Find out how you can dispose of a property for which you are still paying an EMI, or to purchase one that is mortgaged to a bank or a housing finance company
When Sameer Khan purchased two properties in the western suburbs of Mumbai three years ago, the idea was to generate extra rental income for his family. “I had taken loans for both flats when they were under construction. Though the properties are nearly completed, it will take another six months to get the possession,” he says. However, with the steep increase in home loan interest rates, Khan is finding it difficult to service both the loans and plans to sell one property. “The profits generated from the sale of one house can be used to pay the loan for the other,” he says.
Financial insecurity is just one of the reasons a property owner may want to sell a house for which he is still paying the EMIs. A couple of years after buying the house, you may feel the need to upgrade to a bigger property. If you are moving to a different city for work, you may want to settle down there after disposing of the existing property.
While these arguments are valid for a seller of a mortgaged property, it may also make sense to buy a mortgaged resale property rather than one that is under construction. The advantage of purchasing a resale property is that it may be at a better and established location and you will be dealing with an individual instead of a builder’s sales team. In the case of a resale property, you have ample time to examine the pros and cons of the deal before taking a decision. Another advantage with buying a resale property is that banks generally conduct due diligence for the house that they are going to finance.
While the reasons for selling and buying a mortgaged property may vary, one common problem that most people face is: can you sell a mortgaged property at all? Do you need to settle the home loan first and then approach a buyer or can the buyer take over your loan? What if the buyer himself plans to take a loan to fund the purchase? Many property owners who have bought the house with money borrowed from a bank have grappled with these questions. To avoid confusion while finalising a deal, here’s how you can sell (or buy) a house against which a loan is outstanding.
Get the property documents in order
The main documents required to sell a residential property are the housing society share certificate and the sale/ purchase deed of the property. The sale deed confirms that the land is in the name of the seller and that he has the right to dispose it of. If the property has changed hands more than once, the buyer may also ask for a copy of the previous deeds, in order to confirm the authenticity of the deal and property.
The buyer will also demand the copies of stamp duty and registered house documents. Since these papers will be mortgaged with the bank if you have taken a home loan, you can use a photocopy of the required documents to initiate a deal. Depending on the kind of property and ownership, some more documents, such as a no-objection certificate from the housing society and a documented consent in case of jointly owned property, may be required.
If a buyer pays with own funds
In this case, the procedure is pretty straightforward. The seller first needs to obtain a letter from the bank with which the property is mortgaged, stating that the bank agrees to relinquish the property documents after the full and final payment of the loan. The buyer will then be required to pay an amount equivalent to the outstanding loan to the seller’s housing loan account, after which the process of releasing the documents by the bank is initiated.
Once the borrower pays off all the dues, he receives the ‘no due’ letter from the bank. The original documents kept with the bank as security are usually released over a period of 5-10 working days of receiving the money. Ramesh Bhojwani, a Mumbai-based financial expert, explains that the sale proceeds cannot be fully executed till the time you are servicing a housing loan. “You can’t sell a mortgaged house if the buyer insists on the documents required to apply for a loan because all the original papers are lying with the bank,” he points out.
Are there any tax implications either for the buyer or seller if the amount is paid as a lump sum? Hiten Shah, associate director, tax and regulatory practice, Ernst & Young, explains, “The lumpsum payment made by the seller will not have any impact on his cost of acquisition. However, the interest paid on the loan can be claimed as deduction under income from house property and a deduction for principal repayment can be made under Section 80C of the Income Tax Act,” explains Shah.
If the buyer takes a home loan
In this case also, the seller will still be required to settle his home loan first. The buyer of the property will have to submit all his financial documents to the bank and once the bank is fully satisfied about his repayment capacity, he will be eligible for the new loan. Experts advise that it is better to take a housing loan from the same bank where the seller has mortgaged the property as the bank will just have to examine the buyer’s financial eligibility before furnishing the loan.
While selling or buying a mortgaged property is possible, selling it within a couple of years of buying it can pare down your actual profit by half. “The seller will incur short-term capital gains tax regardless of whether the sale proceeds are invested in a new property or not,” says Om Ahuja, chief executive officer, residential services, Jones Lang LaSalle India.
If you have taken a home loan on the property, you will also have to take into account the interest that you have already paid before calculating your actual gains. Under Section 80C of the Income Tax Act, the principal of the home loan can be claimed as tax deduction. However, if the property is sold within five years of buying, the tax deduction is reversed.
If you have held the property for more than three years, the gains are treated as long-term capital gains and taxed at a lower rate. The taxman also gives you the option of using indexation to bring down your tax liability. This lowers the effective profit from the sale of the asset and, therefore, the tax liability.