5 Smart Tips To Get A Loan Against Property Without Hassle

Most individuals invest in property either to make a profit by selling it at a higher price, or to park their excess funds securely. However, many are unaware that owning a piece of property can also serve as a financial safety net by using it as collateral to secure a Loan Against Property (LAP).

Here is all you need to know about LAP, along with essential tips to consider before applying for one.

How Loan Against Property Functions

Loan against property (LAP) is a multi-purpose secured loan offered by most lenders, which involves mortgaging one’s existing immovable property to obtain funds for financial needs, such as business expansion or personal requirements, such as funds for education abroad, medical treatment, etc. Both residential and commercial property can serve as collateral.

LAPs are sanctioned against the property put up as collateral by the borrower. Generally, both self-occupied as well as leased out property can be used for raising funds through LAP. These loans are usually offered for a maximum tenure of 20 years, and the rate of interest typically starts from 9 per cent per annum.

Here are a few things to consider before applying for a loan against property:

1. Evaluate Your Finances Before Borrowing

Before you apply for an LAP, make sure you assess your repayment capacity and evaluate your financial position through cash inflow and outflow. Your repayment capacity refers to the ability to repay the loan, considering the current level of income and fixed obligation to income ratio (FOIR). FOIR refers to the proportion of a borrower’s income currently being paid out as monthly instalments, such as equated monthly instalments (EMIs). In case your FOIR exceeds 50 per cent of your tax-home pay, lenders may hesitate in lending to you, or you may be charged a higher rate of interest than others. Therefore, you must borrow what you can repay conveniently, according to your repayment capacity and the existing as well as potential financial position in the near future.

2. Verify Eligibility To Avoid Rejection

Lenders would only accept your loan application when you fit into their eligibility criteria, such as minimum age and income, employer profile, area of residence, etc. Since every lender has its own set of eligibility criteria, make sure you check your eligibility with a few lenders that you would have shortlisted.

Failure to meet these may lead to outright rejection of your loan application in the initial stage itself. To avoid this, borrowers can use online financial marketplaces’ websites, which provide a loan eligibility calculator tool. The tool would assist in checking their eligibility before applying for any loan.

3. Compare Lenders To Find The Best Loan Deal

Loan processing, along with documentation and other formalities in an LAP involves an additional step of the lender’s evaluation of the property to be mortgaged. This makes it even more important to choose the right lender as per your eligibility and requirement.

Borrowers may use online financial marketplaces to compare and choose the most suitable lender for themselves. Since LAPs are generally taken for longer tenures, up to 20 years, parameters such as interest rates, processing fees, loan to value (LTV) ratio provided by the lender, service terms, etc. should form a major basis while comparing various lenders.

4. Check Your Credit Score And Report

Before submitting your loan application, borrowers must check their credit score as well as credit report, as errors in these may prove to be highly influential to your loan approval chances. Lenders check your credit history through your credit report and score while evaluating your LAP application.

A lower credit score depicts you as a less creditworthy borrower who is more likely to default in the future, thus leading to either loan rejection or approval of the loan along with a higher interest rate. Also, review your credit report periodically to ensure no error or fraudulent activity gets bypassed and harms your credit score, resulting in rejection of the loan as well.

5. Keep All Required Documents Ready

A loan against property can be availed by both salaried and self-employed professionals along with businesses. For the non-salaried category, additional documentation is required for income assessment, such as audit reports, income tax returns (ITRs) of the last 2-3 years, know-your-customer (KYC) documents, financial statements, etc. Additionally, for LAP, legal documents of the property are required to be submitted by the borrower to assess the property and ownership’s authenticity.

The next step involves evaluating the property to determine the loan amount as per the LTV ratio offered by the lender, which is usually up to 70 per cent of the property’s current market value. 

Once the lender has checked the credibility of the borrower, the final loan amount is decided and sanctioned against the property provided as collateral.

Borrowers, therefore, must do their bit of research beforehand in order to assemble the required documents on time and ensure a smooth loan procedure subsequently.