A property servicing home loan is one where the owner still pays off a loan taken to buy the property, meaning the bank or lender has a financial claim on it until the loan is fully repaid. Selling such a property can seem complicated. You may think the property may be complex to sell just because the home loan is pending. Sure, the process for selling a loan-serving property differs from the process of selling a loan-free property and follows a different approach. However, if you follow the proper process and all the mandatory documentation is in order, you can be assured that the process will be as smooth as selling a loan-free property.
Can you sell a house that is still servicing a home loan?
If you want to sell a property with an active home loan, you’ll need consent from your lender. This is usually provided in a letter stating the total amount required to repay the loan, including any prepayment charges. The letter also lists the documents the lender holds, which will be released once the stated amount is paid. The amount is often calculated for a future date, allowing the buyer time to arrange funds. After settling the dues, the bank will return your original documents and issue a loan closure letter confirming no outstanding amount. Be sure to get a no-dues certificate to avoid future issues.
Mandatory documentation for selling a property that is still servicing a home loan
If you plan to sell a property with an outstanding home loan, the first step is to organise the necessary documentation. Here are the mandatory documents required for selling a property with an active home loan:
Loan statement: A detailed statement from your lender showing the outstanding loan amount.
No objection certificate (NOC): Issued by the lender, confirming their consent to the sale once the loan is fully repaid.
List of documents held by lender: A list of original documents (like the title deed) held by the lender as collateral.
Sale agreement / Sale deed: A legal agreement outlining the terms of the sale between you and the buyer.
Encumbrance certificate: This shows that the property is free from any legal liabilities other than the existing loan.
Loan closure letter: Issued by the lender once the loan is repaid, confirming no outstanding dues.
No dues certificate: All dues, including prepayment penalties if applicable, are cleared.
Property title documents: The original title deed, once released by the lender after loan repayment.
How to sell a home with an outstanding loan
Selling a home with an outstanding loan requires clearing off the lender’s debt. The process is usually completed in three different ways.
- When the buyer pays from his savings
- When the buyer decides to take a loan from the seller’s bank
- When the buyer decides to take a home loan from a different bank
All above methods of selling a property with an outstanding loan are explained in the below steps:
Step-by-step procedure for selling a property with an outstanding loan
Step 1: Obtain lender’s consent
Before initiating the sale, the seller must contact their lender to obtain consent for selling the property. This typically involves a formal request and may require a written letter from the lender stating the outstanding loan amount and any associated prepayment charges.
Step 2: Calculate outstanding amount
The seller should request the lender to provide a clear breakdown of the outstanding loan amount, including any prepayment fees and the total amount required to settle the loan.
Step 3: Explore payment options
The seller and buyer can choose one of the following three methods to settle the outstanding loan:
- Outstanding loan paid through savings: The buyer pays the outstanding loan amount directly to the seller’s loan account using their savings. Once the payment is made and the loan is fully settled, the lender releases the original title deed to the seller, allowing them to transfer ownership to the buyer.
- Outstanding loan paid via home loan from the same lender: If the buyer opts to take a home loan from the same lender, a tripartite agreement is created between the seller, buyer, and lender. The lender assesses the buyer’s loan eligibility. Upon approval, the lender pays off the seller’s outstanding loan directly, and the remaining balance is given to the seller. This method streamlines the process since all parties are dealing with the same bank.
- Outstanding loan paid through loan from different lender: If the buyer chooses to secure financing from a different lender, the seller must request a certificate from their lender detailing the outstanding loan amount and any associated documents. The buyer’s lender will then pay off the outstanding loan directly to the seller’s lender, after which the original property documents will be transferred to the buyer’s lender. The buyer will then pay the seller the remaining balance.
Step 4: Complete necessary documentation
After settling the loan, both parties must complete all necessary documentation, including the sale deed, which must be registered with the relevant authorities. The seller should ensure all property documents are in order.
Step 5: Obtain no dues certificate
Once the loan is fully paid off, the seller should obtain a no dues certificate from the lender, confirming that there are no outstanding amounts. This protects both the seller and the buyer from any future claims related to the loan.
Step 6: Transfer ownership
With all dues settled and documentation complete, the seller can officially transfer ownership of the property to the buyer. This includes handing over the original title deed and any other necessary documents.
Step 7: Update property records
Finally, ensure that the property records with local authorities reflect the new ownership to avoid any future disputes or complications.
When will the property papers be transferred to the new home buyer?
When a seller sells a property with an outstanding loan, the papers will be transferred to the new homebuyer after the outstanding loan amount is fully repaid. The process typically works as follows:
- Loan settlement: The outstanding loan amount is either paid by the buyer (if paying from savings) or by the buyer’s bank (if taking a loan).
- Release of documents: Once the loan is fully settled, the seller’s bank will release the original property documents as collateral.
- Transfer to buyer: These documents are then directly handed to the buyer or transferred to the buyer’s bank if they take a loan, allowing the property ownership to be legally transferred to the buyer.
The documents are transferred only after all dues are cleared, and the lender no longer has any claim on the property.
Who makes the payment of stamp duty – buyer or seller?
Stamp duty is a tax paid to the state government. The payment is made as registration charges and is paid to the sub-registrar’s office to record the property transfer. The payment of stamp duty is the responsibility of the buyer.
Short term vs long-term capital gains tax on selling a property with an outstanding loan
In India, when you sell a property, a capital gains tax is to be paid. Any profit earned from selling a property is subject to capital gains tax. Tax is divided into two categories:
- Short term capital gains tax (STCG)|
- Long term capital gains tax (LTCG)
Short term capital gains tax: This tax is applied to any property that is sold within 24 months of purchase.
Long term capital gains tax: Applicable on properties held for more than 24 months or 2 years.
| Condition | Type of tax | Tax applicable |
| If a property is sold within 24 months of purchase | Short term capital gains tax | The gain will be added to the existing income of such individual and taxed as per the applicable tax slabs |
| If property is sold after 24 months | Long term capital gains tax | 12.5% without indexation or 20% with indexation |
How a mortgaged property deal benefits both the buyer and the seller
A mortgaged property can benefit both buyers and sellers. Let’s understand this using an example.
Example: A few months ago, Mohan purchased a 2-bedroom flat for ₹55 lakhs from Vinay, who had an outstanding loan of ₹10 lakhs on the property. Mohan made a down payment of ₹20 lakhs, part of which Vinay used to prepay his outstanding loan. This allowed Vinay to get the original property documents released from the bank. With these documents, Mohan registered the property in his name and secured a home loan for the remaining amount, which was approved within 10 days. It was a win-win situation: Mohan got a good deal, and Vinay successfully sold his mortgaged property, clearing his loan in the process.
How is a property servicing home loan different from a property mortgaged for loan
Property servicing a home loan
- Meaning: When a property is “servicing a home loan,” the owner repays a home loan taken to purchase that property. The loan is still active, and the borrower makes regular payments (EMIs) to the bank or lender.
- Ownership: The property owner retains possession and legal ownership of the property, though the lender holds a lien or charge on the property as collateral.
- Loan type: This situation typically arises with home loans taken for buying residential properties.
- Sale of property: The owner can sell the property while the loan is active by repaying the outstanding loan amount to the lender, either from the buyer’s payment or their funds.
Mortgaged property
- Meaning: A “mortgaged property” refers to a property pledged as collateral to secure a loan. It is the asset against which the loan (not necessarily a home loan) has been issued. The borrower may or may not be repaying the loan, which could be a home loan, a loan against property, or any other form of secured loan.
- Ownership: While the borrower possesses the property, the lender holds significant rights. If the borrower defaults, the lender can legally seize and sell the property to recover the outstanding loan amount.
- Loan type: A property can be mortgaged for various types of loans, not limited to home loans. Loans against property (LAP) are an example of a property used as collateral for a business or personal loan.
- Sale of property: Selling a mortgaged property involves settling the loan or seeking lender approval for the sale. The mortgage must be cleared before transferring ownership to the buyer.
Things to know before selling a property that has an outstanding loan
- You need your lender’s approval to sell the property.
- The outstanding amount mentioned in the lender’s letter is typically calculated for a future date, allowing the buyer time to arrange their finances.
- If the buyer is obtaining a loan from a different lender, you can request your bank to provide an undertaking that they will release the documents to the buyer’s lender upon payment of the outstanding loan.
- If the buyer intends to take a home loan, it’s advisable for them to approach the same bank where you have your loan, as this can streamline the process.
- The release of the original title deed, registration of the sale deed, and discharge of the sale consideration typically occur simultaneously.
- Sellers need to verify the buyer’s capability to complete the transaction and the source of funds for the purchase.
- The bank will conduct due diligence on the new buyer’s income and complete KYC before approving a loan transfer.
- Sellers should calculate their tax liability, which may include capital gains tax, before selling the property.
- The tax impact can be mitigated if the seller reinvests capital gains in another residential property within two years or constructs a house within three years of the sale.
Importance of Encumbrance Certificate in Selling a Property with an Outstanding Loan
An encumbrance certificate is crucial when selling a property with an outstanding loan as it serves as proof of the property’s ownership and indicates whether any financial liabilities, such as mortgages or liens, are associated with it.
This certificate provides potential buyers with assurance that the property is free from any legal disputes and confirms that the seller has the right to transfer ownership. For sellers, obtaining an encumbrance certificate can also help facilitate the loan settlement process with the bank, as it outlines the outstanding dues, ensuring transparency and a smoother transaction during the sale.
Housing.com POV
Selling a property that is still servicing a home loan can be a complex process, but it can be accomplished with careful planning and the right approach. Understanding your loan situation, preparing your property effectively, and navigating the sale process with transparency and diligence are key to achieving a favourable outcome. By following the steps outlined in this article, you can ensure a smooth transition from property owner to seller while managing your existing home loan obligations.
FAQs
Is it easy to sell a property with an outstanding home loan?
Yes, it is easy to sell a property with an outstanding home loan. However, you need to ensure that you follow the correct procedures. A mortgaged property may face issues with finding buyers but overall it can be a very lucrative deal for both buyers and sellers.
Can I sell a property even when the home loan is outstanding?
Yes, you can sell a property with an outstanding home loan, but you need to settle the loan with the lender during the sale process.
Can a collateral property be sold?
Yes, a collateral property can be sold, but the lender must be informed, and any outstanding loan amount must be settled first.
What is a capital gains tax on a property?
Capital gains tax is a tax imposed on the profit from the sale of a property, which can be classified as short-term or long-term based on the duration of ownership.
How do I transfer ownership of a mortgaged property in India?
Ownership of a mortgaged property can be transferred by settling the outstanding loan with the lender and executing a sale deed to the buyer.
What is the tripartite agreement for the sale of mortgaged property?
A tripartite agreement is a legal contract between the seller, buyer, and lender that outlines the terms of transferring ownership of a mortgaged property while settling the outstanding loan.
What is a sale deed for a loan?
A sale deed for a loan is a legal document that records the transfer of property ownership from the seller to the buyer and may also specify how the outstanding loan will be managed during the sale.