Loan Process Guides

Mistakes to avoid while taking a loan against property

Mistakes to avoid while taking a loan against property

A LAP or loan against property is a secured loan given against a commercial or residential or property like a flat, apartment, house, shop, or office. The property that will serve as collateral needs to have a clear marketable title while also being self-owned. A LAP can be used for purposes like medical emergencies, personal purposes such as marriage, funding business expansion, or medical emergencies, etc.

In fact, a loan against property is a great way to secure funding when one is in a cash crunch as it gives you access to the equity hidden within your property. Part of the crucial factors that lenders consider when they are determining loan eligibility is your credit history, income, and the present value of your property. In some cases when applying for a LAP, there are a few errors that can slow your application process down or prevent you from receiving the funding you need. These loan mistakes are detailed as follows.

Loan mistakes to avoid when taking a loan against property

Have you opted for a loan against property? Ensure you avoid these seven loan mistakes.

  1. Not comparing interest rates
  2. Interest can be costly on most loans, especially on loans taken against a property. Part of your due diligence when choosing a lender for your loan against property is to compare the interest rates of various lenders, and then choose one that provides affordable interest rates to you. By choosing the best option, you can ensure that your EMIs (equated monthly installments) are lowered to your taste.

  3. Not being attentive towards the tenure
  4. Your loan against property has a tenure attached to it and this duration is important. Tenure is the amount of time for which the loan needs to be fully paid back. Avoid opting for a longer tenure simply because you are offered it. In case you can afford to pay back your loan sooner than usual, then it is recommended that you do so. The shorter your tenure, the lower your outgoing interest amount.

  5. Not factoring in the time before disbursal
  6. Not factoring in disbursal time is a critical factor when taking a loan against property. Loans against property can take some time before they are fully processed as lenders require time to value your property prior to sanctioning your property. For this reason, it is advised that one enquires about the time expected for the lender to sanction as well as disburse your loan to make sure you can match your funding requirement with the schedule of the lender.

  7. Not looking at the Loan to Value Ratio
  8. In mortgage lending, the most commonly used ratio is LTV, or ‘Loan to Value ratio.’ It is used to determine what the necessary amount to put as a downpayment is and whether the lender will be able to extend credit to the borrower. LTV is a critical ratio to consider when buying a home, as lenders can determine the level of risk exposure they take when underwriting a mortgage or property purchase.

  9. Neglecting the terms and conditions
  10. Oftentimes many people avoid reading the terms and conditions that are offered under the loan against property. One crucial outcome of not doing so would be that you may not be prepared to tackle additional fees and charges that could potentially increase your borrowing cost. Hence, it is crucial to understand all terms and conditions of your LAP to make sure that you make an informed decision.

  11. Skimping on documents
  12. When you apply for a loan against property, many documents are required for a range of purposes — from assessing your legitimacy and to securing collateral against your loan. Among the more earnest loan mistakes to avoid is not providing all your details and documents carefully. You may be rejected as a candidate if you do not provide all your details in due time. Some of the documents necessary for a LAP are:

    • Completed and duly-signed loan application form.
    • Your proof of income, from form 16 to salary slips, and a bank account statement for salaried individuals. If you are self-employed, you should provide your bank statement, income tax returns, and any other financial statements. In case you do not have ITR, there are lenders like ourselves who assess your income via Assessed Income programs.
    • All KYC (Know-your-customer) documents like your address, identity, signature, birth date proof, address, and more.
    • Property’s title chain.
    • Check mandated for the application processing fees.
  13. Ignoring your CREDIT score
  14. Although your loan against property is a secured loan, your CREDIT score will still be considered during the application processing stage. While your loan application is being processed, your credit score can work for or against your favor. A higher credit score, for instance, can help you in securing a loan that is more favorable in terms of EMI and tenure, while also increasing the chances that your application will be approved, to begin with.

The Bottom Line

A loan against property can unlock the funds your property holds, making them a great resource for those who are strapped for cash. However, ensuring that one compares interest rates across business loans, personal loans, and LAP providers, look at loan tenure, consider one’s CREDIT score, be wary of the loan disbursal time and the terms and conditions, is key during this process. Also, making sure one’s documents are perfectly aligned with what is required by the lender is key to making sure your application is processed smoothly.

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