Understand the Vital Clauses in Your Home Loan Agreement

A home loan contract is a legally binding contract. It binds both the client and the bank to its terms. Once a debtor and a bank have signed the agreement, they must follow it. Once you have signed, it is difficult to back out of a home loan arrangement. As a result, it’s always a good idea to take time and understand the home loan agreement. 

Legal issues may be difficult for a novice to comprehend. However, they are necessary to make an informed decision regarding housing loan options. Thus, borrowers should be aware of the 10 key clauses in a home loan contract.

What is a Housing Loan?

A housing loan, also known as a home loan, is an amount of money loaned from a lender or bank to buy a house. Home loans have a variable or fixed rate of interest as well as repayment periods.

The estate is mortgaged to the creditor as security until the debt is repaid. The bank or other lenders will keep the deed or title to the property until the loan is repaid in full, including interest.

10 Clauses in a Home Loan Agreement

Here are the 10 clauses of a housing loan agreement you should be aware of:

1. Prepayment or Foreclosure Charges

A prepayment clause reflects the amount of the loan that needs to be paid in addition to the EMI. Borrowers should look at this provision if there is a budget that includes prepayment.

Banks impose no prepayment or foreclosure fees on home loans with variable interest rates. If a loaner has a fixed-rate loan, the bank may levy a fee based on the rate specified in the agreement. This clause might help in figuring out the best payback arrangement.

2. Default Clause

When a borrower fails to repay the EMI on time, the bank usually considers them a defaulter. But there are other ways for a bank to think that a borrower is behind on their payments. These conditions include the borrower’s death or divorce in the case of a combined home loan borrowed by the couple. The default clause spells out the circumstances and penalties of being a defaulter, which might occur if EMIs are not paid on schedule or if the borrower is engaged in any illegal activities.

3. Amendment Clause

An amendment provision allows the terms of the contract to be amended in the event of trouble repaying the loan. These modifications are virtually always to the buyer’s detriment. Getting written consent before changing agreements is usually a good idea.

A housing loan cannot be amended once both parties have agreed upon it. To alter, both sides must mutually agree on an amendment. A one-sided change to a loan contract is an act of bad faith and renders the arrangement null and void. Identify and avoid clauses in the agreement that allow the bank to change the terms.

4. Security Clause

The bank will make a housing loan up to a particular proportion of the property’s worth. The loan value is also based on the borrower’s income, credit rating, age, and ability to repay. The lender may insert a condition in the agreement stating that if the valuation of the collateral asset declines during the loan term, leading to a rise in the loan-to-value (LTV) ratio, the lender may require the borrower to deposit the money required to reestablish the original LTV ratio.

If the worth of the property decreases, the debtor may be required to pay an extra security deposit against the current home loan balance. This provision should be carefully read since it may significantly affect the debtor’s repayments.

5. Interest Rate Clause

This provision allows the lender to adjust the interest rate depending on any changes in the RBI’s marginal cost of funds-based lending rate (MCLR). Ensure that the rate of interest is appropriately secured. The interest reset clause specifies the terms and frequency of interest rate changes.

6. Disbursement Clause

The loan payment may not always be sent directly to the debtor but may instead be made through the builder. This clause establishes the terms for the home loan distribution.

7. Third-Party Clause

A third-party clause allows the loan to be transferred to another party without the debtor’s consent. This can happen if they default on the debt, but it may also happen arbitrarily.

8. Force Majeure

With this type of provision, debtors may begin with a fixed-interest rate loan. Still, the interest rate may be subject to alteration in unusual situations. However, debtors might be able to evade it if they are careful.

9. Notification Clause

This part of some agreements says that the borrower must tell the lender when they get a promotion or raise in pay, and it also says what the borrower must do in that case.

10. Other Balances Clause

It specifies that any debtor’s payment will be deducted from other balances. This includes charges for late payments or transaction fees. The total sum remaining will be applied to the EMI payment.

Points to Consider Before Taking a Housing Loan

Below are some points to consider before applying for a home loan:

• Make sure to understand the type of home loan interest rate being given. In contrast to a fixed interest rate, which remains constant during the term, a variable interest rate might change.
• The tenure of your housing loan is important since it determines the EMI amount due each month on the deadline. Knowing the actual duration will allow the debtor to correctly allocate their money.
• Selecting a home loan with a straightforward application process and few documents is advantageous. Ideally, a home loan that permits online processing and speedy disbursements should be chosen.

The Bottom Line

Before actually signing a home loan contract, you should thoroughly read and understand its terms. Remember that once the deal is signed, there is no turning back. For more such blogs, head to the Piramal Finance website to better understand all finance-related topics.