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This article is written by Magaonkar Revati, a student pursuing BA-LLB (Hons.) From Dayanand College of Law. This article deals with all the necessary information and procedure for selling a property with an outstanding home loan.

Introduction

Selling a property is not easy as selling any product, we have to follow so many procedures, documentation, etc. for properly and fairly selling the property without any failure and lacuna. When it comes to selling a property with an outstanding home loan amount it becomes more stressful for the sellers. Sellers get so confused about how to sell a property when that property is mortgaged for the loan amount, so the question comes is that can we sell the property with an outstanding home loan? If yes, then what is the procedure for the same, and if not, then also why? and what we can do?

So the answer is yes, an owner of a property with an outstanding home loan can sell his property to an appropriate buyer by following and completing all the documentation and procedures required for it. In this article, we will focus on the procedure and all points included while willing to sell a property with an outstanding home loan.

How to approach the potential buyer while selling the property with an outstanding home loan

Before selling a property, the seller needs to inform the buyer about the outstanding home loan amount. It should be informed even before fixing and negotiating a final price. There are so many different ways to approach a buyer according to the buyer’s capacity, such as:

  • If the buyer decides to pay from his funds.
  • The buyer decides to take a home loan from any other lender for paying the property amount.
  • The buyer decides to apply for a home loan from the seller’s lender bank.

Required documents for selling the mortgaged property

When there is an outstanding amount of home loan at the time of selling of property; as the original documents will be with the lender or bank or any institution, it is necessary to have copies of the original documents which are given to the lender for mortgaging the property for a home loan. Primarily it is necessary to have all related photocopies of the original documents such as:

Encumbrance certificate

An encumbrance certificate (EC) is a shred of documentary evidence for proving that the said property is free from any monetary and legal liabilities. It works as proof that the said property can be sold with a free title and the buyer will not have any baggage associated with the property. This document can be contrived from the office of the registration authority.

It gives assurance to the buyer that the property he is going to buy is clear or not of any legal dues and the marketable title.

It is a reference for any liabilities that arise out of a mortgaged property that has not been cleared by the owner/seller. 

This certificate normally is valid till the particular transactions in that period only and only those transactions will be considered. 

Procedure to obtain Encumbrance Certificate (EC)

EC is provided by the sub-registrar officer where the property has been registered to find out any transactions which have taken place relating to the property, the following procedure should be followed:

  • First of all the application is to be made at the sub-registrar office for getting EC, the copy of address proof, property details, title with fees applicable for acquiring the certificate.
  • The Officer will complete the inspection of the index list of information within the specified period.
  • EC gets issued within 15-30 days from the date of application.
  • The form of the application and certificate is given in agreement with the rules or provisions of the Registration Act according to the respective states. 

Often, an application is to be made under Form No. 22, and the EC gets issued in Form No. 15. Copy of sale deed is a document that certifies the tile and eligibility of a person on the said property. It is one of the most important documents while a property is in the process to be sold out. It specifies the details that are important for a purchaser of a property. 

Copy of sale deed

A copy of the sale deed can be obtained in the event of loss or displacement of the original document. The owner/seller of the property can obtain a copy of a sale deed after preparing a bond of indemnity.

A sale deed is also used for the procurement of a loan towards the property, so in absence of the original sale deed the bank, or lender can ask for a copy of the sale deed, affidavit, etc.

Procedure to obtain Copy of Sale Deed

  • For addressing the loss of the original document FIR must be filed in the nearest police station with proper information of the document such as registration number, details of the ownership.
  • When the police don’t succeed in finding the original document a non-traceable certificate will be issued to the owner/seller for applying for a copy of the sale deed.
  • After that, the person needs to publish the advertisement of loss of the document in two newspapers including an invitation for claim over the property and if no claims come within the specified period from an advocate should be acquired for the same.
  • An affidavit has to be filed on a stamp paper if the original document is not found; that affidavit should indicate trails of lost or misplaced sale deed and the other related documents, the undertaking must be assigned and attested with a public notary including FIR document, copy of the advertisement in the newspapers to an affidavit.
  • After submitting all these above-mentioned documents with an application requesting a copy of the sale deed, it can be obtained from the respective sub-registrar.
  • All the documents must be supported with the prescribed fees it may vary from place to place. 

Home loan sanction letter

A home loan sanction letter is a first approval letter to the home loan applicant which is signed by a person in authority. This letter gets issued only after verifying credit history, income stability, ability to repay, documents. 

This letter of sanction is valid till six months from the date of its approval. Its format is based upon the sanctioned loan amount, tenure of repayment of the loan, interest rate of home loan, and terms and conditions of the lender. 

Mother deed copy

Ownership of the property is always changing through its transactions, it is an important aspect to keep tracing the ownership of the property. Mother deed is one of the important pieces of evidence and documents to prove the ownership of property. It is also one of the main documents while establishing the sale transaction by the owner of the property for proving the ownership. 

This document is important in terms of a transaction of property. It traces the origin of the property with all its conveyance deeds. A person has to apply to the sub-registrar office to get a copy of the mother deed when the original one is lost, in the mother deed the present owner/seller of the property has to mention the loan he/she has taken by mortgaging the said property. 

Tax receipt of the property

The tax receipt is one of the important documents required in a sale transaction, it shows the ownership of a person which has been recorded by the government with all property tax payments history. While selling a property, one needs to show and provide this receipt to the buyer so he can avoid unnecessary future issues and get registered his name so that from the time all the tax will come in that person’s name and if he doesn’t do it the same will go on the previous owners’ name though it seems okay it isn’t. The new owner will need to pay an extra fine for this and delay in tax payments. 

The seller should provide the last house tax receipt to the buyer of a property. 

Mutation of property

The mutation is also known as “Dakhil Kharij”, it means changing or transferring the ownership and title over a property from the previous owner (seller) to the new owner (buyer) in government documents. 

This enables the government to charge taxes on the name of the buyer (new owner) and also helps the owner (seller) to transfer the ownership. In the procedure of Mutation, an application has to be given with a non-judicial stamp, it must include information about the property and should be submitted to the tehsildar of the area. This procedure may change or vary from state to state.

NOC from society

No Objection Certificate (NOC) is a mandatory document in the selling of a property. A person has to make an application for NOC to the society, it may require for any personal reasons also. Society has to issue it within a month from the date of receiving an application. The NOC does not let the buyer free from the responsibilities of that person from paying all the past dues to the society itself. 

The Cooperative Department of the State has come forth with a circular earlier making the NOC mandatory for Cooperative Housing Societies and it has to issue the NOC to its members within a specified time.

Procedure how to sell property with outstanding loan

For selling the property with an outstanding home loan one needs to follow the below-mentioned process:

  • The seller has to get a loan outstanding letter by requesting the bank or lender.
  • The seller has to get prior or principal approval from the lender.
  • In this approval, a part of the sale consideration (amount) has to be directly paid to the lender or bank and the remaining amount (if any) can go to the seller or owner of the property himself.
  • After the above process, ss the loan gets paid and liability cleared.
  • Then the bank or lender can release the property documents. 
  • Now the seller can transfer the ownership and title to other property in the name of the buyer.
  • If still, any amount remains it can be settled between the seller and buyer. 

                  

Case Law

M. Shanthi v. Bank of Baroda on 9 August 2017 (Madras High Court)

In this case, the writ petition is filed for issuance of the Writ of Mandamus, for directing the respondent to return the property documents that are belonging to the petitioner. These documents were given to the respondent for the security of the loan amount. Without paying the exercise general liens. 

The petitioner had borrowed 47 lakh rupees from the respondent bank by mortgaging his property with depositing the title deed, in respect of 6 plots that belonged to the petitioner. After some ups and downs in payment of instalments of the loan amount, the petitioner approached the bank for redeeming the entire due and redeeming the mortgage. 

The Bank denied the redemption of the mortgage upon full payment of the debt. The petitioner sent the representation to the bank to which the bank replied that the bank will be in a position to close down the loan account and on such closure no interest will need to be payable. 

The bank made the representation that it has a general right of lien under Section 171 of the Indian Contract Act so that it can proceed against the petitioner’s mortgaged property for outstanding loan account of “M/s CMS Educational Trust” where the petitioner is also liable as a guarantor. 

As above mentioned loan transaction stands separate where the petitioner is guarantor, the petitioner’s property is not secured and it cannot be either proceed with. The property which was given as a security by the petitioner was worth rupees 2.5 crores for the loan borrowed, hence the documents cannot be retained by the respondent bank. 

The bank has filed an O.A. before the Debts Recovery Tribunal, Madurai against the CMS Educational Trust.

The bank never claimed the properties as a right of lien which was given as the security for the loan amount. So the petitioner is only a guarantor and not a mortgagor of the properties in the said case.

Therefore, the writ petition filed by the petitioner stands as allowed by the court and it has been directed to the bank to return documents relating to the petitioner’s property which was given as a security for the payment of the due loan by way of deposit of title deed.

Conclusion

Therefore, when a seller wants to sell the property before completing the home loan amount, there may be so many different reasons behind it such as financial issues, wanting to change the house and shift in the other one, there may be several reasons behind it. But after taking into consideration all the factors that are necessary for selling a mortgaged property or property with loan amount is a cliche process, it is said by so many eminent researchers and professionals that unless it is necessary one should avoid selling it. 

Apart from the sellers’ reasons behind it, it can be beneficial for the person buying the said property, as he will not need to undergo the contrivance of builders’ sales associates for a property under construction. So they get benefit easily by buying an already constructed or a resale property. 

References


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