How can a guarantee mortgage help to get a home loan early?
In these uncertain times, buying a house can be a daunting task as banks are apprehensive about giving fresh loans. The amount of the loan which can be availed is severely impacted negatively due to the various restrictions being put on the eligibility of the borrower. Resorting to other measures like taking a personal loan or a gold loan to make up for the limited amount available, can prove to be a costly affair in the long run. However, home loans backed by mortgage guarantee can give some respite to the borrower. Here’s how a guaranteed mortgage can help to get a home loan early.
What is Guarantee Mortgage?
A mortgage guarantee is a credit default guarantee to manage the credit risk. This is taken by Lenders and housing finance companies (HFCs) in case a borrower defaults on housing loans.
A bank has the power to invoke the mortgage guarantee as soon as the loan becomes a Non-Performing Asset (NPA). This is as per the Reserve Bank of India (RBI) mortgage guarantee guidelines. This arrangement guarantees the repayment of the principal and interest outstanding in the housing loan account of the borrower. The guarantee is to the extent of the cover a bank takes.
For example, let us assume that the bank has applied for a mortgage guarantee of 15 percent on your home loan of Rs 2 crore. In case of the borrower making a default, up to Rs 30 lakh loss has to be borne by India Mortgage Guarantee Corporation (IMGC). The moment the loan contract becomes an NPA, the bank has the right to invoke the mortgage guarantee, and IMGC is liable to pay the equated monthly installments (EMIs) on your behalf to the lender.
The borrower has to repay the loan amount to the bank of the financer as and when the amount is available with him/her. As per the example given above, IMGC will cover your default of up to Rs 30 lakh, but you have to pay this amount later with the remaining outstanding balance. If you are not able to repay the housing loan before the account becomes NPA, then this will severely impact your credit score and the lender will have to auction the property to recover the losses after IMGC’s guarantee limit is exhausted. A home loan turns into an NPA after 90 days past the last due date.
The benefit of Mortgage Guarantee
Housing loans backed by mortgage guarantee are processed early and that too on better terms. One can get the loan for longer tenures. Other sources of income are also taken into consideration, like rental income from parent’s property. This can lead to an increase in the amount of loan to be availed by 20 percent to 30 percent.
Hence, a larger amount of the home loan backed by mortgage guarantee reduces the dependence on other sources of funds to finance the purchase. The entire process becomes faster, and the borrower can repay the housing loan in a larger duration.
Must Read: 4 Smart Ways to Avoid Penalties on Premature FD Withdrawals