Intro: While buying under-construction properties, most borrowers aren’t aware of important calculations involved in the overall loan process and conditions that banks apply while disbursing the loan.

As a result, they end up in a stressful situation where the builder is chasing them for payment and on the other hand, their bank has refused to release the payment from the sanctioned limit stating that the mandatory conditions are not met.

In this article, we are going to learn about all such calculations and requirements that the bank expects you to be ready with and avoid any hiccups at the time of loan disbursement on under-construction properties.

So, the next time you get into such complicated property transactions, you will be much more prepared and ready with the required knowledge and ensure that your disbursement request is not denied.

WHAT PARAMETERS DO BANKS CONSIDER TO SANCTION PROPERTY LOANS

Loan eligibility is primarily based on the following 3 parameters:

1. Income / Repaying Capacity – Most banks will accept the maximum of 70% of your net monthly income as your total loan repaying capacity.

It also includes all existing EMIs that you are paying towards other loans. Hence, having too many loans with high EMI payments can reduce your overall loan eligibility to zero.

1. CIBIL Score and repayment history – CIBIL records are of utmost importance which should be spotless and not reflect defaults in any of the loan repayments in the past. Also, having a minimum CIBIL score of 700+ is good enough to comfortably secure a loan.

• Loan to Value (LTV) Ratio – “LTV ratio” refers to the ratio of the “Amount of loan availed” to the “Market value of the property”. It can be calculated using the below formula.

Amount of loan availed X 100

Market value of the property

Banks are obligated to strictly follow bank guidelines and work within the policy frameworks of “Reserve Bank of India” which NBFCs to an extent can escape.

Hence, rules being followed by banks and NBFCs while sanctioning property loans are different. As banks work in a more restrictive environment, NBFCs on the other hand enjoys higher liberty as compared to banks while sanctioning loans. Lets us first understand how banks and NBFCs calculate your loan eligibility.

Assuming, you walk into the bank to apply for a Rs. 1,00,00,000/- loan.

This is how the bank will calculate your eligibility:

Scenario 1

Rs. 1,00,00,000/- (Agreement Value) X 75% = Rs. 75,00,000/- only

With the above example, it is understood that banks will only sanction the maximum loan of up to

• 90% of the total “Agreement value” if the loan amount is up to Rs. 30,00,000/-.
• 80% of the total “Agreement value” if the loan amount is between Rs. 30,00,000/- to Rs. 75,00,000/- and
• 75% of the total “Agreement value” beyond that.

Please note that stamp duty and registration charges cannot be included in the “Agreement value”.

So, while banks consider “Agreement value” while calculating our loan eligibility, some private players like non-banking finance companies on the other hand consider “Market value” of the property while sanctioning loans.

This works in favour of many borrowers as the market value of the property is often higher than the agreement value and it enhances their overall loan eligibility. This rule is however, applicable for ready-to-move-in properties only.

For instance, you come across a wonderful deal where the seller of a ready-to-move-in property is in urgent need of funds and is ready to sell his property at a throwaway price of Rs. 1,00,00,000/- only, where its actual market value is Rs. 1,20,00,000/-. Assuming, you do not enough cash with you but at the same time do not want to lose out on this deal as well. So, if you approach the NBFC requesting them to sanction the maximum loan possible, this is how they calculate your loan eligibility.

Calculation by NBFC will be as follows:

Scenario 2

 Rs. 1,20,00,000/- (Market Value) X 75% = Rs. 90,00,000/-.

In the above 2 scenarios, the borrower will undoubtedly prefer the 2^nd offer and will go with NBFC and not the bank. However, it should not be misunderstood that NBFCs are always better than banks. They sometimes offer this flexibility to compensate for a lot of other benefits that they fall short on unlike banks. It may include better products, higher interest rate stability, having repo rates as the benchmark rate and many more.

We trust that so far you have understood how your loan eligibility is calculated across various banks and NBFCs.

Now let’s go a little deeper into the process and understand under what scenarios do banks deny disbursement of loan for under-construction properties.

Please remember the following 3 parameters while buying an under construction property on loan:

1. Loan sanction amount.
2. Self-Contribution.
3. Construction stage of the property.

If you have availed a loan from a bank then you should note that banks strictly follow the “Equal contribution clause” OR “Margin money clause” while disbursing loans for under-construction properties. It simply means that every time the builder raises a demand for payment, the bank will disburse the loan only after you have paid your share of self-contribution to the builder and the receipt and the bank statement confirming the transaction is submitted to the bank.

Confused???

Let us understand this with the help of an example:

Assume, you have booked an under-construction property worth Rs. 1,00,00,000/- for which you have availed a home loan of Rs. 80,00,000/-. The remaining Rs. 20,00,000/- will be your contribution.

In this case, the total property cost is Rs. 1,00,00,000/-, the loan sanction amount is Rs. 80,00,000/- and the self-contribution is Rs. 20,00,000/-

In other words, 80% of the property cost will be funded via bank loan wherein your self-contribution will be restricted to 20% only.

Now, assuming your builder raises a demand for Rs. 10,00,000/- which is 10% of the total property value.

Here, most of the borrowers are mistaken believing that the bank will honor the entire demand of Rs. 10,00,000/- and they need not worry about it, which is incorrect.

They plan the entire transaction believing, that the bank will keep clearing all the payments until Rs. 80,00,000/- limit is exhausted and their self-contribution of Rs. 20,00,000/- will come into play only at the end of the plan. This is ABSOLUTELY INCORRECT.

Before you even approach the bank with the disbursement request, get following things in place

Pay the 10% of your contribution first. i.e. 10% x Rs. 20,00,000/- = Rs. 2,00,000/-.

Once the payment is made, the original payment receipt provided by the builder along with the bank statement reflecting the transaction should be submitted to the bank. Only then the bank will agree to release 10% of their contribution. i.e. 10% x Rs. 80,00,000/- = Rs. 8,00,000/-.

This is not it. Before the bank releases the payment, there is one more condition that will be looked at and that is the property construction stage as per the architect certificate. The architect of the property should also certify that 10% of the total construction is completed.

Once these 2 conditions are satisfied (Self contribution and Property construction stage) the bank will then release 10% of their contribution.

So collectively, the builder will receive the total demand of Rs. 10,00,000/-.

This is how to process is going to work every time the builder raises a demand.

The process is not as complicated as it looks, however, every property investor should be aware of such rules to avoid any surprises at a time when they can do nothing about it.

DOCUMENTS REQUIRED BY BANKS FOR MAKING PART-DISBURSEMENTS

The below set of documents are required to be submitted to the bank whenever a payment demand is raised by the builder.

• Original demand letter.
• Latest architect certificate.
• Original payment receipt of the previous disbursement done by the bank.
• Bank statement reflecting margin money payment.
• Disbursement application form in the bank’s format.

CRITICAL POINTS TO REMEMBER WHILE APPLYING FOR A LOAN

• Choose the bank very carefully – Many times, some of the builders may recommend you to take a loan from the NBFC of their choice or the one that they have a tie-up with. They may try to lure you stating that their process is easy and the loan can be sanctioned in no time.

They may do that because builders are always in a hurry to get their payment and they are least concerned with the value you get or interest you lose in the long run.

Some of them even have a special arrangement with some NBFCs where they get a higher amount disbursed even before the construction of the property reaches that stage.

It is a straight loss to the customer as they start paying interest on the loan much sooner that otherwise should not have been disbursed. Some nationalized banks like State Bank of India on the other hand does not support such malpractices and they straight away deny disbursement if the construction of the property is not completed up to that level.

This is one of the primary reasons why some builders may discourage you from approaching conservative banks.

Hence, as a borrower, it is up to you to think about what you are getting into and avoid getting carried away with such gimmicks and fall in such traps. They simply lack value and may even result in higher losses towards interest payments which can erode your investment value in the long run.

It is always advisable to be patient and go with reputed banks especially nationalized banks like State Bank of India, Bank of Baroda etc. that follow strict guidelines and protect their borrowers from such malpractices.

• Assess your future cash requirements before finalizing the loan amount – Many times, borrowers overlook certain expenses that are likely to come up in the future. Especially, after the property is fully constructed and possession is given. Some of the primary expenses may include alteration or home furnishing, buying a new car or sometimes buying extra parking that is available at a discount and so on.

Hence, one should avoid getting over enthusiastic and be more prepared for such least expected expenses instead of relying on other loans or making compromises.

For this, if you are not sure about what to do then you can simply apply for the maximum loan possible and reduce your self-contribution in the property. In case, you do not require the extra loan later, you can make prepayments anytime without a penalty.

• Having property insurance in place – Some banks have made property insurance mandatory and insist on getting the structure of the property insured once the property is fully constructed and the final demand for the payment is raised by the builder.

In such cases, bank will not release the final demand before having a property insurance in place.

Hence, it is important to get this point clarified with your home loan provider and buy a suitable cover as specified by your bank, get the same hypothecated in your bank’s favour, and attach the copy of the same with the list of disbursement documents checklist.

With this, we can conclude this article and we hope that our inputs have helped you gain valuable insights and enhanced your knowledge level on the subject matter.

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