For a large percentage of the population, taking a loan against their property is often the only option to finance a major expense. Also known as a Mortgage Loan, Loan Against Property (LAP) is made available by a lender when the borrower mortgages a real estate piece owned by him/her.
These loans are preferred by lenders, since they are backed up by a piece of real estate as a collateral for the loan, as well as the borrower who has to pay an interest rate that is lower than the amount that goes with a personal loan. Further, even though the loan is taken against a property, it remains under the ownership of the borrower who can continue to make use of it.
LAP can come in handy when one requires a bigger loan amount since real estate can fetch up to about 60% of its market value as loan amount. Thus, a real estate valued at Rs 50 lakh may provide for a loan of up to Rs 30 lakh, given the fulfilment of certain conditions.
9 Factors Affecting Your Loan Against Property Eligibility
In order to be eligible for such a loan, one needs to meet certain criteria. Though the criteria for the same may differ from one financial institution to another, the main factors that impacts your eligibility for LAP are :
1. Bad Credit Score
Having a poor credit score is one of the worst aspects to bring to the table when applying for any loan, including a loan against property. A
credit score is one of the first checks that a financial institution undertakes while assessing a loan application.
A poor score from any credit information company is a matter of concern for an applicant. Because regardless of the value of the property, if the owner’s credit history is seen in bad light by any of these companies, chances are that the applicant will not be approved. Missed, late, or failed payments on loans and credit cards, partial or full defaults on earlier financing arrangements, as well as dishonored cheques pull down one’s credit score and seriously jeopardise chances of securing a loan against property. 2. Job Instability
A stable job is essential in procuring a loan against property. This is so because due to the relatively long tenure of such loans, financial institutions offering such loans want to be sure of the repaying ability of a borrower. Apart from the credit score, job history is also a measure of this ability, and thus has a large bearing on an application being accepted. One needs to seem settled down professionally in order to successfully apply for a loan. 3. Age of Property
The age of the real estate being mortgaged has a bearing on two aspects of the loan: the amount as well as the tenure. As a thumb rule, the older the property, the lower its value on the market, which lowers the amount of loan that a lender will offer on it. Also, older properties will lower the repayment tenure of the loan as their market value will continue to go down as time progresses. Though newer construction offers more value as well as a longer tenure of loan than an old one, a well-maintained, redeveloped or renovated older property will also carry quite a bit of value. 4. Age and Income of Borrower
Similar to the age of the property, the age of the potential borrower also has a bearing on successful acceptance of a loan against property application. The younger a borrower, the higher is his presumed repayment ability thus making it easier for such an applicant to receive this loan. The closer ,one is to retirement, the more questions are raised about continued income after retirement making it more difficult for loan approval. Even for a younger applicant, though, a regular flow of income is required and any financial institution seeks proof of this before accepting a loan application. 5. Loan Tenure
For an applicant, a longer loan tenure is beneficial as it results in lower EMIs. This is especially important if the income of a borrower, though regular, is low. Lower EMIs would put lower pressure on such a borrower’s finances. Here are a couple of things to note about loan tenure. - Longer loan tenures also benefit the lender as they result in much higher interest income from borrowers than shorter tenures do. They are thus more likely to approve loans with longer tenures than those with shorter ones. However, borrowers should opt for shorter tenures as it would save them a lot of money on interest payments. The flipside of this is that the amount of loan offered against a property may decrease.
- Further, loan tenures are also closely tied with the age of the borrower. Though longer tenures benefit them more, financial institutions would not offer these tenures to borrowers who are nearing retirement.
6. Interest Rates and EMIs
A major factor to consider for those desiring loan against property interest rate is the type. One can choose between a fixed or floating rate. As their names suggest, the rate remains fixed for the entire duration of the loan tenure in the former while it the latter, it changes with the change in the interest rate environment in the country.
A higher rate of interest increases the EMI while a lower rate lowers it. In case of floating rates, if rates change, one can choose to change the EMI or the loan tenure. If the prevailing interest rates are lower than the historical average and the loan tenure is long, one can opt for a fixed interest rate. On the other hand, if one expects a decline in interest rate, floating rates are a better choice. One should also discuss whether switching from one rate to another is possible and the charges associated with the process with the lender before agreeing to loan terms. 7. Lack of Property Documents
Similar to bad credit history, the lack of complete and proper documents is a major red flag when it comes to applying for loan against property. Sometimes applicants only have a legal document issued by the government, which names the owner of the land but do not have other important documents like title deed, building blueprints and plans, as well as approvals from various authorities. In such a case, lenders are unlikely to entertain an application. Given the sensitive and legal nature of real estate transactions, it is essential that property papers are complete in all respects before an applicant approaches a financial institution.
8. Mortgage Insurance
Mortgage insurance may not be a requirement but is certainly an asset when applying for loan against property. It protects the interest of the property owner in case of an unfortunate happenstance and provides a sense of increased confidence to a lender when assessing a loan application. With all other things remaining the same, lenders would tend to approve an application in which there is mortgage insurance faster and more smoothly than an application which does not have the insurance. 9. Faulty ITRs
Complete and undisputed filing of Income Tax Returns are necessary for a borrower while applying for a mortgage loan. Alike a steady flow of income, this is crucial in an application being processed successfully. Typically, a lender asks for three-year ITRs but this may vary in certain cases.
Failing to provide this documentation could lead to rejection of an application even if a potential borrower is able to prove a regular flow of income, is young, and has complete property documents.
Even though a loan against property is much easier to take, it’s good to always remember the worst-case scenario – losing the property for defaulting on payments. It is always better to look before you leap instead of regretting a decision later.
