Take the case of Aarav, who was looking to shift to a different city. Luckily, a certain Mr. and Ms. Raghavan were looking for an apartment in his neighbourhood. It was a match made in heaven.
There was one problem, however. Aarav still had a ₹80 lakh loan pending on the house, and the couple wanted to take a loan to buy it. The question was: would Aarav’s bank allow him to transfer his pending loan to the Raghavans? That’s when they reached out to Raju, a real estate agent, and met him over a cup of coffee the next day.
The agent told them such cases were common, and that they could enter into an arrangement in which the seller house transferred the loan on the property to the buyer.
They were relieved, but wanted to know more. They ordered another round of coffee, and the questions started to flow.
What’s the process?
The buyer can go to a bank or housing finance company and ask for a home loan. Most lenders offer loans even if the seller hasn’t finished paying theirs. Lenders used to charge a prepayment penalty of 2-4% of the loan amount if the principal was repaid early, but most banks have now done away with this.
There are two possible scenarios here:
1) The buyer takes a loan from the same lender as the seller.
2) The buyer chooses a different lender.
In the first case, the process will be faster. Before disbursing a loan, a bank typically checks the borrower’s credit score, cash flow, income, and details of the collateral, which in this case is the flat. If the buyer chooses the seller’s bank, the lender will already have the details of the apartment.
If the seller and buyer have all the required documents, it’ll take around 15 days for the loan to be processed after the ‘agreement of sale’ is signed. But if the buyer seeks a loan from a different bank or housing finance company, it could take 30-45 days.
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However, in some cases, the same bank may not be willing to offer a loan. This could be because the buyer’s credit history doesn’t meet its standards. Or the buyer may want to approach a different lender.
Here’s how it would work. Let’s say Aarav’s property is worth ₹1.5 crore (with ₹80 lakh of the loan pending) and Raghavans apply for a ₹1 crore loan.
Once the loan is approved, the lender will first send ₹80 lakh through a demand draft in favor of Aarav’s bank. This money can only be used to repay the loan. This is done so that the first bank releases the original property documents. Banks do this only after the dues are paid in full. The balance of ₹20 lakh will then be transferred to the seller’s account. To be sure, the buyers’ contribution of ₹50 lakh is first given to the seller, after which the bank will disburse the loan.
Keep in mind that the buyer can’t apply for an additional loan for, say, interior design or furnishing before completing this process.
What are the costs?
When you apply for a loan, you need to pay around 0.25% of the loan amount as a processing fee (the actual percentage varies across banks). There’s also be an upfront ‘mortgage fee’ of about 0.3% of the loan. Another major cost when is stamp duty and registration charges, which are 6% of the sale consideration. Stamp duty charges vary by state.
There’s also a ‘society transfer charge’ that varies by society. There’s a cap on this fee, which varies across states. For instance in Mumbai, the cap is ₹25,000, as per society by-laws. This can be split 50:50 between the buyer and seller.
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Also, don’t forget that the real estate broker will charge 1-2% of the transaction value as brokerage. Some people also buy insurance for their property.
Is this a good idea?
There’s no issue with choosing this method, called ‘seller balance transfer’. However, while taking a home loan, you should make sure it aligns with your family’s long-term financial goals.
There are a couple of other things you should be aware of as a buyer. First, check if the property documents are genuine. The buyer’s bank will ask for a photocopy of the original documents even if the seller hasn’t yet repaid the loan. As a a buyer, you should ask for a foreclosure letter, which will show exactly how much of the loan principal is pending.
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Also, if you’re looking to buy a house for ₹1.5 crore, you shouldn’t pay more than ₹4 lakh when signing a memorandum of understanding with the seller. It’s not a good idea to put up a huge amount at this stage. You should instead pay a bigger amount when signing the sale agreement or giving a demand draft that says the money will be transferred when the sale deed is changed.
With Inputs from Grihum Housing Finance Limited.
Note: This is a hypothetical example.
