SYNOPSIS

Before signing on your home loan agreement, be aware of these clauses–

How the lender retains security cover for the loan.
How your payments are utilized.
Treatment of your loan, if assigned to a third party, incase of default.
Prepayment clause.
Notifying the lender for any changes in address, employment, etc.
How ‘default’ is defined.
Conditions for amendments to agreement.

Buying a home evokes a number of feelings and emotions; happiness, pride, relief, security and many such playing with the buyer’s mind. More often, a home loan is indispensable in this acquisition process. But when these emotions overwhelm at the time of purchase of that much cherished home, the finer details of the loan get drowned. While taking a home loan, most buyers focus only on the basic factors such as interest rate for home loan, down payment and EMI. The buyer pays scant attention to the loan agreement, which is often relegated as a legal formality to be signed in a hurry. However, a home loan is a major financial decision, the impact of which plays out over a long period of time. The home loan agreement is binding on the customers during the entire tenure of the loan. It is therefore necessary to be aware about the important clauses in your home loan agreement.

Important Clauses in your home loan agreement

A home loan agreement contains a number of clauses which form the framework of the transaction between the lender and the customer. Each of these defines, describes or demarcates the terms and conditions on the basis of which money is lent and borrowed. Therefore, these clauses have legal implications and need to be understood and adhered to for the smooth completion of the loan. Here are a few important ones that a customer should be aware of:

1. Security cover clause:

This stipulates that the loan should be adequately covered for the entire tenure by the security provided. The property being purchased is usually the security for the loan. But in case this alone offers insufficient security to the lender (say due to fall in market prices or deterioration or destruction of the property), the lender may call upon the customer to provide additional security to safeguard the outstanding loan amount.

2. Setting off other balances:

Any payment made by the customer would first be set-off or adjusted against other dues that may be outstanding as on that date. This could be penal interest for late payment, processing / transaction fees etc. Only after these dues are fully recovered, the payment would be applied towards EMI or principal repayment

3. Assignment to third parties:

The lender may opt to assign a home loan to a third party either in case of default or for their own business expediency. The obligations and terms of the loan would remain undiminished and transferred to the identified third party. The original lender may not need to obtain the approval of the home loan customer for such assignment.

4. Prepayment clause:

Prepayment refers to making repayment in excess of the EMI obligations stipulated in the loan agreement. Such excess payments made by the customer are adjusted against the outstanding principal at the time of payment. This prepayment may be a fraction of the outstanding loan or in full. This clause stipulates how prepayment can be made and the financial implications if any, of such prepayment.

5. Notification clause:

The customer is obliged to notify of any change in his employment / business / profession, income levels, change in address or residential status (resident to NRI and vice-versa) etc promptly to the lender. The clause stipulates the timeframe and mode of notifying these.

6. Definition of default:

If the customer fails to meet his repayment obligations as per the terms of the loan, it is considered a default. This clause sets out the situation under which a customer would be considered to have defaulted and the implications of the same.

7. Amendment clause:

This clause deals with the amendments to the home loan agreement. It specifies how, when and who can make amendments and the rights and obligations of each party in such circumstances.

Conclusion

A home loan agreement could be called the bible of your loan. It is the framework that controls your home loan. Before availing a home loan, ensure that you go through the details of the agreement. If needed, seek clarifications from your lender or seek professional assistance. Remember, you can negotiate only certain terms of the home loan agreement (like tenure, interest rate etc). You need to critically examine others before you sign on the dotted line.