBIL scores of 620-680, though imperfect can still be approved for home loans, but if your score is less than 620, you need to pay off some debts and improve your score before applying. You have better chances of getting a home loan from the bank with your savings and deposit accounts as they will be more accommodating. You could also apply for a joint loan with your spouse if he/she has a better CIBIL score.
Using a home loan to fund your home is a better option and financial institutions offer different types of home loans depending on the customer’s needs. Home loans can be in the form of bridging loans, floating or fixed interest rate loans, stamp duty loans, or NRI home loans. They can also be in the form of loans for land purchase, building purchase, construction, or loans for remodelling an existing home. While the loan documents needed remain the same, the home loan rates, monthly EMIs, and tax benefits may vary.
Different financial institutions have different rules when it comes to collateral security against loans. While some banks are more lenient than others, you will need to provide some collateral against the property, which is usually the title deed of a property or the property that you are taking the loan for itself. The borrower is usually expected to make a down-payment of 20% of the total value, which substantially brings down the EMIs and home loan amount needed. The value of security needed also diminishes accordingly.
While getting housing finance from financial institutions is quite easy, choosing the best option can be challenging. Though fixed-interest home loan rates are more secure, the premium can be higher. With floating interest rates that are linked to the market, the interest varies with market conditions during the tenure of the loan. The bank offering floating rates will have a base rate as well as a floating element too. The base rates are revised periodically at the RBI’s directives or due to other factors, resulting in fluctuations in payable EMIs.
Availing of a bank loan involves processing loan documents and other formalities which are chargeable. Financial institutions differ in their approach to implementing housing finance but they all have a mandatory processing fee. This fee could be a specific percentage of the loan amount or a fixed processing fee. Pre-payment or pre-closure charges can become applicable as a penalty for paying off the loan before the tenure period. Other miscellaneous charges for documentation, stamp duty, credit bureau report issuance or consultation may also apply.
A property with an outstanding home loan against it cannot be sold until the loan has been paid off. The potential buyer cannot avail of a home loan for the said property while it still has a loan entailed to it. The property’s documents will be with the loaner financial institution, hence there is an encumbrance towards its sale without full payment. However, if the buyer isn’t taking a loan for buying your property, then a deal can be reached with your bankers where the buyer hands over the remaining EMIs amount to the bank and it releases the property documents.
An NRI home loan can be availed for residential and commercial properties, but not for buying agricultural land, farmhouse or plantations. The home loan can be for purchasing ready-to-move-in properties, under-construction properties, or for buying a used property. Home loans can also be used for buying a plot, for carrying out construction, or for renovating or remodeling an existing property. The loan documents for NRIs differ from those for residential Indians and require some additional evidence. The loan tenure is also much shorter for NRI home loans – about 5-7 years only.
NRI FAQ
A person of Indian origin (PIO) who can claim to have Indian lineage doesn’t require any special permission to buy property in India. However, there is a clause inserted by the Foreign Exchange Management Act (FEMA) in 1999 which stipulates that a foreign national of Indian origin cannot purchase agricultural land or invest in a farmhouse or plantation in India. Such properties are limited to resident Indians only. Payment for real estate investments should also be done in Indian rupees, with funds transferred to India through legal banking channels.
Foreign nationals of Indian origin who have held Indian passports in the past or who can claim Indian lineage are known as PIOs and are covered under the general permission act to buy property in India – without filing for permission from the RBI. However, the payment for the same needs to be done through funds transferred to India through normal banking channels or via funds held in NRE/FCNR(B) accounts. Alternatively, payment can be done through NRO accounts maintained in India. Payments cannot be made from outside India, through foreign currency, or through travelers’ cheques.
Can non-resident Indians living abroad buy a property through an agent or through power of attorney?
Non-resident Indians (NRIs) who aren’t physically present in India can still be able to buy property in India through the help of a power of attorney or agent, who can make the transactions on their behalf. Based on mutual trust and understanding, an agreement can be made between an NRI and their relative or lawyer/agent to execute the purchasing formalities of the said property through Power of Attorney executed on behalf of the NRI. The Power of Attorney formalities should be executed on a stamp paper in front of the relevant authorities.
There is no specific permission required by non-resident Indians residing abroad from the Reserve Bank of India (RBI) when making real estate investments within India. This is because the RBI has given general permission to non-resident Indians for investing in residential and commercial properties. However, there is a clause set up by the Foreign Exchange Management Act (FEMA) in 1999 and executed in June 2000 that prevents non-resident Indians from investing in agricultural land, farmhouse or plantation properties in India.
A foreign national of Indian origin is also referred to as a person of Indian origin or a PIO. These are people living abroad who have once held an Indian passport or have relatives of Indian origin. Buying immovable property in India is regulated by the Foreign Exchange Management Act, 1999, and entails that non-resident Indians and PIOs cannot buy property in India that is agricultural land, plantation or farmhouse. PIOs will need to file a declaration form IPI 7 with the central office of the RBI within 90 days of the purchase of immovable property.
Non-resident Indians or NRIs who hold Indian passports are also eligible for availing of NRI loans in rupees up to one crore when buying property – just like any other resident Indian. However, there are slight differences when it comes to the repayment of EMIs. Monthly remittances have to be made in rupees from an NRO, NRE or FCNR account. The money remitted to these accounts should also be done through legal banking channels. Most banks ask for a resident co-applicant or an NRI guarantor who will need to provide identity, address, and income proof.
Income earned as rent on real estate investments by Non-resident Indians (NRIs) will need to be deposited in Ordinary non-resident rupee (NRO) accounts. While FEMA allows rent income to be deposited in NRE accounts, banks prefer it’s being deposited in NRO accounts only. And as long as the income is earned in India, it will become taxable in accordance with Indian laws too. To repatriate this rental income abroad, it will have to be first transferred from an NRO account to an NRE account before becoming eligible to remit abroad.
Repatriation of proceeds of sales to a country outside India is possible, provided certain clauses are fulfilled. According to the Reserve Bank of India (RBI), the sales proceeds to be repatriated should not exceed the foreign currency brought into the country for the property’s initial purchase. Proceeds can be repatriated through an NRE account. The RBI has further made repatriation easier for non-residents and PIOs by removing the lock-in period for retaining the real estate investment before its sale. However, only the proceeds of two residential properties can be repatriated abroad.
A person of Indian origin (PIO) or a non-resident Indian (NRI) can make any number of real estate investments under the general permission act as there are no limits on the number of properties that can be purchased by NRIs or PIOs. However, these properties have to be paid for by foreign funds transferred into the country through legal banking channels. Funds maintained in non-resident accounts in accordance with the provisions and regulations of the RBI and the FEMA Act, 1999 can be used to buy property in India.
As far as tax implications for buying property in India by non-resident Indians go, he is as entitled to tax benefits as a resident Indian is. An NRI can claim deductions of up to Rs.1.5 Lakh under section 80C. Property purchased through NRI loans has further advantages as tax claims on the interest rates on the loan have no upper ceiling for NRIs. A flat 30% tax claim on any rent income can also be made in lieu of maintenance. And if the real estate investment is left vacant, there is further wealth tax exemption.