Buying a home has been made possible—even easy—with the convenient availability of housing finance schemes. Many of us have invested in under-construction projects, hoping to reap profits on completion. While some of us buy a home intending to live in it, the rest of us buy the property as an investment option, with the intention of earning a rental income.
Without a Home Loan, buying a residential property is a herculean task for the middle class home buyer. Let’s say good deals have encouraged you to invest in two properties, availing two different loans—one on each property. However, when the EMIs begin to hit you hard, your options are limited to selling one off, and using the proceeds to repay the other loan.
Financial insecurity is the main reason homes still under mortgage are sold.
Here are a few options on how you can go ahead with the sale of your home, even when you have an outstanding loan against it.
If the Buyer Settles the Purchase with His Own Savings
If the buyer is financially sound, and chooses to buy the home with his own savings, there are absolutely no hassles involved. With a loan outstanding letter from the bank, the seller can fix the deal with the buyer. The buyer then proceeds to make payments to the seller’s loan account.
When the liability has been fully settled, the property documents—held by the bank—are released to the seller. Now, you can transfer the property title to the buyer.
If the sale price amounts to more than the outstanding loan, the balance can be settled between the seller and the buyer. The bank is out of the picture once the outstanding loan has been settled.
If the Buyer Opts to Avail a Loan from the Seller’s Lender
Under such circumstances, the buyer, the seller, and the bank enter into an agreement where the bank has custody over the title deeds. When the buyer applies for a Home Loan servicing, the bank conducts a background check to determine his eligibility. Once the buyer meets the set norms, the loan is sanctioned. Whatever outstanding balance remains in the seller’s loan account is settled, and balance (if any) goes to the seller.
Subsequently, the title deeds are transferred to the buyer, but the documents remain with the bank. Once the buyer’s new loan EMI is calculated—with the help of tools such as Home Loan emi calculator—he will pay against the outstanding loan balance.
If the Buyer Avails a Loan from a Different Lender
Here, the seller provides a ‘loan outstanding’ letter, along with a copy of the property documents, to the buyer. Based on the above documents, the buyer applies to his choice of lender for a Home Loan.
If he meets the eligibility criteria and the loan is approved, the buyer’s bank settles the loan account with the seller’s bank. Once the loan has been settled, the seller’s bank releases the property documents to the buyer’s bank.
Only after receiving the original property documents can the buyer avail the full loan amount.
The document essential to executing any property sale is the property deed. It can be either the share certificate issued by the housing society, or the sale deed for the developer. If you have taken a Home Loan from a bank or a housing finance company, then the documents would be in their custody.
Your buyer will need a copy of the property deed before he enters into any agreement.
If you’re selling a home which is still under a loan, the following documents need to be maintained—the original property deed (mother deed), Home Loan documents (sanction letter, statement of EMI payments), housing society share certificate, property tax receipts, NOC from the society, sale deed, and encumbrance certificate.
These must all be in order to ensure a smooth sale; the buyer requires these documents to establish his rights, and in order to avail a Home Loan.
There is the incidence of capital gains on the sale of any home. It makes no difference—from the tax point of view—whether you sell a home with an outstanding loan, or clear of any lien. If the sale is executed within 3 years of buying the property, you are liable to short-term capital gains.
The principal amount on your Home Loan is allowed as a deduction under section 80C. However, the benefit of this deduction is reversed if you sell the home within 5 years of acquisition.
If the sale is effected after your have owned the property for more than 3 years, you will need to pay long-term capital gains tax. However, you can claim the benefit of indexation (adjustment for inflation).
Selling a home that has an outstanding loan isn’t too different from selling a home which is free of lien; there are only a few minor differences.
Instead of the full consideration being paid to the seller, it is first paid off to the bank to settle the outstanding loan. In fact, as a buyer of a house property under mortgage, you can be assured of a clean title as the bank would have conducted checks right at the time the seller had applied for a Home Loan. As a buyer, it is a safer option for you to buy a resale home which is under mortgage, rather than investing in an under construction project.