Selling a mortgaged house

TR has taken a housing loan of Rs 25 lakh. She has stayed in that house for almost five years and now she has to relocate to another city. She wants to dispose the house but still has an outstanding loan of Rs 20 lakh. What can she do? Can she sell the mortgaged property? The answer is yes. And, there are two ways to go about it.

One case is that the buyer does not take over the loan from the borrower. In such a case, the procedure is very simple. The seller should obtain a letter from the bank/housing finance company (HFC) stating that the bank will return the borrowers’ documents after the full final settlement.
During the repayment of the housing loan, if the borrower wants to sell the property, the proposed buyer should deposit the sale proceeds in the loan account and then only can the documents be released.

There is a due date given by the bank/HFC to make the full payment. If the borrower is not able to make full payments by the due date, he will be paying certain premium over and above the outstanding as prescribed by the bank.

Once the borrower pays off all the dues, he receives the letter. Subsequently the borrower will receive the documents, which were submitted at the time of loan application, in 7-15 days. But, at any point of time, a borrower should have a photocopy of all the documents he had submitted to the bank at the time of loan application.

Let us take Ms TR’s example. She had borrowed Rs 25 lakh from the bank. If the outstanding amount is Rs 20 lakh, she has to pay Rs 20.5 lakh (including prepayment penalty of 2.5%) to the bank to square off her dues. Let us assume the resale value of her house is Rs 30 lakh. So, the buyer of the house will give a draft/cheque of Rs 20.5 lakh to the bank/HFC. The buyer will give the balance of Rs 9.5 lakh to the borrower.

C You can sell the house with the mortgage. You should get into an agreement of sale first. The purchaser or his bank can clear your loan and the balance will be paid to you. In this procedure both the buyer and the seller undergoes additional formalities. The loan is not transferable from the seller to the buyer.
The new loan amount will be treated as a fresh one in the buyer’s hands. If the buyer takes the loan from the same bank/HFC he/she has to submit new documents for the loan processing. If the buyer approaches another bank/HFC, the mortgagee (the first bank) writes a letter to the new bank that the former will deliver all the documents on the receipt of payments.
Some banks have the property servicing department. This department undertakes various services like property advisory, counseling, etc. But what you need to question is if the bank has a technical expertise to deal with real estate.

Property servicing, especially for single customers, requires adequate technical expertise. Even today, customers prefer a real estate broker over a banker for property-related decisions. Even today, banks have been successful in huge property deals for the corporate. But they are not a major player in individual property servicing.

It varies from bank to bank. Some banks may not even charge a prepayment penalty while some banks/HFCs may levy a penalty of 2% of the outstanding loan amount. If you are using the sale proceeds to buy another house and opt for a loan from the same bank, then you can negotiate on the prepayment penalty.

It’s not difficult to sell a mortgaged house. But what you need to know is whether selling it makes any business sense to you? If a borrower sells a mortgaged house within the first few years from the time of purchase, then he may get a raw deal.

For first few years, a borrower would have paid more of the interest of the loan. Also, he will have very low equity in house. During that period, if the borrower wants to sell, he will lose money on two counts. The property price will largely be unchanged in 2-3 years. Also, the borrower’s income wouldn’t have changed significantly in this time period.