Do you know that you can buy a property where the owner still has a loan running on it? Yes. It’s possible. Let’s tell you how.
It’s a fast-paced world today and people are changing properties just like they change their phones. Well, almost! So, it isn’t uncommon to find a property advertised for sale that has a loan running. Such a property is called mortgaged property. The definition of mortgaged property goes something like this – mortgaged property is a property that has an outstanding loan.
Now, what are the advantages of buying such a property? First, mortgaged properties that come up for sale are not usually very old. Most of the times, these properties are under 10 years. The owner would have decided to sell it because of capital appreciation that has happened quickly. The second point is that mortgaged properties are sold at a discount to new ones. This is because they would have been occupied for quite some time and might have some wear and tear. So, if you buy a mortgaged property, you are getting a ready to occupy the property at lower costs.
The third and biggest advantage is that getting a Home Loan for such a property will be easier. This is because the property will already have been evaluated by the bank that granted the loan that is running on the property. They would have gone through all the approvals already. If you take a loan with the same institution (that granted the previous loan) you can save a lot of time that would otherwise have to be spent on document verification and evaluation of the property.
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Now, the question is, how will the previous loan be settled and when will you get the property transferred in your name? Let us tell you.
The documents needed
You need to have a copy of the sale deed to ensure that the seller is indeed the owner of the property. You should also get copies of the stamp duty and other documents related to the house. Get the property tax papers too to check if the property has no pending taxes. It is better to take your legal counsel’s help when you decide to buy a mortgaged property.
In order to understand the process, we will take an example. Suppose, you buy a house worth Rs. 60 lakh. The seller has a Rs. 10 lakh loan running on it. In this case, you approach the seller’s bank along with the seller to initiate the process of closing the loan. Here they are three different ways you can buy the house. One is using your own funds, another is getting a loan from the same institution where the seller took the loan or get a loan from another institution. If you are using your own funds, there are no issues. You can use them to close the loan of Rs. 10 lakh and you can ask the bank to transfer the property in your name after you pay the remaining to the seller. In case you are taking a loan from the same institution, you can use the down-payment for your loan to close the previous loan and then, the bank will transfer the property to your name.
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When you take a loan from another institution, things get a bit complicated. First, you need to make the down-payment for your loan to the seller’s bank. Then, if that is not enough, you might need to use your loan amount to close the seller’s loan. Once your lender pays the total amount of the property to the seller, then the papers will get transferred to your name. Usually, in the first and second case, original property papers are released within a fortnight. However, in the second case, there might be a delay in getting the property transferred.
Buying the property using own funds
You need to get a letter from the seller’s bank. This letter should say that the bank will release the original property papers after you make the full and final settlement for the seller’s outstanding loan. You can give the rest of the money to the seller when the papers are released. Note that banks will specify a time within which you need to make the full and final settlement.
You can talk to your bank to ensure that a time period that is convenient for you is fixed. In case, you don’t settle the loan within the period, the bank could impose a penalty. Once you pay off the loan, the bank will provide a ‘No Due’ certificate that states that the loan has been fully paid and there are no dues. Usually, the paper is released within a week or fortnight of getting the ‘No Due’ certificate.
Buying the property using Home Loan
In case you are taking a Home Loan, note that you will not be able to transfer the old loan to your name. You have to pay off the seller’s loan. This is the case even if you decide to take a loan from the same lender. For this, you need to first go through the process of getting a Home Loan for the property. You can initiate the closure of the seller’s loan only after your loan has been approved. In case you are taking a loan from the same lender, the old loan account can be closed using your loan and the lender will pay the rest of the amount to the seller. The bank will release the original papers once your loan is approved and the old loan is closed.
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In case you are taking a Home Loan from another lender, you might need to use your down payment for the loan to close the seller’s loan. Once the old loan is closed, the lender will release the original papers and will have to transfer it to your lender. Then, your lender will pay the rest of the money to the seller. This is a very complicated process and there is a lot of delay between closing the loan and getting the papers in your name. In order to avoid a lot of tension, it is best for you to have a tripartite agreement. This will be an agreement between you, the seller and the bank. This agreement will state that you will settle the present loan and then pay the remaining amount to the bank so that the property can be transferred to your name. This agreement will help you in case there are any issues getting the original property papers. Some people sign a Memorandum of Understanding (MoU) but the agreement mode is always better.
In all this confusion, don’t forget to compare Home Loan rates across lenders before choosing a lender. Choosing the same lender as that of the seller might have advantages but you could lose a lot in interest payments. So, always do a thorough research before choosing a Home Loan.