What is legal and technical verification in home loan processing?

[ecis2016.org] Only after carrying out a legal and technical verification of the property, will banks approve your home loan application. We examined the impact of this exercise, on the buyer’s home loan application status and amount

Financial institutions apply a wide range of risk assessment tools, to gauge a borrower’s creditworthiness. This task is carried out diligently in case of long-term big-ticket mortgages, like home loans, for obvious reasons. Apart from examining the individual creditworthiness of the applicants, banks also apply several checks on the property for sale. Since this is the asset acting as the security against the loan, no stone is left unturned to ensure that the bank is lending money towards a safe property. Thus, banks carry out a legal and technical verification of the property, for which they would grant the loan.

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What is legal verification of property?

For a property investment to be fulfilling, it should be free from all legal hassles. Even though buyers check the legal status of the property in their own way, they get additional help from the lender if they are making the purchase with the help of housing finance. As a general rule, all banks, housing finance companies (HFCs) and non-banking finance companies (NBFCs) send an expert team to examine the property and its related documents, to establish its legal standing.

This process that banks follow to examine a buyer’s creditworthiness, helps him/her in a great manner. As an inexperienced buyer may not have the legal know-how to examine the property documents and be able to spot any discrepancies, the legal verification of the property by banks – which is carried out by specialists in the field – is actually a tremendous help.

For this purpose, the bank’s team of legal experts (these will typically be certified lawyers) would examine all the original property-related documents, including the title deeds, no-objection certificates (NOCs) and other ownership papers.

Note that the applicant has to give copies of the property documents while submitting his loan application but must present the original documents with the entitlement when the bank’s legal team makes a visit for examining the property. As the team would make a visit at a predetermined date and time, the buyer must get in touch with the seller and ensure that the original documents are ready for inspection.

If it is an under-construction property that has not previously been owned by anyone, the buyer has to present all the documents that prove that the builder has the required permissions in place, to initiate construction. These include the commencement certificate, NOCs from various authorities, encumbrance certificates, occupancy certificate etc. They will also have to show the builder-buyer agreement, along with other papers.

In case the buyer is purchasing the flat from the secondary market, he will have to show the chain of documents pertaining to previous ownerships of the property, to the bank’s legal team. If a property has changed hands, say, four times since it was built, the buyer will have to ask the seller to arrange for all those documents.

The process would be much easier and the paperwork much less, if the seller happens to be the only owner of the property and there has been no change of ownership in the past. In this case, only the original purchase documents have to be shown to the bank’s legal team.

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After examining each document, the legal team will prepare and send a report to the bank, stating, if the case may be, that they see no issues with the legal title. In case there are issues with the property title, the same will find a mention in the report and the bank would reject the home loan application.

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Impact of legal verification on home loan application

No bank will ever fund the purchase of a property that is caught in any kind of legal complexity or dispute. Expect the lender to outright reject your loan application, if the legal team sends across a negative report. This is, however, quite helpful for the buyer, since they are saved from getting caught in a wrong deal.

What is technical verification of property?

The second type of verification that banks conduct, before approving a home loan request, is known as technical assessment. Through this process, the lender tries to gauge the physical health of the property in question. The technical experts visit the property and examine its physical condition, building specifications and market value and decide on the loan they could offer for the property.

Remember that in case of any defaults in future, the bank will sell this property in the open market to recover its losses. Hence, the bank will not offer you a housing loan of Rs 1 crore, if it expects to generate only Rs 90 lakhs from the market, if it were forced to sell the property.

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For this purpose, the technical valuation team will thoroughly examine the map of the property, physically verify the carpet area of the property and physical conditions of the property and assign a value to it, based on the prevalent property rates in the same location.

Similar houses in two different localities in Delhi, will not have the same value, because while the average rate in one locality could be Rs 5,000 per sq ft, it could be Rs 50,000 per sq ft in some other locality.

The team will also see if the structure has been built following all the norms. While deciding the property’s value, the team will also factor-in the quality of materials used for the building purposes and the labour charges in that particular city.

Identical properties in similar localities in Delhi and Lucknow, for example, will have different costs, because labour charges are higher in the national capital than in Uttar Pradesh’s capital. The cost of building materials will also be comparatively higher in Delhi than Lucknow. Locality-specific considerations will also determine costs.

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Based on their observation, the technical valuation team will send a report to the bank, stating the property’s value. Since banks typically offer 80% of the property’s entire value as home loan, expect to get 80% of the property value as judged by the bank’s technical valuation team.

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Impact of technical verification on home loan amount

Suppose you are buying a property for Rs 1 crore. As you are aware that banks typically do not offer more than 80% of the house cost as loan, you arrange for Rs 20 lakhs from your own sources and apply for a housing loan of Rs 80 lakhs from the bank. Now, when the bank’s technical valuation team visits the property for examination, it decides the market value of the property to be not more than Rs 90 lakhs and states the same in the report.

If the bank from where you are taking the loan has a loan-to-value (LTV) ratio of 80% only and is absolutely unwilling to make any exceptions, it will be able to offer only Rs 72 lakhs as home loan to you. This means, you will have to arrange another Rs 8 lakhs on your own.

Legal-technical verification charges on home loans

Lenders mostly hire third-party contractors to undertake the legal and technical verification of the property. Consequently, the borrower is almost always asked to bear the cost involved in this process. While some banks impose a separate fee known as the legal and technical evaluation fee, others might club the same with the processing fees.

The charges will vary, depending on the lender from whom you are taking the loan. Typically, the bank will ask you to pay a flat fee of between Rs 5,000 and Rs 10,000, as legal and technical evaluation charge.

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Legal-technical verification: Benefits for buyers of under-construction homes

Builders mostly tie up with several banks, to launch a new housing project. The banks agree to partner with the builder, only after examining all the legal and technical aspects involved in the project. So, buyers investing in an under-construction property have an advantage, in the sense that no time will be spent in carrying out the legal and technical evaluation of the property and the financial institution will quickly process their home loan request, after examining their personal creditworthiness.

Even if banks have no tie-ups with the developers, they may have a list of approved projects. You will also be able to skip the legal-technical evaluation formality, if you select a home from the approved projects in a bank’s list.

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