Legal verification is the process of confirming that all the documents related to the home loan are in order and that there are no outstanding legal issues that could jeopardize the loan.
The legal verification process can be time-consuming and complex, but it is essential to ensuring a smooth and successful home loan transaction.
The process of issuing home loans often turns out to be a risky transaction for both the parties involved- the borrower, as well the financial institution involved in the lending. On one side, can the applicant be certain that the loan will be adequate for the home or property he wishes to purchase? And, on the other hand, can the lending institution be sure that the borrower will not default, or that the property is a sound investment for a loan?
Home loans have been a booming sector lately, with the latest outstanding figures for home loans standing at 17.4 trillion rupees, in June. Moreover, RBI’s recent move to increase the upper limit of home loans by 100% shows confidence in the potential of this sector. However, banks and other lending institutions need to navigate their home-loan approval process with caution.
Before issuing home loans, financial institutions need confidence that the property in question is not involved in any legal disputes or other problems that could be potential roadblocks in the loan process. For this, they employ a range of assessments to ascertain the credit risk associated with their borrowers.
This is where legal and technical verifications come in. They refer to the due diligence conducted before the granting of home loans by lenders. The verification must be done with the utmost care since it would help the institution evade any unethical or fraudulent practices in the process of home loans.
Legal Verification Process
Legal verification is the process of confirming that all the documents related to the loan are in order and that there are no outstanding legal issues that could jeopardize the loan. This includes verifying that the property is free and clear of any liens or encumbrances, that the borrower is who they say they are and that all the information provided by the borrower is accurate.
The legal verification process can be time-consuming and complex, but it is essential to ensuring a smooth and successful home loan transaction. The process looks something like this.
- Borrower submits documents to begin the process.
- The following documents must be submitted: originals of the agreement to sell, receipts for payment of property tax, and blueprints/floor plans.
- While the applicant may submit copies of relevant documents when initiating the application process, the applicant will be required to present the original documents with the required seals during the on-site technical verification.
- Following this, the lender conducts a legal check. A team of experts, like lawyers, examines the documents that include NOCs, title deeds, etc.
- The legal verification is carried out in two phases. There are two phases to the legal verification process. First, the property is examined, followed by the creation of the title report.
Technical verification is the next step in the process. This is done as a check on the physical condition of the property before the granting of the loan. The property is visited and examined by experts. The findings are then used to value the property so that the loan reflects the true value of the property.
Why is legal verification so important?
Legal verification is carried out very carefully for many reasons.
This process assures the lenders that the property is safe and free from legal conflicts, or any other problems that might land the lending institution in trouble.
- Accurate valuation of the property
The loan can then be issued free of risk. For the borrower, the technical verification of the property helps them gain the amount that truly encapsulates the value of the property.
- Convenient for the borrowers
Banks collaborate with builders for projects, post carrying out legal and technical verification. In such situations, the borrowers have higher convenience, since they do not have to partake in the legal and technical verification process. They will only have to attest to their creditworthiness.
- Screening for potential red flags
If any red flags crop up during the legal verification process, the loan is unlikely to be processed, since the lending institution is at risk.
- Captures the value of the property
The loan is likely to only be the amount that is equivalent to the market value of the property. Hence, a sound and thorough judgment of the property is made available to both parties through the verification process.
Legal implications are difficult and time-consuming to do away with. Being aware of them helps navigate necessary processes with ease while obtaining loans, as well as ensuring that the property is fetching its price.
(By Atul Monga, Founder and Chief Executive at Basic Home Loan)