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For housing loan approvals, banks carry out certain due diligence, before sanctioning the same. This process consists of two distinct parts. In the first part, the bank/ housing finance company, will conduct a scrutiny on the customer. This financial due diligence of the home loan seeker is done, on the basis of the home loan documents submitted by the customer, to determine the quantum of home loan eligibility, and to ensure that the applicant can service the loan properly. The second part pertains to legal due diligence on the documents and title of the property, for which the home loan is sought, to establish the legal ownership of the property, and the competence of the seller to sell it.
Legal due diligence of the property
In most under-construction projects, the developer gets the legal due diligence done by the lenders, in advance. This is commonly known as pre-approval of the project. It is often used as an assurance from the developer and lender, that the lender has carried out the legal due diligence on the title of the land of the project. Consequently, loan approvals for the project may be relatively smoother, as one part of the verification process is already completed.
It also saves the lender from the hassle of having to conduct due diligence every time a home loan application is received, for such an approved project, at any of its branches, as the data on such due diligence will already be available. Moreover, these pre-approved home loans reduce the processing time and ensure better conversion for the bank.
Should home buyers rely only on the due diligence of the bank?
Home buyers, who opt for a pre-approved home loan, are often under the impression that the legal due diligence carried out by the lender, guarantees a clear title to the property. However, this may not always be true and it is the buyer who is at risk, in case the title is found to be defective, later on. If any dispute or defect in the property’s title is discovered, the buyer is not absolved of his/her responsibility of serving the home loan, even if the property goes into litigation. In such a situation, the buyer may, temporarily, be deprived of his right over the property, while still having to service the housing loan.
Second due diligence
While the concept of a ‘second opinion’ is common in the medical profession, it is equally important in the case of a home purchase. Purchasing a house often, involves investing a substantial amount of one’s lifetime savings. Hence, it is advisable to be cautious, instead of trying to save a few thousand rupees by avoiding due diligence.
The recent litigation over land acquisition in Noida Extension, where more than 100 projects were derailed and possession abnormally delayed, is a prime example. If the Supreme Court had decided otherwise, all these buyers would have lost their savings. Even though the lenders in these projects may have carried out their own due diligence, buyers still faced a long litigation process.
(The author is a taxation and home finance expert, with 30 years’ experience)