Comparative Analysis of Under-construction, Ready-to-move and Resale homesIntroduction
Everyone desires to purchase a house. Generally, there are three options to purchase your dream home. One can opt to purchase an under-construction, ready-to-move or resale property. Each comes with their advantages and disadvantages which are explained below.
These are properties that have been announced by real estate developers and will take time to complete.
A major advantage associated with under construction properties is that they are affordable for most of the people through a home loan. People make a down-payment which is generally 20% of the property price and then start paying the monthly EMI’s each month. This way a lot of people are able to own the house in a convenient manner. EMIs are paid as the work progresses. Therefore, initial EMIs are low in case of an under-construction home. Even if one is not taking a home loan, they can pay the money in parts by opting for construction-linked payment. A lot of choices
There are various locations where new projects come up, so the choice in terms of location or which floor you want are generally high. If you are not happy with 12th floor, you can pay accordingly and take the 3rd floor.
Under Construction properties are generally in the outskirts of the city and hence the price appreciation due to future development is good in under construction properties. Since the price paid is less, you may get higher returns for an under-construction property.
On an average the completion deadline given by the builders. Depending on the size of the project, it is 2-4 years, but it gets delayed and further delayed most of the times. In some cases, the 2 years can turn into an excruciating 4 to 5 years or even more. This delay can be attributed to issues pertaining to land dispute, cash crunch and most of the times incomplete permissions from authorities.
There have been cases where builders could not complete the housing complexes because of cash crunch, high interest rates, or high raw material costs, diversion of funds into other projects and at times legal reasons, resulting in buyers losing their money.
Not like you thought
Income tax claim issue
You can avail for tax benefits only after you get the possession of the house. If you are going to buy under construction property, be ready to pay rent + EMI and not receive any tax benefit unless you get the possession certificate.
Price Appreciation might get affected
Your property rate might not appreciate the way real estate experts might have predicted due to a change in the market outlook. If major infrastructure projects get cancelled in that vicinity, the property rates are bound to reduce.
No clarity on maintenance charges
In under construction flats one cannot be hundred percent sure about the exact maintenance charges to be paid till one occupies the flat. The maintenance charges may vary depending upon the facilities provided by the developer.
Real Estate Law 2016 and Under-Construction Property
However the New Real Estate Bill passed in March 2016 aims to minimize the disadvantages of the under construction properties in the following ways: .The builders will have to deposit 70% of the amount in an escrow amount so that the funds collected from the consumers for one project cannot be diverted to another.
If there is any delay in the completion of the project, then the builder will have to pay the money with the same interest rate being paid by the customer to the bank; back to the customer.
The builder cannot makes sudden changes in the layout of the under-constructed property without the approval of the clients.
The State Level Real Estate Regulatory authority will ensure that all the projects are registered and that they are delivered on time.
These are properties that are ready to reside in. One can get immediate possession of such properties as the construction work is already completed and there is no waiting period.
Get to see it
Unlike under construction properties, ready-to-move properties are completed and you get to see them before purchasing. Here there are considerably less chances of a miss-match of expectations and reality. One can witness not just the house but the entire residential building or complex.
These properties can be availed instantly. One can save the expenses attributed to paying rent and transportation by opting for a ready-to-move in property.
No service tax
Generally, when a builder sells a property in a group housing project before it is fully developed a service tax is levied. The amount depends upon the carpet area of the property. However, if the property is ready for possession, then you do not have to pay this tax.
Payment in one-go
In case of Ready-to-move in properties, all the payment has to be made upfront and all at one time. There are no stages in payment like you have in under construction properties. So even if you are buying it on home loan, generally you have to pay all the down-payment, registration charges, stamp duty etc. all at one go.
These homes on an average, cost higher than under-construction properties[This seems to be incorrect, as per our business. They say it’s less expensive. Pls verify.][It is higher. Please refer to the link-http://profit.ndtv.com/news/industries/article-which-house-to-buy-under-construction-or-ready-to-move-320566 ].
Low price appreciation
Ready-to-move properties do not appreciate as beneficially as under-construction property as most of the development has already taken place and the price has appreciated over a period of time.
Resale properties are those that had been occupied by someone else. If someone sells a property after residing in it for some time, it will become a resale property. The resale property can be bought from the original buyer or the investor.
Price of resale properties is economical as they are available at a cheaper rate[Pls check if this is correct. Accd to business this is not at a cheaper rate, rather more expensive.][It is cheaper. Please Refer to the link- http://profit.ndtv.com/news/your-money/article-buying-a-resale-flat-heres-a-checklist-382463]. However, this will depend upon several factors like the age of the building, location, developments in the vicinity etc.
Like ready-to-move properties, resale properties also aid immediate possession.
In case of a resale property, the neighborhood and the building or complex is generally settled. One can have a look at the immediate neighborhood and also gauge the aesthetic value of the real estate property.
One might need to incur expenses pertaining to the renovation of the house.
As you are dealing with an individual, the down payment might be more than that associated with ready-to-move and under construction property.
Physical inspection of the site becomes imperative and needs to be done meticulously in comparison with ready-to-move properties. The documentation also needs to be checked diligently as chances of fraud are paramount in such cases.
Consider the following points while deciding either of the above mentioned options – your budget, locality, price appreciation, builder’s reputation, have you purchased the house from an investment standpoint or a residential standpoint, whether you want to reside in the house for a long period or a short period, proper documentation, inspect the property and plan out the EMIs. Consider all three options, weigh the advantages and disadvantages and make an informed decision while opting for a property.
Stages of construction and their financial implication
Various stages of construction have their own financial implications. Whether you are availing a loan to build a home on a land you own or going for an under construction property, the following points will guide you to make your journey hassle-free.
A construction loan is a short term loan that is availed to pay for the cost of building a house. It may be offered for a term that allows the customer to build the house. Such loans have a variable rate that fluctuates with the prime rate. While applying for such a loan, a lender will have to be provided with a construction timetable with detailed plans and a budget.
Working of construction loan
A schedule of payments is drawn up in terms of the construction loan.
The builder is provided with funds at designated intervals for the continuation and completion of the project.
These disbursements are provided at the various stages of the construction process, such as foundation, lock up (the stage where windows and doors of the property can be locked).
The number of draws and the amount to be paid is negotiated between the lending institution, the borrower and the builder.
The lending institution may release the draws after the inspection of the construction pace.
After the draws have been paid and construction completed, the buyer will have to take the end loan to pay off the construction loan. The balance that is left to be paid of the construction loan is rolled into the normal mortgage.
Type of Construction loan
There are two types of construction loans available.
One step loan- In this type of loan, the lender for the construction loan and the mortgage are the same
Multi step loan- In this type of loan, the mortgage and the construction loan are split, wherein, the construction of the building is completed and the mortgage payment starts only after the house is built.
Disbursement at various stages
The disbursement of the loan amount is not done at one go. Depending on the progress of the construction, the amount is released in installments at the various stages of construction.
For the disbursement of the loan, most lending institution follow the 80:20 scheme, wherein the buyer pays 20% down payment and the rest is disbursed lending institution in installments.
Various stages of construction
The construction of a building is a long drawn process that involves various stages.
Foundation- The foundation stage involves laying the foundation of the house with steel placements etc.
Frame and Brickwork- At this stage, the builder puts up the frame of the house which includes roofs and windows.
Lock Up- It is so named because at this stage the doors and the windows become lockable.
Second Fix- At this stage, the plumbing and the electrical work is completed, plaster boards, gutters and pipes are installed.
Completion- This is the final walkthrough stage wherein the builder acquaints the buyer with the various features of the house.
Payment at various stages of construction
The stages of construction; foundation, frame and brickwork, lock up, second fix and completion provide an idea about the payment schedule of the construction loan availed.
A proper contract lists out all these stages along with the amount to be disbursed at each stage.
Because the payment will be made at various stages, it is necessary to get a fixed price from the builder so that the lender is aware of the amount to be released at each stage.
Progressive draw down
The payment of the loan amount in various stages of construction is referred to as the progressive draw down
The interest paid is less in such stage wise withdrawals than what needs to be paid on the withdrawal in lump sum
Usually the builder requires to be made five payments, i.e. in the five stages of construction
The builder can be paid directly by the lender upon request
Before the final payment, an expert will be send by the lender to investigate the completion of the construction; if it is not found to be satisfactory then the lender can withhold payment
The interest and the repayments will only be charged on the funds used
Percentage of payment at the various stages
Foundation stage -maximum 20% of the total price
Framework, lock up, second fix stages maximum 70% of the total price combined
Completion stage-remaining 20% of the total cost
It is important to note that the lender will not pay more than 35% at each stage
The progressive draw down on the construction loan suffers from a few disadvantages.
If the construction of the house is not completed on time, then the buyer will have to pay a fee to extend the loan.
While paying off the construction loan, if the credit amount of the borrower drastically changes, then the buyer will not be qualified for an end loan. The buyer risks foreclosure until the previous amount is paid off and a new loan can be availed.
Points to be kept in mind
The lender usually takes 2 – 7 working days to release the payment for the various stages
If the total cost of construction is hard to be determined, then the buyer should apply for a variable cost construction loan
The lender should be provided with the buyer’s contact details as well as the builders’
A construction loan is usually availed to make the process of building a home easier. The provision of the payment of the borrowed amount at different stages makes it easier for the buyer as well as the lender to keep a track on the progress of the construction.
Pre-Launch Offers on Homes
Given the myriad of options, choosing the right property becomes a tricky affair for prospective buyers. Many home buyers are lured by the prospects of pre-launch offers advertised by the builders. To safeguard the financial interests of the buyers, it is important to understand the concept in detail. Read ahead to know more about pre-launch offers.
Defining a Pre-Launch Offer?
A pre-launch offer usually involves creating buzz by spreading information about an available property that has not yet been put on the market. The finances involved in a pre-launch offer are usually lower compared to the launch offer, making it sound prospective to buyers who invest in the property. The investors/ buyers usually have to wait for one or two years before the project is completed and they can take possession of the property.
Difference between a Pre-Launch and a Soft Launch
For a layperson investing in a prospective property, it becomes necessary to understand the difference between pre-launch and soft launch in the real estate language.
Pre-launch is kind of a distant dream wherein the builder raises money from the public for real estate projects that do not have regulatory approval of licenses and clearances yet. In soft launch, the money is asked to be invested only after all the regulatory approvals are in place.
Given that pre-launch is considered to be an illegal affair, the builder usually insists on cash payment so as not to leave a paper trail. In soft launches, which are legally permissible, the payments are usually made through arrangements that are legally viable.
Advantages of pre-launch for customer
Given the interest in buying one’s own property, the pre-launch offer sometimes proves beneficial to the investors.
The pre-launch offers usually provides great discounts to the early bird investors.
It provides a good rebate to the investors in terms of their overall finances if the project finishes on time.
The investors are allowed to sell off their property to other buyers once the project is completed and this is done on mutual agreement with the builder as the investor in the first place provided the cash necessary for completion of the project
Disadvantages of pre-launch for customer
The pre-launch investment by a buyer is a risky affair and as such it has its flipside as well.
Conscious delay by the builders in completion of the project, if the property is not creating enough buzz in the market or legal delays, leads to excessive financial burden and mental and emotional harassment for the investor.
No tax benefits
Investors also undergo the loss of tax benefits if the delivery of the house keeps on getting delayed. The income tax rule which allows deduction for both principal repayment and interest payment cannot be availed until taking possession of the house. If the project keeps on getting delayed, then the investor will have to continue paying the EMI of the house without getting any tax benefits.
Limited exit routes
Investing in a pre-launch property leaves one with limited exit routes. Opting to cancel the investment might lead to heavy losses if the market conditions are not right. For those looking to sell off the house might not find buyers right away as prospective buyers would be more interested in buying a fully constructed house rather than one under way.
Advantages of pre-launch for developers
The builders are heavily oriented towards offering a pre-launch investment to potential buyers.
Through information spread via word of mouth, the pre-launch affair helps create a buzz around the upcoming property
It keeps a constant stream of cash flow for the company and also helps the builder to use it for other projects if necessary
The builders can attract an interest-free capital from the investors
It helps to retain an old customer base by providing them with new projects as well as develop a new clientele
Disadvantages of pre-launch for developers
Not just customers, the builders also face difficulty with their pre-launch offers.
Since pre-launch offers are not legally permissible, and the buildings do not have the necessary regulations, there is the possibility of being tangled up in a legal mess that takes time to sort out.
Delay in projects or overall cancellation of the project leads to monetary losses as well as the loss of a clientele base for the builder.
The negative publicity garnered because of one failed pre-launch project might shed a bad light on the other projects of the builder.
Factoring in on the pre-launch offer
It is imperative for the prospective buyers to keep in mind a few factors while going for a pre-launch offer.
It is necessary to make a comparison of the pre-launch price to the future market price and this can be done with a review about the demand of the project, comparison with other projects in the same area etc.
It is necessary to find out whether the builder has successfully completed projects before and if he has enough funds for the current project.
The investor should know whether or not the builder has the necessary documents to start and complete the project like that of the Intimation of Disapproval as guidelines for the builder etc.
The investor should ensure that the project is on its way to be cleared by banks or housing loan companies.
The Legal Route
To ensure that the money invested is not misused, investors should make sure that an agreement (receipt) is signed between the builder and the investor that spells out monetary transactions conducted. In case the project fails to launch, this agreement can be used as proof in the court of law to get back the money invested.
Pre-Launch Offer and the New Real Estate Regulation, 2016
The new Real Estate Bill passed in March 2016 aims to provide a lifeline to the customers so that they are not duped by the Pre-Launch offers:
Without the necessary regulatory approvals already in place, builders will not be allowed to advertise pre-launch offers.
The builder will have to provide information about the project and the plan layout, the status of the approvals, details of the projects completed in the past 5 years, so that the buyers can make an informed decision.
The project layout as advertised in the pre-launch offer will have to be delivered. Otherwise the builder may be fined for the same.
Given that investing in a pre-launch project is a high risk undertaking, the investors should be assured of the credibility of the builder. The investment should be done only when the buyer has enough resources to sail through bad weather. Otherwise the lack of regulatory approvals that lead to legal hassles might prove dampening to the investor. The investor should do a thorough scrutiny of the proposed project and then make an informed decision about the investment.
What is the Difference between Leasehold property & Freehold Property?
A house is a lifetime investment. It takes careful planning and allocation of resources, namely time and finances. When you look for a house, it is necessary you understand and are aware about ownership of the investment.
Fundamentally speaking, there are two major types of property available in the estate market – Freehold and Leasehold. While it might seem like a technical jargon there are few key differences between freehold and leasehold properties, including difference in state laws and regulations. Let’s take a close look at these types of property ownership.
Freehold property means, that you own it outright. The building and the land attached, thereby belong to you. The title of the house rests with the “freeholder”. In case of such ownership, the owner has full and undisputed rights to the property.
You do not incur annual ground rent and relative expenses
There is no timed lease to be worried about
The number of participants in the process of ownership is also negligible hence reduces dealing with the various parties
While it may have its benefits, the freeholder is responsible for maintaining the property and the land. These costs can be expensive, hence it is recommended to budget for these pre-emptive cost before investing in a freehold property.
The value of freehold flats are generally higher than leasehold properties.
Freehold owners are not subject to various charges as they have absolute right over the property.
Responsible for maintenance
Since, the owners have the absolute right, they are in charge of maintenance and repair of the property. In case of renovations and repairs to the property, the owner is responsible.
The owner or freeholder enjoys complete and absolute ownership for the property.
It is easier to get home loans for freehold property, provided the title is clear.
Managing of the property is a hefty task, at times it is time consuming and incurs high costs.
For a freehold property, the initial cost are high, as the property includes the land expenses.
The property incurs various costs such as property tax and state tax, however if the purchase is through home loan, tax deduction can be availed.
In a leasehold property, the owner or agency gives the property on lease to the lessee for a stipulated period. The ownership rights are with the lessor. The lessee is transferred the temporary right and authority to use the property. Although the lessee has a right, there are certain restriction of sale, transfer or gifting of such properties, and they have to obtain permissions from the owner in that case.
For such ownership a lessee pays lease premium or annual ground rent fixed by the owner in the contract. While the lessee is not responsible for maintaining the property, he/she will have to share cost for maintenance and repairs with the true owner. In addition, the lessee also will be liable for paying service taxes and related costs.
Once the lease period is over, the rights get transferred back to the true owner. Or the lessee can opt for extension of the lease, it can also be extended from 99 years to up to 999[Pls check if its 999 or 99 and verify][It is 999 years. Please refer to the link-http://www.99acres.com/articles/leasehold-vs-freehold-property.html/] years, in which case the lessee can purchase it by paying a price.
Properties such as apartments or flats can never be freehold as the land is shared by other flats. Leasing flats are quite popular in metropolitan regions.
They are relatively cheaper as the land cost paid is lower than in case of freehold.
When buying due to stringent checks for developers and sellers, the titles are credible and verified.
The lessee enjoys the benefit of tax deductions on annual income tax.
Major drawback includes that, once the property has only 80 years remaining on the lease, its value plunges. In such a case, it is tougher to get mortgage on such property.
Process of buying the property is longer, the required clearance from State, owners and the society is time consuming.
Renewal of the lease is completely at owner’s discretion.
Converting leasehold property to freehold property
If the opportunity so arises, converting leasehold to freehold is a great option. If the owner is willing to sell, the leasehold property can be purchased directly from him. Some states like Delhi allow such conversion, however the applicable state rules need to be checked before making the decision.
The conversion process
For the conversion, the buyer (lessee) needs to pay one time amount to the owner.
The amount can be in lump-sum or in equated monthly instalments (EMI), however, EMI will incur regular interests.
The state also has a detailed list of conditions for conversion of leasehold property. One such condition is that the leasehold property should possess clear title and there should be no on-going legal proceeding for the same.
In case there is such a legal dispute, the property can only be converted post settlement.
The lessee should meet all such regulations for a successful conversion.
The lessee and the owner both need to provide adequate proof and documentary evidence such as No Objection Certificate (NOC), etc.
Which one to go for?
If you want the ownership to your property, Freehold is your only choice. But if that is not your priority, leasehold too is a worthy option. Leasehold property comes with a long list of formalities to be taken care of before purchase. Freehold property is comparatively easier. Apart from taking the pros and cons of both in consideration, your choice of either ownership or lease should also depend on availability of finances – home loans have made this easier – or it aligning with your future plans.
What is meant by Carpet Area, Built-Up Area, Super Built-Up Area
First time home buyers are often misguided when house hunting due to real estate jargons thrown around by builders and developers. The knowledge of these terms are significant for a profitable investment in a property, especially an emotional investment like first house property. Before you go house hunting, brush up on the following terms, so you don’t get duped. This real estate knowledge will empower you to make negotiations and have a pleasant house hunting experience.
Carpet area, as the name suggests, means the area inside the property where a carpet can be laid and is measured wall to wall. It is the actual space available for use within the property minus the thickness of wall. This is the measurement you should be aware of before buying a property. The carpet area gives an idea of usable space for each rooms such as kitchen, living room, bedrooms and bathrooms. Some builders also include balcony and verandas, it is better practice to confirm what entails the area, to prevent eventual buyer’s remorse. Carpet area nowadays is usually around 70% of the built-up area.
Built-Up Area or Plinth Area
Built-up area = Carpet area + walls + utility + balcony The area after addition of carpet area and thickness of inner walls is called built-up area or plinth area. Walls consist of 20% of the built-up area. Other spaces such as balcony, flower bed and utilities are inclusive and amounts to 10% of built-up area. Thus, 30% of the area is not usable and the remaining 70% is available as carpet area. For example: If the developer says built-up area is 2200 square feet, 30% (660 sq. feet) is the built-up and remaining 70% (1540 sq. feet) is the carpet area.
Super Built Up Area
Super built-up area: Built-up area + amenities and common areas Also known as saleable area, super built-up area is added to built-up area. This area generally consists of amenities and passage. Developers usually calculate amenities such as the space for pools, garden, passages, etc. within the super built-up area. It is usually calculated by adding 15%- 50% of loading factor* to the carpet area. Home buyers need to beware when developers quote super built-up – their preferred sales tactic – it does not give you an accurate measurement of available living space. The following is an illustration of how builders calculate built-up for flats/ apartments. Flat 1 (F1) area- 2200 sq. feet Flat 2 (F2) area – 1200 sq. feet The common area measures to 1000 sq. feet. F1 share - 400 sq. feet and remaining 600 with F2. Super built-up thus calculated is- F1: 2200+400= 2600 sq. feet F2: 1200+ 600= 1800 sq. feet
Here are certain things you need to be sure of before you make that purchase:
There is no fixed ratio of super built-up to built-up or carpet area.
Old buildings have higher percentage of carpet area than new construction, where the percentage could be as low as 60 to 70 %.
When comparing property quotes, compare them to same measurements, i.e., carpet area to carpet area, etc.
Make sure to ask the builder or seller the super built-up is area and what it consists of. Ensure that all the area details are mentioned in Sale Agreement. Minute changes in these details could mean higher purchase price for you, hence you need to be clear of them before buying.
*Loading factor is defined as the area which includes the proportionate share of the common area for a flat which is determined by applying a multiplier to the carpet area.
It is necessary for the buyers to remember that as per the regulations of the new Real Estate Bill that has been passed in 2016, the builder has to advertise and sell the property as per the carpet area instead of the super built-up area.
Difference between Builder floor apartment and a multi-storey apartment
The inordinate expansion of real estate has provided people with a variety of options regarding their living spaces. Although visible to the naked eye, not many understand the actual difference between the different types of residential spaces. As potential buyers it becomes necessary to understand the variety that real estate provides and as such the following will highlight the difference between a builder floor apartment and multi-storey apartment.
Builder Floor Apartment- It is a residential space in a low-rise independent building that has all the amenities of a housing unit. It generally consists of two or four floors.
Multistorey Apartment-It is an apartment in a multistoried building in a housing complex, usually constructed by private builders or governmental authorities. The apartment usually consists of many floors as per the layout plan.
The difference between a builder floor apartment and a multistorey apartment can be understood by referring to the following points of comparison, which can round up as advantages and disadvantages of the apartments as well.
Builder floors are constructed by local builders on the area provided by the landowner. The builder also gets part ownership in the building. Builder floors are considered to be a good investment opportunity by those seeking to renovate their house and at the same time gaining some profit from the market.
Multistoried apartments are usually constructed by government authorities or private builders and then sold to individual buyers.
A builder floor is on the higher side of the price scale as the builder has to compensate his expenses for constructing lesser number of floors.
A multistorey apartment is cheaper compared to a builder floor as the property builder optimizes his expenses by selling the different apartments to customers.
A builder floor does not have the facilities of swimming pool, parking etc. A multistoried apartment is usually provided with the facilities of gym, car parking, swimming pool etc.
Builder floors are spacious as flats are not cramped into one floor.
Multistoried apartments, in order to accommodate a number of housing units, have lesser space in the flats. But they are usually provided with more open spaces in the complex.
Service and Maintenance
A builder floor usually involves maintenance of the building with other floor owners. But there is no monthly maintenance charge involved.
A multistoried apartment, as per rule, involves the payment of maintenance charges in terms of gardening, cleaning etc., irrespective of whether those services are actually availed by the residents or not.
Builder floors need not necessarily have a particular parking area within the building premises. An extra car may be required to be parked outside the building premises. Multistoried apartments are provided with parking spaces for all the residents. Some usually allow parking for visitors as well.
Builder floors might be prone to security and safety concerns due to unrestricted entry in the absence of a security staff.
Multistoried apartments are usually gated communities with restricted entry, CCTVs and round the clock security.
Builder floors have more independence and privacy as one family usually occupies the whole floor.
Multistoried apartments have less to offer in terms of privacy and independence as there are usually 3-4 flats occupying a particular floor.
The choice between a builder floor and a multistorey apartment ultimately rests with the potential buyer, as while investing in a property different considerations have to be kept in mind in terms of finances, security, services and privacy.
The Valuation of Property
Buying or selling a house involves a lot of investment as well as commitment. As such a property involves a lot of emotional connection as well as financial commitment, it becomes necessary to ascertain whether that property is worth it or not; and that is where the valuation of property comes in.
Property valuation or real estate appraisal means calculating the value of the property at the market value. Real estate appraisals are necessary to ensure that the amount of investment being made in a property is worth it and such appraisals also form the foundation of home loans, taxes etc. Property valuation also helps set, the selling price of a house.
Authority for property valuation
A property valuation or real estate appraisal is done by a certified, state-licensed professional. A property appraiser usually considers factors such as-
Recent sale of other properties
Replacement cost of the property
Operating cost of the property
Rental income, if any, that it might earn
A professional property appraiser becomes important in order to have an unbiased third party opinion before, as well as after a home sell or purchase. A professional appraiser uses a few methods for calculating the value of a property-
Comparison of the property is done to similar properties that have been recently sold and is usually used for the valuation of farm, vacant properties and residential properties.
The assessor calculates the replacement cost of the property in reference to the current labor and material charges. The appraiser may sometimes add the value of the land as well.
The assessor, by taking into account the operating expenses, maintenance charges and financing terms analyses how much money the property might earn if it is rented out.
Common Considerations by the property appraiser
Property valuation aims to achieve an estimate about the best transaction price for the property. Apart from the mathematical model, the property appraiser also keeps some general considerations in mind while evaluating a property.
Qualitative considerations such as condition and infrastructure of the property, location of the property and legal restrictions (if any)
Quantitative considerations such as the total area of the property, age of the property, number of other buildings in and around the property
The appraiser also does the valuation depending on the locality and the neighborhood, present political situation of the country as well as economic stability
Points to be kept in mind
The homeowner or seller appoints a property appraiser to understand and estimate the value of the property, as most of the times they are not competent enough to do so on their own. But, home sellers/buyers have to ensure that they do not blindly follow the evaluation given by the professional expert and can keep in mind a few points when their property is being appraised.
Ascertain that the agent has researched the value of the property by using a comparative market analysis, i.e. in relation to other properties sold as well as about to be sold in the market
Ascertain that the agent has asked all the relevant questions related to the maintenance of the property and that a chance has been given to the homeowner to provide a proper justification regarding wear and tear in the property
As a potential buyer, ensure that the agent has properly informed regarding any shortcoming or potential difficulty in the property
Ensure that the agent explains the implications of the contract before the submission of any document
Difference between Buying and Renting a Property
Buying or renting a property is not just a financial consideration; it is, in fact, a lifestyle decision. Buying a house involves a hefty financial commitment. A prospective customer has to make a choice between spending a part of the monthly income on rent and paying off home loans. We delineate the differences between buying and renting a property with regards to their advantages and disadvantages so as to help you make an informed decision.
The difference between buying and renting a house can be understood in comparison to the points as listed below.
Owning a home offers the possibility of increasing personal wealth, as the principal on the loan is paid over time, giving a chance to build equity depending on the market value. Owning a house makes it in an asset.
Renting a home provides a possibility of being left with more cash in terms of savings than what might be required for to pay off the mortgage after owning a house. But without the possibility of building equity, rented house becomes just a roof over the head.
Ease of movement
Owning a house may sometimes prove to be dampening, if, after investing the money, one needs to move for job responsibilities. This might prove to be an added financial burden, with paying the mortgage on the house as well as rent in the new place, specifically for those whom company accommodation is not available.
Renting a house helps with the ease of movement, as apart from paying the house rent in a new city, no other additional housing cost is involved.
Owning a house means that the owner has to take the responsibility of the maintenance of the house. The maintenance has to be done keeping in mind the living conditions at present along with the future prospect of maintaining the market value of the house in case of resell.
Renting a house means that all the responsibilities regarding the maintenance and repair of the house rests with the landlord.
Owning a house vs renting a house
Both owning a house and renting a house comes with their set of advantages and disadvantages which are delineated as follows.
Advantages of owning a house
Paying off the mortgage usually means hassle-free living in terms of financial considerations relating to the house
Given that the house is an asset, it can be used for funding other investments
Any changes or renovations as preferred by the homeowner can be made without being answerable to anyone
Flipside of owning a house
Given that owning a house is a big financial investment, one needs to be sure about whether they can afford it or not
One has to be prepared for a fall in the market value of the house
Going over the top while buying a house means there might be a need to cut down on other expenses like extravagant holidays or frequent outside meals One needs to be prepared for the extra expenses incurred in terms of maintenance and renovation
Perks of renting a house
Renting a house provides a/b flexibility of movement in case of sudden change of job. It does not require a long term commitment on the part of the tenant
Renting provides an affordable opportunity to live in an area or building which might be too costly to buy
Renting makes moving out of the house easier
Downside of renting a house
The tenant is bound by the rules mentioned in the lease agreement and does not have the freedom to make structural changes to the rented apartment
Renting a house does not provide the opportunity for return on investment on the house as the money/ rent goes to the fund of the landlord
The tenant has no control over the rent amount fluctuations, which are decided by the landlord
No protection against non-renewal of lease when the term of the agreement expires
Benefits of tax on home loans
Although home loans come with the burden of EMIs’ (Equated Monthly Instalment), homebuyers are provided a breather in the form of tax benefits on home loans. However, it is very important to keep in mind that the tax benefits on home loans can be availed only on fully constructed properties.
Tax Benefit under Section 24 of the Income Tax Act
For those with self-occupied house property, the tax benefit that can be incurred for interest on a home limit is limited Rs.2,00,000, irrespective of whether the property is self-occupied or vacant
The deduction is available on loans taken for purchasing a fully constructed house or for constructing a house. The purchase or the construction has to be completed within three years of taking the loan from the end of the financial year
The deduction of interest on loans taken for repair or reconstruction is limited to Rs. 30,000
As per the Budget of 2016, if a property is not acquired or completed within 5 years of availing the loan from the end of the financial year, the interest benefit would be reduced to Rs.30000. This is a relief to the buyers in a way as the earlier cap used to be 3 years.
Tax Benefit under Section 80C
Section 80C provides the benefit of claim of the portion of EMI which goes towards principal repayment.
The deduction limit under the tax benefit of this section is Rs.1,50,000. It should be noted that this is a combined cap for all the investments that are clubbed under Section 80C such as EPF (Employee Provident Fund) etc.
The amount paid as stamp duty charges and registration fees is eligible for deduction under this section
Tax Benefit under Section 80 EE
The Budget 2016 has provided for the following benefits under Section 80 EE-
An additional deduction of Rs.50,000 for the first time home buyers on properties valued less than Rs.50 lakhs and on loan amount Rs.35 lakhs sanctioned between April 2016 to March 2017
A running common belief is that rich people, who have enough money at their disposal for this generation as well as others to come, do not need to avail home loans. With the cash at hand, they can readily afford to buy the property they want without the hassles of bank approvals. But reality suggests that it is advisable for rich people to take up loans as well.
Depending on the market trend, they are more likely to get a low interest rate on a huge amount and as such will have the opportunity as well as the financial ability to invest in other ventures and expand their financial interests.
Banks also look forward to attracting rich clients towards their home loans as they are least likely to default on their payment.
Taking out a home loan means that the rich become eligible for tax benefits under the Income Tax acts as well.
The decision about owning a house or renting one, depends on the comfort and vision of the individual’s life. However housing markets and life circumstances are too varied for any outsider to make a generalized statement regarding the best option. Future buyers or tenants can only be provided with an idea about the situation, the ultimate decision is at the customer’s discretion.
Steps involved in buying a house
Checklist that needs to be considered during a site visit and buying a house
Buying a house is one of the biggest investments thus, it is important to get it right. Knowing the right questions to ask and the necessary inspection to be made is the right way to ensure that the investment being made is worth it. The following checklist can be prepared by a prospective buyer regarding the aspects of the house that need to be looked into.
Before investing in the house, the buyer should ask the seller of the house if the place is involved in any financial liabilities so that the position of the buyer is not affected once the house is taken possession of.
There is no house that does not require maintenance of sorts. As prospective buyers, it is advisable to conduct a thorough check of the house to see whether all parts of the house are easily accessible for repairpersons to work on in case of emergencies. Also ensure that there are no persistent plumbing problems.
It needs to be checked whether the area where the house is located has all the amenities such as schools, grocery shops as well as easy availability of transportation. It should also have a running water supply, electricity, and should not be a flood prone area. The buyer should also take a note of whether or not street lighting is available in the area.
Whether or not the bedroom will be affected by noise factor, light factor or any other factor that might cause nuisance to the inhabitants, should be looked into. The temperature of the room throughout the year must be considered. If the bedroom is fully furnished, then its quality must be checked as well.
Whether the pipe connected to the basin and the sink is working properly and that the water in the basin dries up quickly needs to be checked by the buyer along with the availability of proper gas connection. The kitchen cabinets should also be checked to verify if they are spacious enough or not.
The buyer should check whether or not the taps and showers are without leakage, the working condition of the flush, the existence of an exhaust fan as well as the supply of running water.
You should take a tour outside the house to take note of the condition of the paintwork, significant cracks in the wall and signs of dampness.
A thorough inspection should be done to check whether a proper drainage system is available in the house. Lack of a drainage system might lead to flooding from a partially blocked sewer.
Check for the presence of proper insulation in the ceiling space, walls and under the floor.
Check for evidence of cracked windows, unhinged doors or doors that don’t close properly and the condition of the wall and the ceilings.
There should be clarity whether floor coverings, curtains, blinds, air conditioner and heaters are included in the contract within the price range of the house.
One can insist for a report from a builder or an engineer regarding the condition of the house and if not found satisfactory, the contract can be cancelled. The buyer should also hire a proper lawyer to ensure that all the documents are in place and valid.
The checklist is a helpful way to turn the house into a home without rushing into and not letting the heart take control over the head. No house is perfect and it is in the buyer’s best interests to find the shortcomings early on so that there is no regret after moving in or extra expenses in renovating the house.
Steps involved in buying a house
Buying a proper house is a major financial and emotional commitment. This means that buying a house cannot be a hasty decision. It has to be planned and executed properly so that there is no remorse on the part of the buyer. Below is a list containing important steps that need to be kept in mind while going for that dream house.
Finances become the most important aspect in the home buying process as it determines the purchasing capacity of the individual. It might seem a bit confusing to go for the financial aspect before looking at a house. But if one is aware of the money that they can spend on a house, it becomes easier by not setting high expectations and getting a house that will make them indebted for the rest of their lives.
It is usually recommended that people should look for homes that do not cost more than four to five times their annual household income. This is because prospective home buyers are usually asked for 20% of down payment. Also while deciding the price range, it is necessary to keep in mind all the other expenses in daily life.
The best way to go forth for buying a house is to get pre-qualified for a mortgage and this can be done by providing certain financial information to the banker.
Depending on the information provided, the bank will inform about how much money can be lend and this will help the individual narrow down their choice about the kind of house they will be able to afford.
The individual should be assertive enough to not let the lender determine a monthly amount that will not be affordable.
Find the builder
One cannot just be randomly roaming on the streets looking for a house to construct. That is why, the individual should have an idea about the kind of builder they would like to work with. While looking for a builder, the individual should have a few points in mind.
A builder with a list of estimates should be avoided. Always ask for fixed prices and a direct comparison with other properties in the area.
Keep an eye out for discount prices and bonus inclusions. However at the same time be aware of fraudulent schemes because sometimes offers which are too good to be true are usually not true.
It is necessary to ask the builder if they will build the house as displayed in advertisements and at an itemized cost. This becomes necessary as many builders do not construct the houses as advertised.
Keep a close watch on the construction process and also on what is covered by the builder’s warranty. Sign up for lien releases so that the sub-contractors etc. are properly paid and no loophole is left for being sued for unpaid bills.
As the Real Estate Bill passed in 2016 makes it mandatory for the builders to provide details about the projects completed in the past five years along with the other structural data, it is suggested that the buyer should ask for such information from the builder.
Selecting the property
Just because a property looks good in an advertisement and is coming good on the budget does not necessarily mean that it will be feasible for the customer. Following things need to be kept in mind while selecting a property.
Location and neighborhood- A property which is far off from the workplace, educational institutions, hospitals and other necessary locations will not be beneficial in the long run. The neighborhood in which the property is located is also very important. A safe and comfortable neighborhood is necessary for security concerns.
Transportation- It is always advisable to select a property that has public transportation nearby and also does not involve much of self-driving to regular places, including the workplace. Otherwise excessive transportation costs get added to other expenses including the mortgage.
Proximity- Proximity to regular leisure activities, restaurants, friends and family is an important criteria in the selection of a property.
Factors in buying a house
While buying a new house it is necessary to take several factors into consideration.
Long haul- It is necessary to invest in a house in which the individual sees themselves living for a number of years. Otherwise uprooting one-self continuously puts an emotional as well as financial strain.
Affordability- Keeping in mind the current and future expenses, it is necessary to not exceed the bank account and only go for a house that can be afforded while leaving enough money for other expenses.
Adaptability- A house that can be adapted to the necessary lifestyle changes is a good investment. A house that is multi-functional for years to come saves on a lot of expenditure as well.
Type of house- It is necessary to have ones preferences sorted regarding the kind of house they would like to live in. Money should be invested in a place that makes the customer as well as their family lead a comfortable life, financially as well as psychologically and emotionally.
Real Estate Agent
A real estate agent is not a necessity, but rather a tool which makes the process of buying a house easier.
Real estate agents are aware of the market and will guide the buyer towards the proper home
They can provide with helpful information about the property, information which might not be accessible to you otherwise
A proper real estate agent is one who is ready to answer any question that may be asked by the prospective buyer
Offer for the house
Making an offer for a house is based on faith, a belief that the house will make the buyer comfortable and happy with the hole in the pocket. While negotiating with the seller it is necessary to remember to be not too stingy yet in tune with the price range
Once an offer is made on the price of the house to the seller, there is the probability of a negative as well as positive reply. If the response is in positive, it is not necessary to close in on the deal immediately.
Home inspections are contingent with the purchase offer as it allows the prospective buyer to look for structural damages to the building or any other damage that might not have been pointed out by the home seller.
This gives a chance to the buyer to negotiate the offer or withdraw one if significant damages are noticeable. The buyer can also decide if they want the seller to make repairs to the house before finalizing the deal.
A sale can be closed by the buyer if the house is found to be satisfactory financially as well as structurally. The closing of the sale involves signing of the necessary paperwork, including the loan papers. The process usually takes a couple of days. The closure of the sale involves the payment of the previously decided down payment. Once all the payments have been made and the paperwork sorted, the individual is allowed to take possession of the house. The points listed are just an attempt to make the process of house hunting easier by listing out ideas that might help the prospective buyer.
What do NBFC / HFCs / banks look for while evaluating a Home loan proposal?
While evaluating a loan proposal, financial institutions are concerned about the repaying capacity of the applicant. Several attributes are considered by lending institutions while making this decision.
Financial stability of the borrower and the co-borrower is an important factor while deciding whether to provide a home loan or not. A housing finance company or bank sets a fixed upper limit for the amount of money that can be sanctioned for a particular type of loan. Depending on the creditworthiness of a customer, the amount of money sanctioned to the party can be increased to a certain degree.
Factors determining financial stability of a person are:
Bank statement of past six months
Salary slip of past six months
Other loans availed
Age matters especially when the tenure is quite long. The age of the borrower is a crucial factor and most banks ensure that all the EMIs can be paid by him during the earning phase. So, a person who is 45 years old or above will find it difficult to bag a loan with a long tenure, say, for 20 years.
To lend or not to lend
The Credit Score is a 3 digit numeric summary of a person’s credit history which indicates applicant’s financial & credit health. The Score is derived from the credit history as detailed in the Credit Information Report [CIR] and ranges from 300 to 900 points.
The Credit Score plays a critical role in the loan application process.
After an applicant fills out the application form and hands it over to the lender, the lender first checks the credit score and credit report of the applicant.
If the credit score is low, the lender may not even consider the application further and reject it at that point.
If the credit score is high, the lender will look into the application and consider other details to determine if the applicant is credit-worthy.
The credit score works as a first impression for the lender-the higher is the score, the more is the chance of party’s loan application getting approved.
The decision to lend is solely dependent on the lender and CIBIL does not in any manner decide if the loan/credit card should be sanctioned or not.
The score tells a credit institution how likely an individual is to pay back a loan (should the credit institution choose to sanction his/her loan?) Based on his/her pattern of credit usage and loan repayment behavior. The closer is the score to 900, the more confidence the credit institution / bank will have in that person’s ability to repay the loan and hence, the better chances of one’s application getting approved.
If you are a guarantor for someone who has a poor credit record, it may deter your chances of availing a loan. Thus, analyze a person’s basic financial aptitude before becoming a guarantor for that person. If that person defaults, then it may have a bad impact on your credit score.
Do not apply for multiple loans in a short span of time. If banks or lending institutions find out that you have multiple loans to repay, they may consider you as a person who is credit greedy and reach a conclusion that you are in urgent need of money. This may force the loan evaluator to be strict while considering your loan application.
As a part of the credit appraisal process, the applicant may be required to visit the bank branch for a credit interview. If the applicant is found to be financially sound with a good credit history and the property is financially viable and legally clear of hassles, then there could be no hiccups for obtaining a sanction of the loan application.
The Property to be purchased
Every buyer does not conduct a detailed research while purchasing a property. However, the money lending institutions are extremely meticulous in this regard. They conduct due diligence to determine if the title of the property and related documents are in order since these guarantee the legality of a project. If any issues are found, then the loan application is rejected. Certain real estate developers who have defaulted in the past might be on the bank’s radar. This could also be a factor to reject the loan. This check helps lending institutions safeguard their interests while safeguard borrowers from getting tangled in a legal issue.
The property’s age is also an important factor to be considered by lending institutions. If you need a loan to purchase a house in a building that is thirty years old, lending institutions will think twice about this. In certain situations if the loan is sanctioned, then it will not be for the entire amount, only a part of the loan will be approved. This hesitance is due to loss preempted because of the possibility of a structural collapse resulting in financial loss.
Importance and Advantages of Ratings and Credit Bureaus for Home Loans?
Credit rating is measurement of credit worthiness of a borrower to fulfil their financial commitment. It is measured by a number which reflects the health of your finances in relation to debts. CIBIL, Expersion, Equifacts and Highmark are a few of the important Credit Bureaus. For ease of understanding, reference is made to CIBIL TransUnion scores which range from 300-900, 300 being the lowest and 900 highest. Credit ratings are derived by assessment of your credit history and it shows the record your past and present borrowing behavior. Banks and other financial institution consider these scores for lending home loans.
Role and Function of Credit Bureaus
India has various credit bureaus which provide risk measurements for various financial entities and hence help mitigate risk on lending. Credit agencies also help government and other institutions to grade investments thus regulating financial markets. They play major role in estimating efficient risk premiums and bringing transparency to credit markets.
Advantages of credit rating agencies:
They provide detailed information with high accuracy
Gather information and analysis at low cost than done directly by financial institution
Their approach and result have credibility in credit market
How Rating Works?
Credit rating agencies like CIBIL gather your credit information from various institution. This data is organized by them and submitted as reports to financial institutions. The Banks use this collective data to determine approval or rejection of your home loan application.
A Good Credit Score Is Important For Home Loans
A good credit score benefits from lower rate of interests on a conventional home loans.
Factors Affecting Credit Rating
Following are some major reasons for lower credit rating:
High utilization of credit limit
While your credit card has upper limit for withdrawals and spending, it is unwise to use them frequently, it will increase your payment burdens and lend you a low credit score.
It is always recommended to have a balance of secured (home loan, auto loan) and unsecured loans (credit card, personal loan). Too much of either is bound to get your application rejected.
Defaulting on your bills and EMI will have a guaranteed negative impact on your credit scores, it shows to lenders that you are unable to meet your existing credit obligations.
Many accounts, cards, loans
If you have too many accounts (or cards and loans) in your name, it indicates to the banks that your debt burden has increased, hence your application will get rejected.
Improving Your Credit Score
To improve you scores, you need to keep in check the following:
Pay dues on time
Ensure your payments are on time, be it credit cards, personal loans or utility bills. Pay your debts if any, as early as possible.
Do not exceed credit limits
Make sure you do not exceed your credit limits on your credit cards, this will lead to increase in debt burden for you. Keeping overdraft to minimum is ideal to a good rating.
Review your credit history regularly
Keep track and regularly review your credit score, this be beneficial for any future loans.
New credit in moderation
If you have too many accounts (or cards and loans) in your name, it indicates to the banks that your debt burden has increased, hence your application will get rejected.
Process involved in taking a Home Loan
A home is a great investment especially with the development of Indian real estate. Market is open to supply of studio apartments to villas across cities and town. There are varied projects coming in, taking this in consideration the banks have streamlined their loan processing to the respite of new home buyers. It is now fairly easy to apply for loans, many banks provide utmost assistance to procure your dream home.
A guide to loan process
Once you have zeroed in on the property and the bank, you will come across the following loan processing stages:
The loan officer will provide you with the form wherein the details need to be populated. Various proofs in form of ID, Address proof, Age proof, bank statements, proof of income etc. will be required for application. The lending institution will further scrutinize these details to assess your loan eligibility. Some lending institutions also have relationship managers sent to provide doorstep service that assist in form filling and collection.
Loan processing fees and Personal Discussion
Post application, the lending institution will charge you non-refundable loan processing fees. They are required to carry out various loan formalities and to go forward with the loan process.
On payment of processing fees, the lending institution will summon you for a personal discussion. The lending institution carries out this exercise to gauge your repayment capacity and to determine the loan amount.
Verification and investigation
Next step is verification of the details. Lending institutions representatives visit your residence or workplace to verify the credentials provided by you. In this process, the references mentioned in the application will be verified for authenticity.
Once the lending institution is satisfied by validity of your details through their investigations, it will move forward to evaluate your loan repayment capacity. This is the most crucial step in loan processing. The lending institution may accept or reject your application, depending upon how convinced they are about your financial capacity to repay the loan principal with interest. Lending institution may give you conditional or unconditional sanction. In case of conditional sanction, you will have to satisfy various conditions before loan disbursal in order for the loan to be approved.
When investigation and verification is complete the lending institution drafts an offer letter which contains the following:
The interest rate applicable
Fixed or floating interest rate
The mode of repayment
Special schemes (if any)
The terms and conditions related to home loan
If you agree to conditions in the offer letter, you will need to submit a signed acceptance copy – duplicate copy of offer letter – to the lending institution. It may levy administrative fees at this stage.
Submission of documents and legal checks
You are required to submit legal documents of the property such as deed title, no objection certificate and other legal document. The lending institution will then conduct internal check to ascertain the validity of title of deed. The submission of title document signifies that the property is collateral to home loan, it will be returned only post full payment of loan amount including principal and interest.
Prior to loan disbursal, the lending institution will conduct a technical verification of the property. In case of under construction property, it will evaluate the location of property, stage of progress and construction quality. In case of ready possession property, the bank will check age, ownership, construction quality, locality and legal clearances.
The sole purpose of this verification is to ascertain that your property has undisputed title and it meets the valuation carried out by the lending institution.
Registration of property documents
On completion of all the above formalities, the lending institution is fully satisfied with the legal and technical valuation of the property, the registration process of the loan commences.
You will need to prepare legal documents in the format approved by bank’s lawyers on stamp paper of required denominations.
Signing of agreements and submitting post-dated cheques
On clearance of agreement and property papers from lending institution’s lawyers, it is time to sign the dotted line. Post signing, you are required to submit post-dated cheques as per terms agreed on the agreement.
Disbursement of loan
After the lending institution is sure that financing the property involves no risk, it will disburse the loan amount as per agreed type of disbursal. The disbursal can be in lump sum or in stages.
The lending institution then issue a cheque in favor of the seller or the builder. Mode of payment is partial in case of under construction property and full in case of ready possession properties. Your EMI begins from the day of disbursement.
The above mention procedure is the standard process followed by most lending institutions, though details such as timeline, rate of interest, etc. vary. The lending institutions have now further simplified the home loan process with instant home loan process available online on their respective websites.
10 Questions to ask yourself while opting for a home loan
If you are seeking loan for your dream home, there are dozens of home loan products in the market. With such variety of loans and schemes by Banks it can be confusing to decide the best home loan for your needs. In such a case, following are the questions you need answered to arrive at a solution.
What type of home loan best suits my need?
There are many types of home loans available in the market, you need to decide which of them is best suited to your needs. Following are some popular types of home loans.
Land Purchase Loans
Land purchase loans are taken to buy a plot of land on which the borrower wishes to build a home. These loan can be availed for residential or investment purposes.
Home Purchase Loans
These loans are used to finance purchase of new property or old property. The interest rate on these loans is either fixed or floating.
Home Construction Loans
This loan is for those who wish to construct their home rather than buy a ready possession property. The process for this loan approval is different from other home loans. The borrower has to account for land cost as a cost component to calculate the total price of the house. He also has to calculate the rough estimate of cost incurred for construction.
Home Expansion/Extension Loans
If you already own a house but wish to expand it, this type of loan is perfect for you. Extension means adding extra space to the current structure of your home. This extension can include extra room, floor or balcony, etc. However, lending institutions vary in categorising such loans, some consider it as part of home improvement loans.
Home Improvement loans
These loans are taken for purpose of renovation and repairs. It includes all types of renovations and repairs such as internal and external painting, external repair works, electrical work, waterproofing and construction of underground or overhead water tank etc.
In addition to these, there are other types of loans such as Home Conversion Loans, NRI Home Loans, Balance Transfer Loans, Stamp Duty Loans and Bridged loans.
Which type of interest should I opt for?
Home loan interest is dependent on loan amount, tenure, profile of the borrower and credit score. Two common types of interests are fixed and floating. Fixed interest is determined for the entire tenure of loan. Whereas, floating rates change over time, it is a great option only if you foresee the rates to drop.
Nowadays, lending institutions have a reset clause wherein they change the rate of interest, generally 3-5 years into the loan tenure. Some lending institutions offer hybrid loan rates, it remains fixed for 1-5 years and changes to a floating rate. Additionally, certain lending institutions also allow you to convert type of interest by paying fee or penalty.
How much loan do I qualify for?
Lending institutions sanction loan amount post evaluating your credit score. Your credit score is determined based on your past credit history. Thus, before you take a loan, you need to be sure about how much EMI you are willing to part from your income.
How much EMI can I actually afford?
EMI is the crucial factor that influences your decision to buy a home loan. You need to consider all the parameters to calculate the actual EMI you can afford to pay. Your current salary, regular household expenses, savings, expected income and expenses, and your goals for foreseeable future are some parameters that affect your finances.
It is best not to make hasty decision as your EMI will have long term impact on your financial plans. Ideally, your EMI should not be more than 40-50% of your gross monthly household income.
Will this purchase force me to postpone future plans?
Everyone has some plans for future – personal and financial. You need to make sure the mortgage doesn’t force you to postpone these goals. Purchasing a home has serious effects on your financials, you need to be mindful and trade-off. A home is a great buy only if it does not postpone your future commitments and complements your future plans.
How much will be the down payment?
Indian lending institutions provide home loans to the maximum of 80-85% of value of property. They get the property valuation done from their independent evaluator. The value hence determined is lower than the market value. Some lending institutions also don’t account for Stamp Duty and Registration charges in their loan valuation, thus before taking on loan, you need to confirm the amount of down payment payable by you.
Is there a prepayment penalty?
It might so happen that you get a pay raise and wish to clear your mortgages. The RBI regulation and the NHB regulations have made pre-payment easier by asking the banks to not levy pre-payment penalty on floating rate loans paid from any source and fixed rate loans paid from own source i.e. salary.
Are there any other additional costs?
Interest rate is not the only expense payable on home loan. Home loans also privy to expenses such as processing fees, administrative and service fees. It is strictly advisable to get complete fees and expense related information from lending institutions before you opt for any loan. This saves you any unpleasant surprises in future.
Does my bank allow home loan refinance?
At times due to various financial reasons it might be difficult to repay your mortgage. It is always good to be prepared and review your options beforehand. You can transfer your loan balance to another lending institution to benefit from lower interest rates or to escape from bad service by existing lender.
However, such changes also warrant additional fees such as processing and/or pre-closure fees.
Are there tax benefits?
With such a huge investment, it is delightful to know that it can reap some tax benefits. Home loans are tax deductible under Indian Income Tax Act. Section 80 C and Section 24 allow for tax deduction on home loan for repayment of principal amount and interest amount paid respectively. Thus lowering your effective cost of borrowing.
Everything you need to know about Home Loans
What is a home loan?
Investopedia defines home loan as “A loan given by a bank, Mortgage Company or other financial institution for the purchase of a primary or investment residence. In a home mortgage, the borrower transfers the title to the lender on the condition that the title will be transferred back to him once the payment has been made, and other terms of the mortgage have been met.”
What are the types of home loans available?
There are many types of home loans available in the market, you need to decide which of them is best suited to your needs. Following are some popular types of home loans.
Land Purchase Loans
Land purchase loans are taken to buy a plot of land on which the borrower wishes to build a home. These loan can be availed for residential or investment purposes.
Home Purchase Loans
These loans are used to finance purchase of new property or old property. The interest rate on these loans are either fixed or floating.
Home Construction Loans
This loan is for those who wish to construct their home rather than buy a ready possession property. The process for this loan approval is different from other home loans. The borrower has to account for land cost as a cost component to calculate the total price of the house. He also has to calculate the rough estimate of cost incurred for construction.
Home Expansion/Extension Loans
If you already own a house but wish to expand it, this type of loan is perfect for you. Extension means adding extra space to the current structure of your home. This extension can include extra room, floor or balcony, etc. However, lending institutions vary in categorizing such loan, some consider it as part of home improvement loans.
Home Improvement loans
These loans are taken for purpose of renovation and repairs. It includes all types of renovations and repairs such as internal and external painting, external repair works, electrical work, waterproofing and construction of underground or overhead water tank etc. In addition to these, there are other types of loans such as Home Conversion Loans, NRI Home Loans, Balance Transfer Loans, Stamp Duty Loans and Bridged loans.
Can A Home Loan Be Pre-Approved?
Yes. Pre-approved loans is a principle sanction given by lending institutions for a particular loan amount. It requires submission of documents such as Income Tax Returns, bank statements, income proof, ID proof etc. The lending institution carries out various checks and pre-approves your loan. Pre-approved loan is useful when you need resources to book the property at earliest.
However, lending institutions are not obligated to provide the loan. This type of loan is preferred because it has higher negotiation power with the builder/seller and quicker disbursal.
What Is The Tenure Of A Home Loan?
Generally the tenure of the loan is from 10-25 years. Post consideration of interest and amount, the following three factors determine the tenure of loan: Your age, your income capacity and purpose for purchase of property. Hence, tenure varies person to person.
Does Tenure Affect The Loan Cost?
Yes, longer the tenure more interest you will have to pay. It is better to shorten your tenure by marginally increasing your EMI than to stretch EMI across more years.
What Are The Interest Rates Offered For Home Loans?
In a completive banking atmosphere, the interest rate differ across banks and lending institutions. There are two types of interest that lending institutions charge - fixed and floating. Fixed interest is determined for the entire tenure of loan. Whereas, floating rates change over time. Certain lending institutions charge a hybrid of both.
What Is An EMI And Pre-EMI?
Equated Monthly Installments (EMI) is a fixed monthly amount paid by the borrower at each month. They are used to pay-off the principal and interest on the loan.
Pre-EMI refers only to the interest portion on the disbursed loan. The actual EMI is paid only post completion of property. This EMI is applicable in case of under-construction home loan.
What Are: Daily Reducing Loan, Monthly Reducing Loan And Yearly Reducing Loan?
Three methods of EMI calculation used are Daily Reducing, Monthly Reducing and Yearly Reducing. In the annual method EMI the interest is paid monthly but that adjustment toward interest and principal is done only at end of year. For monthly and daily reducing method, the concept is the same but the adjustment is made on monthly and daily basis respectively. Shorter length of time is cheaper, hence daily reducing method is the cheapest method.
What Are The Additional Costs That Usually Accompany A Home Loan?
Interest is not the only charge that lending institutions levy. There are other charges you need to be aware of and get information about the same from your bank. Processing charges, commitment fees, pre-penalty charges are some additional costs that accompany a standard home loan.
Do I Need To Furnish Any Security To Get A Home Loan?
Some banks ask for collateral security against your loan. You can furnish life insurance policies, National Saving Certificate (NSC) or another property as security. In case of home loan, the mortgaged property itself is the collateral.
Do I Need A Guarantor To Get A Home Loan?
Not always. Lending institutions may insist on guarantor in case the borrower travels frequently overseas or has a transferable job. Guarantor is insisted in case of personal loan since no asset is attached to it. Since in case of home loan, the collateral is the property itself there is no compulsory requirement of guarantor. However some cases, the lending institution may insist on guarantor, when sanctioning loan.
I Have Two Housing Loans On Two Different Properties. Can I Get Tax Rebate For Both The Loans?
According to Income Tax Act, if you hold two properties to your name only one can be considered as self-occupied, the other will deemed as let out properties. While loan on both can be an attractive option, it has some tax implications.
The residential property: Since this property is self-occupied, it bears no income. However, the deduction on home loan is limited only to Rs. 2.5 Lakh subject to certain conditions.
Deemed to be let out property: If the second house is let out as rented property, the rental income is taxable however, the interest paid on loan is fully deductible.
Additionally, amount paid on maintenance and repairs, repayment of home loan, and stamp duty is also deductible from income tax subject to provisions in income tax rules.
Closing a home loan
On payment of the loan amount you can close the home loan either at the end of the tenure or before. Some lending institutions may charge penalty for pre-payment. For closure of the home loan, you are required to submit a request form for closure and return of the original documents. The lending institution will process this form once it is satisfied all the outstanding dues have been paid by you. The process takes minimum 7 days, post which lending institution will return your original property documents and issue a closure letter stating that there are no pending dues.
Pros And Cons Of Foreclosure
When a borrower fails to pay the loan amount, the lender (banks or other financial institutions) attempts to recover the loan balance from the borrower by forcing the sale of the asset used as the collateral for the loan, this legal process is called foreclosure.
Pros: Selling of the property allows you to pay your debts and also gives you peace of mind. It can also in some circumstances be used to negotiate lower loan obligations from the lender.
Cons: Foreclosure reflects badly on your credit. It goes on your credit report marring your chances of getting any future loans
What is home insurance?
Home Insurance is a type of property insurance which covers private homes, building and its contents. It provides financial protection in event that your home and its contents are destroyed. If you’re opting for home loan, it is now required by most lenders.
No insurance policy is the same. They range from standard cover to wide range of extension covers to protect from variety of damages. You need to evaluate your requirements and capacity, before you choose a home insurance policy.
What does a home insurance policy cover?
Most insurance companies provide the following kinds of coverage for your home. The standard policy cover includes:
Structure of your home
Your policy pays towards repair and rebuilding expenses due to damage/destruction to the property by fire, hurricane, fire, lightning, explosion / implosion, aircraft damage, riots, strike, subsidence, landslide, flood and inundation, earthquake, impact damage, terrorism.
In addition to these, you will get coverage for burglary and theft for items damaged within the property. It is recommended that you purchase enough coverage to suffice rebuilding your home.
Any damage due to above reasons to your domestic electrical and mechanical appliances are also covered under the standard home insurance policy. The coverage also extends to your other personal items and furniture. However, to insure expensive items such as jewellery, art and collectibles to their full value, purchase a special insurance as extension to your home policy.
Some insurers extend the insurance to personal accident. Such cover includes compensation in case of accidental death or physical disablement post an accident. You need to check with your insurer what type of package they offer for this. Certain insurers also include liability insurance in their coverage to protect you or your family against law suits due to negligence or events that occur on your property.
Apart from these coverage, there are additional covers or extensions that your insurer will be happy to offer. These extensions can be helpful if your home includes high value assets.
How do lending institution valuate the property for insurance?
Lending institutions value your property at estimated replacement cost. This means, in event your property is destroyed due to a calamity, the bank will pay you the amount it takes to replace plus adjusted inflate costs. The replacement cost does not reflect market value or the purchase price of the property. To get a fair valuation, be sure to get your property appraised for estimated replacement cost. Then go onto choose the coverage suited to your requirements.
What is generally the tenure of a home insurance?
Tenure of a home insurance varies across insurance providers. It is generally from 1-15 years, you can select the tenure based on your requirement and convenience. Insurers also offer multi-tenure policies where you get higher discount for increasing your policy term.
What is not covered under home insurance coverage?
There are certain things that are not covered under home insurance coverage. The damages or destruction due to the following is not covered:
Willful destruction of property
Loss and damage caused by war
Deliberate criminal acts
Loss or damage caused by wear and tear
Pollution and contamination, spoilage
Volcanic eruption or other convulsions of nature
Change of temperature resulting in damage of stocks
Consequential effects of the specified perils
The requirements for FIR vary as per the company and the type of home loan. FIR is mandatory in case of damage due to vandalism, burglary, riot, terrorism etc. In such cases, you should file a police report with complete list of items damaged/stolen. However, FIR is not necessary in case of natural calamities.
What is the eligibility criteria for availing a home loan?
There is a spurt in home loan applications with the conscious efforts being made by banks and other financial companies to rope in a diversified customer base. Certain eligibility criteria need to be fulfilled before applying for a home loan. The factors of the eligibility criteria as well as some other relevant information related to home loans have been provided for the benefit of those looking to apply for a home loan. Eligibility criteria and the factors affecting them
A whole set of eligibility criteria are set out by the lending institutions for the borrowers to fulfil before being competent to apply for a home loan. Capacity for borrowing- The first thing that banks check is whether the loan amount can be repaid over a long period of time, regularly. This judgement is based on the monthly income. Apart from salary, the institutions also consider incentives, regular bonuses or any other stable source of income which will increase the loan amount. The institutions generally want to ensure that the EMI does not exceed 40-45% of the monthly income. The capacity for borrowing can also be gauged depending on the individual’s credit score that is provided by institutions such as CRISIL after analyzing the person’s financial strength.
Age of the borrower- The lending institutions are assured of security when providing home loans to young people. They usually prefer 10-15 years to be left before one approaches retirement age. Age of the borrower co-relates to the eligibility amount.
Existing loans- The loan eligibility of the borrower goes down if there are regular monthly outflows towards the payment of other loans.
Educational Qualification- Educational qualification is a major criteria in deciding the eligibility criteria for a home loan. Proper educational qualification means better career prospects which in turn means higher income. This assures the banking institutions about the capability of the individual to repay the loan amount.
Nature of profession- A borrower belonging to a stable corporate industry, might be more eligible than those working in the fields that are unstable, even though they might have the same income. A self-employed person might also be allowed a less amount in home loan.
Income stability- Professionals who have been with the same company for a long period are eligible for a higher loan amount than those who keep on changing their jobs continuously. Job hoppers pose the risk of not being able to repay the loan in the stipulated time.
Score of credit- Lending institutions conduct a check on the credit repayment habits of the borrower. If there is no default in the credit habits, then the borrower is considered eligible for a home loan easily.
Dependents-the lending institutions take a note of the number of dependents on the borrower. Presence of many dependents usually mean some sort of financial outflow towards them and as such the loan eligibility might go down. However, the banks do consider any investment structure that is oriented towards the dependents well-being, so that in the presence of such structures, there is no risk of a default Before applying for a home loan, the borrower themselves should conduct a thorough check as to whether they fulfil the eligibility criteria and take steps to fulfil them so that they do not have to return back disappointed.
Home loan Disbursement
Once it has been ensured by the lending institution that the property for which the loan is being availed is legally and technically secure, and all the relevant documents and procedures related to the home loan have been fulfilled, the borrower is handed over the cheque. But before the cheque is released by the bank, the borrower has to provide documents which prove that the amount to be paid by the borrower towards the property is cleared as the banks pay only 80-85% of the total cost.
Disbursement in stages- Lending institutions follow different time frames for disbursing the loan amount depending on the kind of property the loan has been taken.
Full disbursement- If the loan has been availed for a ready-to-move in property or resale property, then the disbursement amount is full and final after the submission of the necessary proof and documents. The amount is disbursed either in the name of the builder of the property or the reseller of the property.
Disbursement in part- Part disbursement of the loan amount is done for properties which are under construction. On a partly disbursed amount, the EMI’s do not start immediately as the calculation is done on the total amount and for a given tenure. The principal on the installments and the interest components are broken up after the disbursement of the full loan amount.
The disbursement of the amount, whether in full or in parts ensures that the borrowers will be able to take possession of the property. However the borrower needs to ensure that the payment receipt of the amount paid to the builder or the reseller is submitted to the bank as it becomes a part of the mortgage documents.
Influence of salary on the home loan amount
Lending institutions are more likely to approve home loans for individuals whose monthly income is able to cover mortgage payment as well as insurance covers.
Evaluation of salary for home loans-the salary of the individual is evaluated in order to assure the lending institutions the loan amount will not become a liability. A few considerations are kept in mind while deciding the loan amount based on the salary of the applicant. DTI-In the evaluation of the financial fitness of an applicant based on their salary, the banks make a note of their capacity to pay off additional debts which is referred to as the Debt-to-Income ratio. This involves the calculation of the debt amount that the individual will be able to pay off from their monthly income on the home loan, apart from additional debts of education loan, car loan etc. A low DTI works positively for the home loan applicant.
Repayment capacity- The income statement of the applicant helps the lending institutions evaluate the repayment capacity of the individual. The home loan eligibility is based on the calculation that the borrower will be able to maintain a decent standard of living with their monthly income after paying 40-45% as EMI on the home loan. In order to increase the home loan eligibility, the applicants should refrain from availing the benefits of reimbursement in terms of medical, car insurance, fuel and maintenance etc.
Applicants with a salary that ensures a stable monthly income and timely repayment of debts have better chances at being considered eligible for a home loan. It is necessary for the applicants to remember that lower salary means qualification for a lower home loan amount.
Eligibility for home loan through co-application
While applying for a home loan, a borrower has the option of taking a co-applicant for the home loan. Subject to certain conditions, two or more persons can be the co-applicants on a home loan. A co-applicant is more of a necessity than a legal requirement. Having a co-applicant increases the loan eligibility as the total eligible income increases.
Benefits of co-application-availing a co-applicant for a home loan comes with certain perks for the borrower.
Increased eligibility- Adding a co-applicant enhances the eligibility of the home loan as the income of both the applicants will be considered while approving the home loan. This also assures the lending institutions that there would be no default on the repayment as, even if one of the applicant is unable to pay, the other will bear the expenses for the same.
Benefits of taxation- Co-application for a home loan provides the borrower as well as the co-applicant with taxation benefits. The borrower and the co-applicant (s) get tax rebates individually under Section 24 and Section 80C in respect of the principal and the interest paid. However it is to be remembered that for availing the taxation benefit, the co-applicants have to be co-owners as well.
In case the property is owned by a woman, jointly or individually, some states levy lower property registration fees. Co-application also reduces the problem of succession issues if the co-owners and co-applicants are married to each other.
While co-application enhances the chances applying for a home loan, it should be remembered that not all people known to the borrower can become co-applicants. Banks have specified the relations who are eligible to be co-applicants and this usually involve blood relations or a married relationship. Co-application also comes with a liability because in case of the death of the principal borrower, the responsibility of repaying the loan falls on the co-applicant.
Whilst individuals are provided with the option of approaching various lending institutions and banks that fulfill their requirements of a home loan, they have to be aware of the eligibility criteria that needs to be met before applying for one.
What is Balance Transfer of a Home Loan?
A borrower keeps a hawk eye on the home loan which has a long tenure, as; a part of the monthly income goes off into the payment of the EMI on the loan. It is advisable for the borrower to look for opportunities to reduce the interest rate after paying the monthly installments diligently for a few years. One of the best ways to this is to go for a balance transfer of home loans.
Home loan balance transfer is a refinancing option wherein the unpaid principal amount of the loan is transferred at a lower rate of interest to another bank. The bank that had extended the original loan amount is given the unpaid amount and the borrower has to pay the EMI to the new bank. If the EMIs have been paid regularly by the borrower then there is usually no problem involved with the balance transfer.
Advantages of balance transfer of home loan
It is usually suggested that the EMIs should always be kept within manageable limits. If the rates of interest are creating a huge dent in the monthly budget of the home, then borrowers have the option of transferring the loan amount to banks that are offering a lower rate of interest. The balance transfer of home loans has a few advantages associated with it.
Lower rate of interest- One major advantage of transfer of home loan is that it provides the borrower with the option of paying a lower rate of interest on the outstanding loan amount
Reduced cost- It helps save on interest cost by reducing the cost of borrowing and hence the cost of ownership of home
Freeing of cash- Encashment on the increased market value of the house can free up significant amount of cash, which can be used to expand one’s personal interests or investment in another property
Transfer with a top up- Sometimes the transfer of the balance on home loan, lets the borrower avail an additional loan on the existing loan facility without having the need to mortgage other properties. This additional loan can be used for expanding business interests or for personal use.
Disadvantages of balance transfer of home loan
As attractive as a transfer of home loan on lower interest to another bank sounds, it is necessary to remember that such a venture comes with its own set of disadvantages.
Foreclosure- It is necessary to evaluate the cost associated with balance transfer of home loans as most banks charge a penalty for foreclosure.
Processing fee- A processing fee is charged by the new lending institution upon transferring the balance loan amount. This might prove to be an additional expense on the part of the borrower. Also the process of applying for refinancing involves the same documentation process as applying for a loan for the first time.
Increased tenure- While reducing the cost of EMI on the new loan, the cost of acquiring the home will increase as reduced EMI would mean a longer tenure.
No tax benefit- Availing another home loan takes away the eligibility of the borrower for tax benefits
Need for enough savings- As most balance transfers are done to avoid a financial crunch it is necessary to have enough savings so as to start pre-paying the loan at the earliest
Trap- Sometimes lending institutions use the lower rate of interests only to trap new clients and then increase the rate to exorbitant amounts leading to a loss for the borrower
Opting for balance transfer of home loan
The option of balance transfer of home loans is available for individuals seeking to cash in on a lower rate of interest being provided by other financial institutions on the existing home loan. An individual borrower should opt for a balance transfer keeping in mind certain factors. High interest rate- A borrower should opt for a balance transfer of home loan if after repeated discussion, the current lender has not reduced the interest rate. Some banks offer low interest rates to new customers but continue with the higher rate for the old customers. In such situations, the borrower should start for looking for options with other banks.
Financial difficulty-sometimes in cases of financial difficulty, a simple restructuring of the EMI can prove to be a lifesaver. It is in such cases that the borrower should look for financing options that provide a lower rate of interest. If the options are feasible to the requirements than it is suggested that the balance transfer should be done at the earliest as a dwindling credit might prove to be a hurdle on borrowing
Reduced EMI- A borrower can go for balance transfer of home loan if there is a desire to simply reduce the EMI
Points to be kept in mind
Transferring the balance of home loan seems to be a good option for those with varied economic requirements, but it is necessary to keep note of certain things before finalizing such a transfer.
Authenticity- The borrower needs to ensure that the reduced interests rates are not just a promotional gimmick and that the lender has proper credentials
Customer support- The borrower should ensure that the new lender has proper reviews in terms of their service quality and customer support. Otherwise the process of transfer becomes onerous
Applicable costs- The borrower should ensure that in the process of transferring a balance of home loan, applicable costs in terms of processing fees, stamp duty etc. are not too high. Otherwise attempting to save money with lower interest rates will prove to be futile
No Objection Certificate (NOC)- It is necessary to get a NOC from the existing lender regarding the transfer of the loan amount which is to be submitted to the new lending institution to facilitate the process of balance transfer
Tenure- If the tenure left for the repayment of the loan amount is not too long, then the borrower should not consider it a necessity to change the lending institutions as the cost of burden in changing banks will not be really worth it
Balance transfer of home loan might seem like an attractive option. But it is necessary for the borrower to weigh all the related aspects of the balance transfer process, lest it leaves a bitter aftertaste in the borrower’s mouth.
Documents required & checklist to be considered for buying different types of properties?
Documents form a crucial aspect in purchasing a property. Having the proper property documents makes the process of buying properties easier. It also helps the buyers in the loan application process. The crucial documents required in the process of purchasing property along with the factors to be kept in mind while property hunting are listed below for your convenience.
In this type of transaction, the property is directly bought from the builder of the property.
Documents required- a number of documents are required whilst purchasing property from a builder.
Sale Deed- Sale deed is the legal document that acts as evidence regarding the sale and ownership of property; it establishes the buyer’s proof of ownership.
Record of the land- Land records serve as a validation regarding the registration of the land for constructing the property. This should also involve the land use certificate which ensures that the property is located in a residential zone.
Clearance for Construction- A certificate of commencement issued by the town planning authority and engineering department serves to validate that the builder has received the necessary licenses, sanctions and permissions for laying the foundation of the building.
Planning approval- A document that proves that the planning has been approved by the appropriate authority ensures that the flat that has been booked will not have a run in with the authorities.
Khata certificate- Khata certificate is required for registration of new property and transfer of property. It is a necessity for the property owner.
Joint Development Agreement- This is required to ascertain whether the land is in the name of the builder or the owner so that at the time of buying the property, no outside claims can be made on the flat.
No Objection Certificate (NOC)-An NOC issued by the water, electricity and environment department is required to be provided by the builder to the buyer so as to ensure that the property does not run into legal hassles.
Checklist to be kept in mind- A few important points should be kept in mind by the prospective buyer while going for a builder purchase. Agent- A prospective buyer should hire their own agent who is well versed with the real estate market of the area rather than relying on the agent of the builder.
Builder’s reputation- While scrutinising prospective homes, it is necessary for the buyer to look carefully into the reputation of the builder; whether the houses previously constructed have been delivered on time, any legal issues etc.
Legal advice- Before making any sort of transactions with the builder, the prospective buyer should avail proper legal advice to understand the liability and commitments.
Home inspector- While investing in a new property that is being built, it is advisable for the prospective buyer to hire an accredited home inspector.
Resale of a property constructed by a builder with the presence of a society
In simple terms, resale property is not a new construction and it was previously owned by someone else.
Documents required- For the resale of a property that has a functioning society, and constructed by a builder, a few important documents need to be in place before going ahead with the transaction.
Possession certificate- The buyer should ask for a possession certificate that had been issued by the builder to the previous homeowner. This certificate confirms that the building had been properly constructed. The possession certificate is not reissued, it is simply passed on to the next owner.
Payment receipt- The buyer should enquire about the latest payment receipt of the previous owner to ensure that there are no dues left to be paid to the society.
Encumbrance certificate- This certificate shows whether at a given point of time the property had been mortgaged and whether it has been cleared. It helps to know about all the property transactions till date.
No Objection Certificate (NOC)-A NOC is required from the concerned society of the property in favour of the buyer. It also helps establish that the seller does not have any outstanding payments against the property.
Other essential documents- Apart from the aforementioned documents required during the transaction of a resale property, the other regular essential documents of the sale deed, land record, construction clearance certificate, planning approval certificate, khata certificate, joint development agreement are required
Checklist to be kept in mind- As the property being bought is not a fresh one, it is important to keep certain considerations in mind. Marketable title- Once the buyer has zeroed in on a property, it is necessary to ensure that the property has no other claimants. In case of joint ownership of the property, ensure that the sale has been authorized by co-owners.
Enquiry about existing loan- The buyer should enquire about existing loans that have been availed for the property by the previous owner. Unless original documents of the loan are not available, the prospective buyer will not be able to avail a new loan.
Society charge- The buyer should enquire about the amount that needs to be paid to the housing society upon taking ownership of the property.
Ready apartment- If the buyer is going for a resale apartment, then it should be a ready to move in apartment rather than an under-construction one. The buyer should make a thorough inspection of all the amenities available in the apartment and also ensure that all the utility bills have been duly paid.
Transaction of plot sold by developer
With the increasing scarcity of land and skyrocketing of prices, many people are cashing in on buying plots of land which will reap investments in the future, in terms of reselling the land or constructing a home on the land.
Documents required- Many important documents are required while conducting a transaction involving a plot of land. The most important ones are mentioned below:
RTC extract- RTC extract is a document that contains details of the area of the land, names of all the previous owners and present owners, along with the names of the tenants, mortgage charges and certificates regarding the change of ownership. It helps establish the title of the land.
Land deed- The buyer should enquire about the original land deed of the current owner as well as the previous owner.
Other essential documents- Several other essential documents are required at the time of entering a plot transaction. These include the sales agreement, encumbrance certificate, katha certificate, Joint development agreement, power of attorney and all paid tax receipts.
Other points to be kept in mind- Investing in a land for present or future use is a huge risk and as such a few points have to be kept in mind by the prospective buyer.
Litigation- Ensure that the piece of land is not under litigation by the government for its projects and that it is not a forest land or situated in a coastal zone.
Location- Ensure that the plot of land is located in an area that has the amenities of water and electricity supply, is not repeatedly encroached and is not in a socially and politically volatile zone.
Purchase of redeveloped property
Redeveloped properties are usually buildings and other properties that have been restored to a better condition.
Documents required- Settlement of such a property requires proper documents which are to be provided along with the purchase agreement
Agreement of development- This agreement signed between the developer and the society mentions the terms and conditions under which the building is being redeveloped.
Power of Attorney- Before transacting on a redeveloped property, it is necessary to enquire about who has the power of attorney; the society or the developer.
Intimation of Disapproval (IoD)-This document is issued by the concerned civic body before the commencement of the construction of the structure after demolition.
Sanctioned plans- The buyer should ask for a copy of the sanctioned plans either from the society or the developer. This document includes the floor plans, designs left to be executed etc.
Certificate of commencement- A commencement certificate is issued for the developer after the demolition of the existing society to start working on the redevelopment of the society
Occupancy certificate- To ensure the legality of the property, the buyer should ask for the occupancy certificate that has been issued by the civic body after redevelopment.
Checklist to be kept in mind- Moving into a building that has been reconstructed after demolition might prove to be a risky investment on the part of the buyer and as such it is necessary that the buyers keep a few important points in mind.
Agreement- If no agreement has been signed between the society and the developer than it will prove futile to invest in such a property. In such a scenario, the buyer should rather go for a resale property.
Rights- The agreement regarding redevelopment is signed between three parties; the buyer, seller and developer. It is necessary to keep the developer in the loop regarding the existing rights of the current owner (seller) being transferred to the buyer.
Approval- The buyer should enquire from the developer regarding the approved drawings of the project, IOD and commencement certificate. If these documents are not available, then it is advisable to not invest in such a property.
Basic Checklist to be considered when buying an Under Construction Project
Investing in an under-construction project involves a lot of risk. Irrespective of whether the property is for self-use or for future investment possibilities, proper research becomes a necessity to ensure that the ventured money does not go to waste.
Points of Consideration
As laypersons investing in an under construction project, it is necessary to be aware of a few details that will help one notice discrepancies involved in the transaction, if any.
Reputation of the builder- The reputation of the builder, in terms of the track record should be looked into so as to ensure that the previous projects undertaken by the builder have been completed on time and all the amenities mentioned in the plan provided. The buyer should also check whether the builder is approved by the banks before applying for a home loan.
Essential Documentation Approvals- Before investing in an under construction project, it is necessary that the buyers pore through the essential documentation approvals, without which the property will be considered illegal. Intimation of Disapproval (IOD)- The IOD is a list of instructions and conditions that the builder has to follow during the various phases of the under-construction project. It is also known as the Building Permit and the conditions to be followed are divided into three stages- Prior to the commencement of construction work- at this stage, the sanction for the building permit is required from the local construction authorities, electricity supply agencies, water supply agency, the sewage department, etc.
During construction- On being provided with the building permit, the local building authority will have to be intimated 7 days prior regarding the commencement of the construction process. A plinth level notice will also have to be submitted describing the work completed up to the plinth level.
Completion of the construction- At this stage, a completion cum occupancy certificate is to be obtained. If lifts are installed in the building, then a lift inspector will have to provide a stamp of approval regarding the same.
The IOD is valid for one year unless revalidated every year thereafter. The building permit ensures
That the building to be constructed meets the objectives of fire safety and resource conservation
That it follows the requirements under the Environment Protection Authority
Commencement Certificate- It is the permission given by the local development authority to start the construction process. In the absence of this document as well as the IOD, the builder cannot lay the foundation stone of the building or draw the boundary line.
Title Search Report (TSR)-A buyer should go for a Title Search Report (TSR), which is to be provided by an independent lawyer; who after inspecting the various documents states whether the property has a clear marketable title. This means an inspection carried out regarding the history of the property and ensuring that it does not have any pending litigations against it.
Tri-party agreement- To avoid fraudulent transactions, a tripartite agreement is a necessity for under construction properties. The tri party agreement involves the buyer, the primary lender and the construction lender. In cases where the builder is not the owner of the land, either the builder or the landowner should be the confirming party in a tri-partite agreement. This agreement extends the credit of construction to the buyer which needs to be paid off once the construction is complete.
Occupancy/Completion Certificate- It is necessary to take assurance from the builder that the buyer will be provided with occupancy certificate upon the completion of the project. A project will be deemed illegal without the occupancy certificate. A builder can apply for the completion and occupancy certificate together or separately and both are issued within three months of the completion of the project.
Sale Deed- The buyer has to ensure that after being provided with the occupancy certificate, the builder will transfer the property to the buyer’s name at the registrar’s office. The sale deed defines the ownership of the apartment.
Layout plan- A buyer should ask for a layout plan from the builder which has been approved by the local development authority. The layout plan is approved only if it is in accordance with the Floor Area Ratio (FAR) or Floor Space Index (FSI). 5% deviation is allowed from the approved layout plan, otherwise there are serious legal implications for under construction projects. It is also advisable to walk away from projects whose layout plans have not been approved because changes in the layout might prove to be waste of investment. Also ensure that the builder does not reserve rights on a portion of the builder’s flat.
Government approvals- Before investing in an under construction property, it is necessary to ensure that all the government approvals are in place. Non-approval by government departments leads to delay in projects. Hiring a good property lawyer will be helpful in understanding all the approvals from the government that are required for an under construction project.
Land mortgage- If the construction of the property is done on a mortgaged land then it is necessary for the buyer to gain a No Objection Certificate (NoC) from the bank that specifies the details of the building and the flat. The NoC ensures that if the builder cannot repay the mortgage amount, then the buyer will not face any trouble and will not be asked to vacate the flat.
Sample flat- Sample flats are used as a marketing tool to give the buyers an idea about the space and dimension of the building. But the buyer should ensure that the dimensions of the purchased flat are similar to the sample flat and all the amenities mentioned in the agreement are actually included.
Hidden Costs- Before investing in an under construction flat, the buyer should talk in details about all the costs involved in buying the flat. Many hidden costs are present that the builder might spring upon the buyer only at a later stage, causing problems in the budget.
Site inspection- To keep an eye on the construction process and ensure that no fraudulent means are being practiced, the buyer should inspect the construction process at regular intervals.
The Real Estate Bill passed in March 2016 provides safeguards for those who are considering to buy an under-construction property- Registration with the concerned authority is compulsory along with a detailed information about the layout plan, land status, real estate agents etc. 70% of the amount collected from the prospective buyers will have to be kept in an escrow amount so that it cannot be diverted to other projects. If the construction gets delayed, then the builder will have to pay the interest amount to the customer as is being paid by the buyer to the bank. If the builder does not stick to the plans as advertised then they are answerable to the regulatory authority.
The sale has to be made as per the carpet area and not the super area.
Under construction projects provide a lucrative offer in financial terms. But if the risks involved in it are not properly scrutinized, then the financial and emotional strain ends up being far more than the buyer bargained for.
What is property registration?
Whenever a property buyer buys a piece of land/immovable property, he/she needs to register the same with the authority concerned. Once the registration agreement is submitted at the local registrar’s office and the registration is complete, the buyer legally becomes the owner of the apartment. The law does not recognize unregistered owners and does not give them any rights over the property.
Steps to Take While Registering a Property
Verify the property title
The property documentation will change depending on whether the property is being transferred from the developer or seller. The process of due diligence gets easier in case of a secondary sale as the first owner of the property would have all the documents in place for the registration of the property. If the title were not clear and marketable, most financial institutions would refuse to finance the property. Find Sub Registrar Office
One has to present the Sale Deed in the concerned Sub-Registrar Office where the land is situated. Your lawyer or attorney will help you to find your property location and the concerned registrar office.
Sale Deed and Stamp Duty
The Schedule of the property should be correctly mentioned in the Sale Deed and if any structure is situated over the landed property that has to be mentioned in the Sale Deed along with its cost. Preparation of property Sale Deed is done by an authorized attorney on behalf of the purchaser. The stamp duty is usually a percentage of the transaction value levied by the state government, on every registered sale. The levy of stamp duty is a State subject and thus the rates of stamp duty vary from State to State.
Take an appointment
The registration fee should be paid a few days before going for registration and the receipt is to be shown at the Sub-Registrar’s Office one day before the actual date of registration. An appointment has to be taken over the phone and registration has to be done at the office of the Sub-Registrar.
Submission of Documents
After detailed verification of the Sale Deed, the registration process will be completed as per the Registration Act. Once the registration is complete, the duly registered document may be collected by signing the dispatch register or by giving a letter of authority to someone to collect it on your behalf. The final sale deed should be stamped and registered at the appropriate Sub-Registrar’s Office. The Sub-registrar keeps a copy of the documents and returns the original documents to the buyer within 30 minutes.
Mutation of the title
Once the registration is complete, the purchaser has to apply to the local municipal authority to get the title of the property concerned transferred to his/her name. This is commonly referred to as mutation of the title of the property.
Which documents must be compulsory registered?
Adjudication is the process of ascertaining the market value and valuing the property to ascertain the stamp duty that is applicable on the property. If the document is signed, adjudication must be done within one month, else two per cent interest per month will be charged. Adjudication is valid up to six months or till December 31st of a particular year, whichever is earlier.
Registration Fees Challan
The Sub-registrar will determine the registration fees payable and issue the challan through which it confirms to accept the pay slip. Pay the registration fees by challan/pay slip from any nationalized bank as per the procedure laid down by the respective Sub-registrar.
No Objection Certificate
No Objection Certificate under the Urban Land Ceiling Act is required if the area of land transferred exceeds 500 sq.m. (Mumbai city) and if the land belongs to a government, semi- government body or a charitable trust, NOC of such government or charitable trust is required.
Property Card of the land on which the property is being registered or is situated.
Original document and its copy
The document must be printed or typed on one side only and in black ink. A photocopy should be taken on only one side of the paper and there should be butter paper between the two sheets of the photocopy.
Proof of old construction
It is better to get the document adjudicated in case the building is very old and proper depreciation is not given by the Sub-registrar. If property sold or purchased is in the old building and the benefit of depreciation is claimed on the market value, then any one of the following documents is to be produced as a proof of old construction:
Municipal assessment bill of the building
Building Completion Certificate
Original registered agreement between the builder and buyer or of any other flat in that building.
Proof of identity
You need to produce ID proof with photo. The ID proof can be any of the following: Copy of driving license, Passport, PAN card, Driving License, Employee ID, Voter ID or Proof of your address with some supporting document.
When and where should the documents be registered?
Whenever a property buyer buys a piece of land/immovable property, he /she needs to register the same with the authority concerned. The registration can take place at the Sub-Registration Office within which the property is located or in the District Sub-Registrar Office of the District where the property is located.
What are the fees involved while registering different types of properties?
Generally, Stamp Duty is to be paid on or before the date of registration of the Agreement. The rate of Stamp Duty varies from state to state however a delay in payment of Stamp Duty would attract penalty @ 2% per month subject to maximum of 200% of the proper stamp duty amount.
Registration is the process of recording the contents of a document with a Registering Officer. The documents are registered for the purpose of conservation of evidence, assurance of title, publicity of documents and prevention of fraud. The Registration fee varies for state to state across the country.
Some states also levy VAT on under-construction property. The VAT rate is generally 1% of the Agreement Value. There has been lot of criticism and controversies regarding the decision of the state governments to levy VAT on under construction property stating that construction of property cannot be considered as goods.
Service tax is another tax levied by the Central Government on under construction property. The current rate of service tax is 15%. Swachh Bharat CESS is levied at @ 0.50% and Krishi Kalyan CESS @ 0.50% is calculated on top of the service tax rate which takes the effective service tax rate to 15%.
What is stamp duty? How to arrive at the correct value?
Stamp duty is payable under Section 3 of the Indian Stamp Act, 1899. Stamp Duty must be paid in full and on time. It is a legal tax and acts as an evidence for any sale or purchase of a property. The levy of stamp duty is a state subject and thus the rates and amounts of stamp duty also vary from state to state.
Who is liable to pay the stamp duty, the purchaser or the developer?
In the absence of any agreement to the contrary, the purchaser/transferee has to pay stamp duty. However in case of exchange of properties, both parties have to bear stamp duty equally.
What is a Power Of Attorney?
A power of attorney is an instrument that is used by people to confer authority on somebody else to legally act on their behalf. They can be of two types — special power of attorney (SPA) and general power of attorney (GPA). While an SPA is used for transfer of only a specific right to the person on whom it is conferred, the GPA authorizes the holder to do whatever is necessary.
Can I authorize someone else to register my property by granting him Power of Attorney?
Property sales through the common practice of general power of attorney (GPA) will not give ownership title to the buyer.
This sums up the process and details of purchasing a property and registering it to become the rightful owner of a home legally recognised by law.
What are problems that you could face after buying a property?
Registering your home and claiming ownership of the house is a big step towards buying a home. However that is just one step which gets you closer to owning your own house. No matter whether you plan to reside in it, or use it as an investment, there are quite a few things which can go wrong after you purchase a property. Here are some of the issues people face after buying property.
Types of Problems
The most common problem facing property buyers today is project delays that can stretch to several years. While most builders have a penalty clause for delays, it is only a fraction of the EMI you pay for your home loan—about Rs. 5 per sq.ft per month. Then there are issues like building plans being changed midway through the construction, or common facilities falling short of expectations.
If a builder uses sub-standard material in construction of a building or makes false misleading representations about the condition of the house then it is denial of the facility or benefit of which a consumer is entitled to claim value. You also have an option to file a civil suit against the builder claiming damages for breach of obligations. The consumer forums then order the builders to remove the defects and also pay compensation to you, the allottee. Construction on illegally acquired land
In cases where the construction has been made on illegally acquired land you can either claim the refund of the amount invested by him in the property or he can ask for an alternate accommodation by the same builder.
If you are overburdened by the excessive hidden charges or enhanced external development charges than what were mentioned in the in the allottee-builder agreement, you can file a civil suit in a civil court.
What is your recourse in case of a delayed project?
Earlier buyers used have little say in booking agreements. The penalties for delay in payments by buyers are mentioned explicitly but obligations of timely delivery by builders are played down. Such lopsided agreements were common a few years ago. But with the passage of the Real Estate Bill in March 2016, the customers will be safeguarded from the whim of the builders-
Timely completion of the projects will be ensured with the government making it mandatory for the builders to deposit 70% of the amount taken from the borrowers for the completion of the project in a third party account.
To help buyers make an informed decision, the builders will have to disclose all information regarding the projects completed in the past 5 years, layout, approval etc.
If the property is not handed over on time, then it is the liability of the builder to pay the interest rate to the customer as is being paid by the buyer to the bank.
The customers cannot be conned by selling the property as per super area. It has to be sold on the basis of carpet area.
Ad-hoc changes cannot be made to the building plan without the consent of 66% of the buyers
If there are in any discrepancies in the property or structural deficiencies, then the buyers can contact the builder within one year of possession and the builder will be held responsible.
The necessary obligations of the builders will be regulated by State level authorities called Real Estate Regulatory Authorities (RERAs)
Who should you approach for legal action?
Those who seek redressal for their claims and wish to be compensated properly can approach the builders. If they refuse to consider the request, you can approach various institutions for legal action against the builder, such as:
The Supreme Court has held that a consumer has the right to approach the Civil Court or the Forum under the Consumer Protection Act for relief in a situation where the builder commits breach of his obligations. There are laws such as the Development Control Rules under which the case can be filed before a Civil Court for damages for refund of amount and interest on the said amount.
According to the Consumer Protection Act, a person who applies for allotment of a building site or for a flat constructed by the Development Authority or entered into an agreement with a builder or a contractor is a potential user and the nature of construction is covered in the expression “service” of any description.
Thus, the Consumer Protection Act provides protection against the malpractices of the builders and developers. It provides a three tier machinery for the redressal of consumer grievances based on the value of goods or services and the compensation if any. Any person dissatisfied by the services or delayed delivery of possession can approach the consumer forum for his redressal.
Competition Commission of India
The allottee can file a complaint against the unfair practices of the builders before the Competition Commission of India which has been empowered to investigate anti-competitive practices and impose stringent penalties on the offenders.
A complaint before the Competition Commission can be made against that builder only who is a dominant entity in the market. The definition of dominant position is a subjective definition and takes within its sweep many builders who tend to abuse their dominant position against that of the allottee who has invested money in his project.
Regulatory Forums and Criminal Courts
An allottee can approach the regulatory authorities complaining against the non-compliance of the statutory obligations by the builders. In cases where the builders make false promises to the flat purchasers and do not comply with their statutory obligations, the allottee has an option to file a criminal case in a criminal Court against the builder along with the consumer complaint to be filed in consumer forum.
New Regulatory Authority
The new regulatory authority called the Real Estate Regulatory Authority that will be set up in states and the appellate tribunals for real estate where the real estate complaints will be dealt with in 60 days. If found guilty of the charges levied by the customers, the builders can face imprisonment for up to 3 years.
This summarises the problems that can come your way during the time period of buying a property to finally being able to use it for yourself. Use your rights as a citizen, a consumer, and a lawful owner to avail of these remedies which can protect your from the effect of these problems.
Basic Vastu Tips to be adhered to after buying a home?
People take great pains to make the home just like they have always dreamt it to be and to make it as comfortable as they can for themselves and their family. One of the important factors that has a big impact on the comfort and vibes of every house, that people live in, is Vastu. Mentioned below are a few tips to make the home a comfort zone that fills its inhabitants with positive energy:
Basic Vastu Tips
Have a Nameplate outside your Door
There is a science behind the idea of having a nameplate outside one’s door. As per advice from established Vastu experts keeping a nameplate outside their home attracts good vibes. It indicates ownership of the house and it works in the favour of the owners as it helps trace positivity and good opportunities back to you.
Avoid Placing Unpleasant Objects in the House
Thorny plants like cactus and other shrubs should not be kept inside the house, they attract negative energies. Avoid keeping artificial cloth or plastic flowers or plants, instead decorate your house with real flowers. Similarly, do not have doorbells that do not have a pleasant ring, they tend to spoil the mood of the house.
Avoid Placing Mirrors in the Bedroom
According to Vastu, there should not be any mirrors in the bedroom it is said to be a cause for major discord and ill health in the family. If there is already in the bedroom it is advisable to keep it covered by a curtain and as far as possible from the bed.
Light lamps and Incense Sticks
Fire is considered effective in burning away all negative vibes and evils residing in a house. Lighting lamps, diyas and incense at home each evening and morning helps keep the atmosphere positive at home. It acts as a cleanser, shooing away the negativity or any evil eye.
Placing Correct Paintings and Portraits
The Picture frames that you hang up on the walls are an important part of the ambience of the house. Picture frames that depict tragedy, war, anger have a negative impact of the atmosphere at home. While photos of an eagle or an owl are considered inauspicious and are not good for a home.
Place holy water in the house
In the dark, unused corners of the house, it is advisable to place holy water to ward off evils. Placing holy water also helps the inflow of positive energy.
Keep Medicines away from the Kitchen
You can do so by keeping medicines away from the kitchen. This is because a kitchen is an area at home which indicates health and happiness, and medicines indicate otherwise.
Hang wind chimes in the house
This is a well-accepted and loved measure to protect your house from negative vibes. Using wind chimes as the tinkling bells help to break negative energy patterns and help the positive energy to flow easily.
With these tips it is easier to clear the house of all evils and protect it from negative vibes and bad luck. Those who believe in vastu must try these methods, for those who don’t believe it wouldn’t hurt by try this out. Take a step towards making your home a calm place and bring good luck at your doorstep through these Vastu tips.
All you wanted to know about Sale of Property
Selling of property, essentially means handing over the ownership rights of land or structure you own, to the purchaser for a definite sum of money. However, selling a property always carries its share of worries and in the present scenario these worries have further multiplied. Here is a list of details that might answer your questions and help you with the selling of property.
Can I sell the property, even when the home loan is outstanding?
Yes, you can sell the property even if the home loan is outstanding. The buyer will also demand the copies of stamp duty and registered house documents. Since these papers will be mortgaged with the bank if you have taken a home loan, you can use a photocopy of the required documents to initiate a deal. Depending on the kind of property and ownership, some more documents, such as a no-objection certificate from the housing society and a documented consent in case of jointly owned property, will also be required.
How much is the registration fee on the sale of Immovable Property?
According to Section 17 of the Indian Registration Act, 1908, it is mandatory to register the documents regarding the transfer, sale or lease of property. The registration fee currently fixed for registering documents relating to property transactions is approximately 1% of the market value or agreement value, whichever is higher, subject to a maximum of Rs. 30,000.
What constitutes conclusion of sale of a property?
The sale process is complete when the ownership of the property is transferred for an indefinite period of time and the new owners possess the right to the sell the purchased property. This right can be fully transferred by registration after the sales deed at the office of the sub-registrar. The Sale deed registration process in India varies from state to state. Some of the general provisions mentioned in the sale deed registration are:
Transfer Title of Property
Terms for Payment
What are the taxes involved while selling a property?
At the time of sale of property there are many taxes which are applicable. Some are levied countrywide while the others are levied in specific states only.
The taxes levied on the sale of property are:
Capital Gains Tax
This tax is applicable on the profit/capital gain that arises out of the sale of property. This tax is to be paid by the seller and has to be paid by sellers in every state across India as it is a part of the Income tax Act. If the property was held for more than 3 years, capital gains tax is levied at a flat rate of 20 % and indexation benefit is allowed to be deducted from the taxable amount.
The buyer of the property is required to deduct 1% from the amount payable to the seller. This is not an amount to be paid by the buyer from his pocket but must be deducted from the total payable to the seller.
This deducted amount should later be deposited by the buyer with the income tax department. This tax is applicable across India and only for transactions with a value above Rs. 50 lakhs.
If the property sold is an under construction property, service tax will be applicable on such a property. The effective rate of the service tax for property is 3.625% or 4.35% depending on the size of the property and transaction amount.
This tax is also applicable across the country and must be paid by the buyer to the seller who will later deposit this amount with the Government.
As VAT is a state level subject some states levy VAT on the sale of property while the others don’t. The amount of VAT also varies according the rates prevalent in every state. The VAT is required to be paid by the buyer to the seller.
Stamp Duty on Property
At the time of transfer of title of property which has been registered with the government, stamp duty is required to be paid on property. In the case of stamp duty on property, the amount has to be equally shared between both parties. Stamp duty rates and amounts vary from state.
How can I qualify for the capital gain tax exemption?
Capital gains from sale of property, which are generally long term assets, are taxed at a flat rate of 20% and can run into much higher amounts. However this amount of tax can be avoided with these provisions provided by the income tax department:
Under Section 54 Any Long term gain from the sale of a residential property shall be exempt to the extent this amount is invested in:
Purchase of another Residential property within 1 year or before 2 years after the due date of transfer of property sold.
Construction of a residential house within 3 years from the date of acquisition.
Although as per section 54, the assesse is given 2 years to purchase a new house and 3 years to construct a house property, the capital gains will still be taxable on the sale of the original property in the year in which it was sold.
Capital Gains Account Scheme
U/s 54, the assesse has to decide about buying or constructing a new house by the end to the year in which the property was sold or pay tax on the sale. To avoid this situation the Income Tax Act specifies an alternative with the Capital Gains Account Scheme.
The amount not invested in buying or construction of the new house, before the due date of furnishing the returns, can be invested in the Capital Gains Account Scheme. Through this, the amount paid for purchasing or constructing the house will be exempt in that year. If the amount in the Capital Gains Account Scheme remains unutilized after the period of 3 years then the amount in the account it will be taxable under capital gains for that financial year.
With these useful tips at hand your property sale should become a simpler and less cumbersome task. Apart from these you can also use the services of an estate agent or a real estate broker as you won’t have to waste time by running around to manage the various aspects of selling like advertising, meeting clients and showing the property to potential customers.