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Can I sell my property before my Home Loan matures? What are the implications?

Your home or the first property that you have bought is undoubtedly your biggest asset, but sometimes due to some unforeseen circumstances, you may have to sell it off even before your loan has been fully repaid. Some of the reasons may be that you find that you need a bigger house because your family has grown or you must move lock stock barrel to another state because of a job opportunity.

In such cases you may find a buyer in a person who is looking at real estate as an investment and would rather invest in a property with an existing loan rather than going in for a property that is under construction. This is because he might find it much easier to carry out a transaction on an established property that has already been verified by a lender once (because it has an existing mortgage on it). Therefore, there are fewer chances of a fraud.

But whatever may be the reasons for the buying or selling of such properties there are several questions that you may have from the customer’s perspective. Is it even possible to sell or buy a property with an ongoing loan? Can the prospective buyer of the property settle your existing loan or do you have to settle the loan before you look for a buyer? What if the prospective buyer himself needs to avail a loan to purchase such a property? These are some of the common questions that come up while discussing a transaction on a property with a mortgage. Read on to get some clarity on buying or selling a property on a loan.

The documents that a seller will need:

Here is a list of the main documents a seller will need-

  • The purchase deed of the property. This is to confirm that the property in question is in his name and he has the right to dispose it. In case the property is one that has had a previous owner, the buyer will also want the copy of the previous deed
  • Photocopies of the stamp duty and registration of the house (since the originals will be with the lender)
  • A ‘No Objection Certificate’ (NOC) will be needed from the housing society if it is an apartment in a society
  • In case the property is jointly owned, a letter of consent from the co-owner stating his wish to go ahead with the sale

One thing that needs to be clarified at this stage is that, a property cannot exchange hands when it is still under the ambit of a housing loan, so the buyer must settle the outstanding loan on behalf of the seller. There are two ways to do it. He either settles the outstanding amount with his own funds or he takes a loan for the same. We are going to take a closer look at both options:

Let’s assume that the seller is Rajan and the buyer is Sanjeev and the bank Rajan has taken a loan from is Bank NMG.

Option I: The buyer uses his own funds

  1. Rajan needs to obtain a letter from Bank NMG that states that upon full repayment of Rajan’s dues, Bank NMG will have no problem relinquishing the property documents.
  2. Sanjeev will have to pay the full outstanding amount into Rajan’s loan account, after which Bank NMG will initiate the process of releasing the property documents.
  3. Once the bank receives the money it will issue a ‘No Due Certificate’ (NDC) to Rajan and releases the property papers after a maximum of 10 days, after which the legal procedure can be completed to establish Sanjeev as the new owner.

Option II: The buyer takes a home loan

  1. In this case too, the outstanding loan amount needs to be settled first
  2. Sanjeev applies for a loan from Bank NMG (or any other bank) to clear Rajan’s home loan dues. Bank NMG carries out a credit appraisal process on Sanjay’s application, as in the case of any fresh home loan application.
  3. If it is satisfied with Sanjeev’s creditworthiness, Bank NMG will issue a loan to Sanjeev.

The rest of the process remains same as point 2 and 3 from Option I.

So, you can indeed sell or buy a property that has a mortgage on it, but as a seller, you must remember that if you sell the property within three years of purchasing it, you will incur short term capital gains tax which will hamper your return on investment. Also, selling the property within 5 years of buying it will result in reversal of tax deductions. Thus, it may be stated with some conviction that as a buyer, you will be at a vantage position buying a property with a mortgage, the seller may have to compromise heavily on his profit margins if he sells it within the first few years.