Procedure of Bank Loan Against Real Estate

The term ‘Real estate’ indicates all types of immovable property which are attached or unattached to land or forming part of the land. Thus, it includes such tangible assets as land, buildings, factory premises, etc. Let’s know the detailed procedure of bank loan against real estate.

As a matter of policy, bankers have always been reluctant to make loans on the mortgage of real estate. Here is the detailed procedure of bank loans against real estate.

One of the principles of sound bank lending is that an advance should be salt-liquidating. Advances ageist immovable property fails to achieve the objective of self-liquidity. Besides, the banker’s reluctance to accept real estate as security is largely due to the following difficulties and legal complications.

Title of the owner

A major drawback of such security is that it is very difficult to ascertain the title of the owner to the property to be mortgaged. A person holding the title deeds of the property may not be a true owner and may be holding the property as a mortgagee.

Even and good title may be subjected to prior charges and encumbrances which the lending banker may not know; again, landed property is subjected to various kinds of titles, such as leasehold, freehold, tenancy, etc.

The problem of establishing the right of ownership, on the other hand, is extremely difficult in the case of agricultural land because land records are not properly maintained. In the absence of up-to-date and accurate records of rights inland, it is difficult for the banker to accept such land as security.

In order to verify whether the borrower is a prima facie owner of the property and competent to create the mortgage, the bankers usually have to ask their solicitors to examine the documents of title to the property to ascertain whether the borrower possesses the right to mortgage the property.

Difficulty in the valuation of the property

The valuation of real estate is a difficult task. The valuation of an immovable property depends upon its location, type of construction, etc. A banker cannot rely on their own judgment for that purpose.

This work is, therefore, entrusted to expert valuers, surveyors, architects, or engineers who take into account all the relevant factors before making the valuation of the property.

Legal formalities and time consuming

While creating a mortgage the preparation of the mortgage deed and registration takes time. This is quite cumbersome work. Besides expenses are incurred in the form of stamp duty, registration charges, and other miscellaneous charges by the borrower.

The bank has to spend a lot of time completing these formalities. Thus, creating a charge involves much time and expense.

Absence of ready realization

If such loans are not being paid on the due date, the bank has to seek the help of the court to sell the property. This is a cumbersome and lengthy process and, in some cases, it takes years to liquidate the mortgage debt. It is also not easy to find a purchaser and, in haste, the property may have to be sold at a price much below what it is really worth.

Therefore, advances against real estate are likely to be locked up over a long period, thus affecting liquidity. Real estate is not readily realizable security.

Legal Bar

The laws governing immovable property, especially land, restrict transfer, and sale. Hindu and Muslim laws and customs impose so many conditions on succession and transfer. Where the property is leasehold, the permission of the lesser is required for transferring or creating a mortgage as per the lease deed. These restrictive laws limit the utility of land and property as suitable security for commercial banks.

In spite of the above defects, advances are granted against immovable property by banks to achieve the national objective set forth by the Government. To increase housing stock in the country, banks have also designed special plans to finance the construction of a new houses, multi-storied buildings/flats, and commercial buildings.

Precaution and Checks

When a banker decides to grant a land against landed property he must pay attention to the following points.

Borrower’s Title

The original title deeds, i.e., sale deeds or sale certificates issued by a court, if the property has been purchased at court auction, etc., should be obtained. If original title deeds have not yet been got delivered from the Registry office and are not possible to be produced, the copies duly authenticated by Registrar/Sub-Registrar along with the original receipt should be obtained. The chain of documents, i.e., bia deed must be complete.

Not only should the bank ask for the last sale deed/sale certificate but also the earlier ones in order to establish how the title was transferred from one purchaser to another and how the present owner derives his title. Mere possession of the deed does not imply full power on the part of the possessor to charge the property.

The banker must, therefore, satisfy himself that the possessor has a full title to the property represented by the title deeds, he can only mortgage the property for his own benefit to the extent of his own interest.

Bankers normally do not go for advancing against the joint property, unless consent in writing from the co-sharers is provided or, the borrower’s interest in the property is mutated in his favor.

Character of title

A title to land may be freehold or leasehold. A freehold title carries an absolute right of ownership of the land. It carries an interest in the land in perpetuity: on the death of the owner, it vests in his personal representatives for the benefit of his legatees or, if there is no Will, the persons legally entitled to it on his intestacy. When under Will, intestacy, consent of administrators, or executors is necessary. Banks prefer freehold property.

A leasehold title, on the other hand, is a “term of years absolute.” and the owner of the leasehold property is a “tenant for a term of years,” I.e., a leasehold estate does not carry an interest in the land in perpetuity; it is merely a lease of the land against payment of rent, termed ground rent. For a fixed term of years.

In the case of, leasehold property, the original lease deed in favor of the borrower must be examined to ascertain the study of the terms and conditions of the lease to find out if there are any onerous (burdensome) conditions.

In the case of leasehold property, the consent of the lessor is normally necessary. In the case of government land, this is all the more necessary because the mortgage of lease-hold property without the permission of the government annuls and vitiates the mortgage.

The latest ground rent receipt should be obtained from the borrower to verify that the rent is not in arrears and that the lease continues to subsist.

Legal opinion

The law relating to the sale, mortgage, and charging of immovable property is highly technical and complicated. The inspection of the title deeds and complicated. The inspection of the title deeds and the verification of the borrower’s title requires thorough legal knowledge.

The title deeds should, therefore, be passed on to the bank’s legal adviser to ascertain whether the mortgagor possesses absolute and undisputed title to the property and also the right to mortgage it.

It is possible that the borrower may have already obtained and report from the same legal adviser.  In such a case, the legal adviser should be requested to resubmit his report and address it to the bank.

Investigation of prior charge over the property

It is also necessary for the banker to ascertain whether the property offered is free from any encumbrance and without any previous charge in favor of any other party because any transfer of an interest in an immovable property is subject to all previous mortgages and charges which have been registered.

Generally, this work is entrusted to the lawyer by the banker who conducts a search in the books of the Registrar or Sub-Registrar’s Office and Registrar of Companies (in the case of limited companies).

Search should normally be taken for 12 years which is a limitation period for a mortgage. A certificate of non-encumbrance should be obtained and kept on record. If a banker has noticed, actual or constructive, any prior encumbrance, he will generally speak, and lose priority in favor of the prior encumbrance.

Failure to conduct a search may result in the banker giving an advance against a charge which will rank after any charge appearing on the registration office.

Approved plan

As a result of the master plans which are operative in some bigger towns, it is necessary to take some additional steps when investigating the title of the proposed mortgagor. The plan may show that the land has been designated for compulsory acquisition, or restrictions are placed on the plot holders/owners of land for the construction of new houses or development of land without the permission of the planning authority.

When investigating a title, the banker should examine whether the plan for construction of the house has the approval from the development and/or competent authority or if there is no notice for the acquisition of land to b mortgaged to the bank.

Valuation

Valuation of the property is a difficult task and must be undertaken by the banker very carefully. If the property is in the Municipal area, a valuation certificate should be obtained from the municipal area, valuation certificate should be obtained from the Municipal Authority.

In other places, this work is also entrusted to expert valuers, surveyors, or architects who take into account all relevant factors before making a valuation of the property.

Lending banker is interested to know the net realizable value or the resale price of the property, and not the book value or replacement cost. A banker’s interest as a lender will be safe if the property can fetch a value equal to the amount of the liability of the borrower in case the necessity arise to sell the property.

The valuation report should contain a description of the property (shop/residential area, etc.) boundaries, Para or mahallah, street number, whether the property is freehold or leasehold, the total area of land, and what the built area is. The total amount of investment so far made in the construction and the amount of loan required.

Margin

As an immovable property is not easily realizable security and its estimated value is just guesswork, the banker should safeguard their interest by keeping a sufficient margin. Banks generally keep a margin ranging between 30% and 50% of the value of the property.

Insurance

In the case of buildings, the security will lose all its value, if it is destroyed by fire. Therefore, the banker should insist that the prosperities mortgaged are insured against fire and the policy is assigned in favor of the bank. Receipts for the regular repayment of the premium should be obtained from the party and attached to the policies.

If the borrower fails to pay the premium the banker should pay it himself charging it to the customer’s account. The building should be insured to the full value so as to avoid the application of the “Average Clause”.

Rates and Taxes receipt

The banker should ensure that all rates, taxes, and government dues stand fully paid as they represent a charge on the property and they rank in priority over any other charges. The latest house tax paid receipt, land revenue receipt, and leasehold receipts should be obtained before making the advance.

• Where the mortgage is by a simple deposit of title deeds, only original documents of the property should be accepted. Certified copies of the original documents cannot create an equitable mortgage. The bank should never part with the title deeds to the borrower during the pendency of the mortgage.
• Where a mortgage registered or equitable is created by a limited company, the same requires registration of bank’s charge with the Registrar of joint-stock companies within a period of 21 days from the date of execution of the deed.

Memorandum of Deposit

Where instead of a legal mortgage, an equitable mortgage of the property has been taken, it is advisable to get a memorandum of deposit from the borrower, in addition to the deposit of title deeds.

The Memorandum of deposit of title deeds drafted by the bank’s lawyer should be obtained on stamped paper and got registered under the Registration Act for better security. Such a memorandum serves as an undertaking by the borrower to execute a legal mortgage in the bank’s favor when demanded.

First charge

It is always for the banker to secure a first charge on the property and take possession of the relevant title deed. Bankers are usually reluctant to advance on second and subsequent mortgages for the following reasons:

1. Title deeds of the property do not come into the hands of the second mortgage.
2. Security by way of the second mortgage may not be adequate.
3. The banker has to give notice to the first mortgagee of his charge and obtain his acknowledgment. He should also ascertain the amount due to the first mortgage. It may be that the first mortgagee is under obligation to make further advances, in which case the potential value of the security will be much less than it is at the time of creating the second mortgage. In case he has to accept a second charge, he must, after investigating the title, etc, ensure a sufficient margin between the value of the property and the amount advanced by the first mortgage. He must also insist upon pari passu charge over the assets mortgaged, i.e., a charge in proportion to the amount lent.

Power to sell

The mortgage should preferably provide for an express power to sell without reference to the court. Even where such a power has been obtained, the banker should exercise it only after serving a notice in writing to the mortgagor to pay the outstanding.

Inspection of property

The inspection of the property is an integral part of real estate lending. Inspection is a form of loan supervision and must be performed occasionally to protect the bank’s interest in the property. Inspections are necessary to assure the bank that the house is being constructed according to plans and banks’ funds are being used for the purpose for which they were borrowers.

There are two ways of mortgaging immovable property.

1. By an Equitable Mortgage
2. By a Registered/Legal Mortgage.

Equitable Mortgage

A mortgage by deposit of title deed is ordinarily called an equitable mortgage. It can be created by an agreement, expresser implied, that an equitable interest in the property shall pass sot the mortgagee as security for a debt due or they become due. Thus, an equitable mortgage may be affected in the following ways.

1. A deposit of title deeds together with a registered memorandum showing the object and condition of deposit.
2. A simple deposit of title deeds with an intention to create a security thereon for the debt; otherwise there is no equitable mortgage.
3. An acknowledgment of the title deeds is usually issued and sent to the mortgagor by registered A.D. post.

For the operation of such a mortgage, there must be the delivery of documents of title to a creditor with an intention to create security against the debt owed by the depositor. In other words, the essential elements to make a valid mortgage are: there is a debt a deposit of title deed, and an intention to create the security on them.

Equitable mortgages accompanied by a deposit of the title deeds do not require registration. Sometimes, a memorandum in writing regarding the deposit of title deeds is executed by the borrower.

The law on this point is that where a mortgage is complete with the deposit of title deeds, and the memorandum simply recites the past fact of the deposit and the creation of the mortgage, the memorandum does not require registration.

It is the easiest and most economical, as it is created by a simple deposit of original title deeds. But is a memorandum or the letter states that the title deeds are being deposited with the bank for the purpose of creating an equitable mortgage thereof and embodies the terms and conditions of the mortgage, it will be interpreted as a contract in this regard and will require registration. In such a case memorandum of deposit of title, and deeds are taken on stamped paper and got registered under the registration Act for better security.

Equitable mortgages are valid only if title deeds are deposited with the bank’s branch situated in a place that has been notified under the Transfer of Property Act or by the Government. All the District and Upazila headquarters are now included as the notified areas where an equitable mortgage can affect.

The restriction to the notified towns refers to the place where deeds should be deposited and not to the situation of the property to be mortgaged. Thus, if the property is situated in a non-notified place but the mortgage is created by the delivery of documents in a notified town, the mortgage is valid.

Legal Mortgage

A legal mortgage may be defined as the creation by deed of a legal estate or interest in land as a security for the payment of money due or to become due in favor of the person who takes the security, subject to the mortgagor’s right to have the estate so created extinguished on repayment of the loan with interest. The legal mortgage gives the banker rights against the property itself, quite apart from any personal action against the borrower.

The banker gets what’s called a legal estate in the property and he is endowed with all sorts of rights and remedies which can, for the most part, be exercised on his initiative and, there is no need to seek the cooperation of the mortgagor. A legal mortgage is a perfect form of security.

When a legal mortgage is desired, the mortgage deed is drawn up by the bank’s legal adviser and is executed on a stamped paper of appropriate value by the mortgagor and registered with the Registration office. It should be noted that a mortgage given as security for a debt is not a sale of the property.

1. Simple Mortgage
2. Mortgage by conditional sale
3. Usufructuary mortgage
4. English mortgage
5. Anomalous mortgage.

Documents needed for bank loan against real estate

1. Application for advance
2. Demand Promissory Note
3. Memorandum of deposit
4. Letter of lien
5. Letter of continuity (in case of overdraft)
6. Letter of guarantee (if the securities stand in the name of the third party)
7. A declaration from the party that the security is the property of the borrower and free from all encumbrances.

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