The borrower must sign and execute the loan agreement before the home loan amount gets disbursed. The loan agreement governs the terms and circumstances of the bank’s loan and defines home loan eligibility with applicable conditions. Although most homebuyers regard the loan agreement as a trivial formality, it is the most important legal document with the homebuyer’s rights and duties.
What Exactly Is a Home Loan Agreement?
A home loan agreement is a contract between a borrower and a lender. The lender determines the term of the loan. However, the borrower must know the clauses and the lender’s numerous terms and conditions.
Here are some important clauses:
Reset Clause on Fixed Rates
Due to the rising trend of interest rates, many borrowers prefer fixed-rate home loans over floating rates. This does not, however, guarantee that the rates will remain consistent during the loan’s repayment period.
Banks can adjust existing housing loan interest rates in response to changes in base rates set by the RBI. Rates may be revised upward or downward later, depending on market conditions. The borrower must remain vigilant to this criterion and query if rates are not reduced when the situation calls for them.
The Default Clause
A loan might be considered to have defaulted for various reasons other than non-payment of instalments as scheduled. Other factors that may apply when a debt is declared to be in default include:
- If one of the borrowers dies or the co-borrowers divorce.
- If any borrowers are the subject of legal or criminal proceedings against them.
- If the borrowers fail to notify the lending institution of a loss or change in occupation on time.
Prepayment Clause
The borrower makes an advance payment of the entire outstanding amount or a portion of it to reduce his liability. However, not every lender deals with prepayment in the same way. It is critical that the borrower reads this clause and ensures there are no consequences to paying off the loan early.
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Most banks and financial institutions do not impose fines for prepayment. There may be other restrictions that dissuade you from doing so. For example, a clause could specify the minimum amount eligible for prepayment.
The Force Majeure Clause
This is a clause that allows the bank or lending institution to change the rates at a later date based on internal policy and external market conditions. This suggests that the so-called fixed-rate loan is a semi-fixed-rate credit.
The customer must be aware of this aspect while signing the agreement. The criteria for such a change are typically vague in the agreement, which is a significant disadvantage for the customer.
Clause of Security Cover
A loan is made available based on the security offered by the borrower. However, the item or property may lose its value due to various factors as time passes.
In such an instance, the lender may request the borrower to provide additional security to cover the deficit. Before signing the paper, the borrower should seriously evaluate these types of terms.
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Notification Clause
Some lenders might demand information in case of a change in the workplace or migration to a new city. This clause is irrelevant, but noncompliance may invite penalties you should be aware of.
Third-Party Assignment Clause
This clause permits the transfer of your loan without your consent and without informing you. You could default on the loan and experience this, but it could happen randomly.
Disbursement Clause
Your loan payment may occasionally get disbursed through the builder rather than directly to you. These requirements for housing loan distribution are established under this section.
Amendments in the Agreement
A loan agreement is a foundation upon which both parties agree on the terms and conditions for loan disbursement. In the first place, it is duly signed by the borrower since they conform to fulfilling the terms and conditions outlined in the agreement. Making changes to the document violates that trust.
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The borrower should take the clause seriously and seek clarification. Amendments to the agreement are not permitted unless both parties acknowledge them.
Conclusion
Clauses have legal consequences and must be understood and followed for home loan eligibility and for the home loan to be completed smoothly. After reviewing the loan agreement, if the homebuyer notices that some sections are unclear or inappropriate, they should seek clarification from the lender before signing the deal.