Things to know before signing a home loan agreement

A successful home loan agreement enables you to purchase the home you have always desired without having to wait for years before you can save up enough money to make the complete payment. You can get a home loan equivalent to, sometimes, even 90% of the market value of the property under consideration. Before you can get your home loan, you need to sign a home loan agreement.

This document contains terms and conditions under which you are agreeing to get the loan and the creditor is agreeing to pay. The contract is to be signed by all the involved stakeholders. A home loan agreement may contain directions to follow in case the borrower defaults. It also tells you how much interest you are going to have to pay for the home loan you are taking. If there are certain conditions involved in giving you the loan, these conditions are mentioned in the home loan agreement.

It is important that you read the home loan agreement word by word. If you think you cannot understand the legalese included in the home loan agreement, it is advised that you sit with someone who knows what your home loan agreement means and then explain it to you the way you can understand. Never sign a home loan agreement that you don’t comprehend or you don’t agree to.

Important clauses to know about before signing a home loan agreement

Most of the borrowers consider simple aspects of taking a home loan such as the down payment or how much is the equated monthly installment (EMI), the tenure, and the interest rate being charged by the creditor. Although they are the primary aspects of taking a home loan, there are many clauses, terms, and conditions that may impact how much money you eventually pay, for how long you pay it, and what you gain or lose through the home loan agreement. Make sure you read the fine print as well.

1. How they define “default” in the home loan agreement

A borrower defaults when they miss paying an EMI or multiple EMIs. Sometimes a borrower is unable to pay the EMI due to a pending case of litigation. What happens in the case of the borrower’s death? Sometimes both husband and wife apply for a home loan and then they get divorced. How will that be handled by all the involved parties? Make sure you know and understand how “default” is defined within your home loan agreement.

2. Prepayment and foreclosure clauses

Sometimes you want to pay more than your EMI (in addition to the down payment that you made) because you have some spare cash. You would like to reduce your tenure or the EMIs you’re paying. Some creditors have no problem with prepayment, but some may impose a fine and this may be included in the home loan agreement terms and conditions. The same goes for home loan foreclosure. What if you want to pay off the entire debt in one lump sum amount? If you envisage such a possibility, make sure that the provision is there in your home loan agreement.

3. Notification clause

Lots of clauses in the home loan agreement are drawn based on how much salary you’re receiving, where you live, and what type of job you’re doing. These factors may change in the future. You may earn more (or less). You may move to another city or You may get promoted (or demoted). Some home loan agreements specify that you notify your creditor when these developments happen. If you don’t notify them, it can attract penalties. Therefore, in case such clauses are present in your home loan agreement, pay attention to them so that you can decide whether you want to comply with them or not.

4. The clause about fixed or floating interest rate

When you get the loan, you can decide whether you want to pay a fixed interest rate or a floating interest rate. In a fixed interest rate, you pay the same EMI through the tenure. In a floating interest rate, the amount of EMI you pay depends on market conditions and the interest rate set by the RBI. Whatever type of interest rate you want to pay, you should be privy to that. There may be some clauses in your home loan agreement that allow your creditor to change the nature of the interest rate you are paying based on certain conditions and this can impact not just your EMIs, but also how much you pay back. If you don’t want this close to appearing in your home loan agreement, take it up with the representative.

5. Handling unpredictable circumstances

Although in India this term is not used much, many are familiar with “force majeure”, which means circumstances that can be neither anticipated nor controlled. The term especially became popular during the pandemic because nobody could have predicted it. All markets and sectors had come to a standstill. Businesses closed. Many lost their sources of income. Similarly, there can be a natural catastrophe. There can be an unanticipated political or social upheaval. Again, in Indian law “force majeure” isn’t clearly defined, in case the home loan agreement is contingent upon the happening of an event that has suddenly become impossible to manifest, the agreement may be considered void. Carefully go through the provisions for such a scope in the home loan agreement.

Conclusion

Going through multiple home loan agreements may seem like an arduous undertaking but remember this: once you have signed the agreement and taken the loan, you will be paying EMIs and making other known and unknown payments to the creditor for years to come, even multiple decades. Therefore spending a few days scouring through the documents and completely understanding them can save you from unpleasant surprises, penalties, and extra payments.