Important Home Loan Terms Every Buyer Must Know in India

You can buy a home by various means, such as relying on investments, using your savings, borrowing money from landlords and simply considering the option to take a home loan depending upon the ease and your monetary conditions .

Buying a home is a dream to many, and investment options to others. However in both the cases, you need to know the insights of home buying , that will help you to make more informed and calculative decisions. You can buy a home by various means, such as relying on investments, using your savings, borrowing money from landlords and simply considering the option to take a home loan depending upon the ease and your monetary conditions .

Home Loan

Home loans are most common among all. A home loan is a secured loan provided by banks and financial institutions to help individuals buy, build, or renovate a house. The borrower repays the loan in EMIs (Equated Monthly Installments) over a fixed period, typically 10 to 30 years. The property serves as collateral until the loan is fully repaid.

Types of Home Loans

There are several types of home loan like :-

1. Home Purchase Loan:

   This is used to buy a new or resale house. Loan covers up to 90% of the property value.

2. Home Construction Loan:

   This is for the purpose of constructing a house on owned land. The amount is disbursed in stages based on construction progress.

3. Home Improvement Loan:

   This loan is used for renovation, repairs, or remodeling. Covers costs like plumbing, painting, and flooring.

Home Loan Terminology

Before you buy or plan to buy any property here are a few important terms that every home loan buyer should know in india:

Principal Amount

The principal amount refers to the original sum of money borrowed in a loan without any interest, earnings, or additional charges.

It is the base amount on which interest is calculated in loans and investments. On the basis of principal amount EMI are made for a particular tenure. Every EMI includes a part of the principal and interest.

For example:- You take a home loan of ₹50,00,000, this ₹50,00,000 is the principal amount.

Down Payment

The down payment is the portion of the price that you pay upfront when purchasing a house. While the remaining amount is covered by a loan. The remaining cost is usually covered by a loan, which the buyer repays over time.

For example:- Suppose you buy a house worth ₹50,00,000. The bank requires a 20% down payment, this means Your down payment is of ₹10,00,000 (20% of ₹50,00,000). The bank provides a home loan for the remaining ₹40,00,000.You repay this ₹40,00,000 loan in EMIs over a fixed period.

Loan-to-Value (LTV) Ratio

The Loan-to-Value (LTV) ratio is a financial metric that compares the amount of a loan to the value of the asset being purchased. It is commonly used in home loans, car loans, and other secured loans to assess the risk for lenders.

LTV Ratio = Loan Amount/ Asset Value × 100

For example:- Property Value: ₹50,00,000

Loan Amount: ₹40,00,000

LTV value for home loan:- 40,00,000/50,00,00 × 100

Processing Fee

A processing fee is a one-time, non-refundable charge that a bank or financial institution levies when approving and disbursing a loan.

It covers administrative costs such as document verification, credit checks, and loan processing. The processing fee is usually a percentage of the loan amount or a fixed fee. It varies depending on the loan type, lender, and borrower’s profile.

Fixed Interest Rate

A fixed interest rate is an interest rate that remains unchanged during the loan tenure. This means the borrower pays , consistent amount over time, regardless of market fluctuations.When you take a loan or invest at a fixed interest rate, Your EMIs remain constant throughout the loan tenure, making repayment predictable.

Repayment Capacity

Repayment capacity refers to a borrower’s ability to repay a loan on time without financial difficulty. It is an essential factor that banks and financial institutions consider when approving a loan.

A strong repayment capacity increases loan eligibility and helps get better interest rates.

EMI (Equated Monthly Installment)

An Equated Monthly Installment (EMI) is a fixed monthly payment that a borrower makes to repay a loan over a specified period. It includes:

Interest Rate

An interest rate is the cost of borrowing money from a lender. It is expressed as a percentage of the principal amount and is charged over a specific period.

There are mainly three types of interest rate :-

• Fixed Interest Rate
• Floating Interest Rate
• Simple Interest vs. Compound Interest

Credit Score

A credit score is a three-digit number (300–900) that represents a person's creditworthiness. It is used by banks, financial institutions, and lenders to assess an individual’s ability to repay loans and manage credit responsibly.

Credit scores are calculated based on the following factors:

1. Payment History (35%)

2. Credit Utilization (30%)

3. Credit History Length (15%)

4. Credit Mix (10%)

New Credit Inquiries (10%)

Margin/LTV (Loan-To-Value)

Margin money is the amount that the borrower contributes from their own funds. It is the difference between 100% of the property value and the LTV ratio.

Collateral

Collateral is an asset that a borrower pledges to a lender as security for a loan. If the borrower fails to repay the loan (defaults), the lender can seize and sell the collateral to recover the outstanding amount.

Collateral reduces the risk for the lender and helps borrowers secure loans at lower interest rates.

Amortization Schedule

An amortization schedule is a detailed table that shows the breakdown of each loan payment over time.

It includes:

1. EMI (Equated Monthly Installment) – The fixed monthly payment.

2. Principal Component – The portion of EMI that repays the loan amount.

3. Interest Component – The portion of EMI that goes towards interest.

4. Outstanding Loan Balance – The remaining loan amount after each payment.

Default

A default occurs when a borrower fails to repay a loan or meet the required financial obligation as per the loan agreement. This can apply to:

A borrower is typically considered in default if they miss multiple payments over a certain period (usually 90 days for loans in India).

Balance Transfer

A balance transfer is the process of moving an outstanding loan balance from one lender to another, usually to take advantage of a lower interest rate, better loan terms, or improved services.

Foreclosure

Foreclosure refers to the early repayment of a loan before its scheduled tenure ends. Borrowers choose foreclosure to save on interest payments and become debt-free faster.

Loan Disbursement

Loan disbursement is the final step in the loan approval process, where the lender releases the sanctioned loan amount to the borrower. This amount can be disbursed in a lump sum or in stages, depending on the loan type.

Frequently Asked Questions