Selling a property in chennai is already a tedious process and if it’s under a mortgage it becomes even more challenging to get it disposed. There could be many reasons as to why the seller would like to dispose off a property either due to financial constraints, need to upgrade to a bigger place or to a better location, relocation to a different city etc. Sellers often find themselves baffled with many questions on how to go about selling a property that is on loan since it involves a third party. Hence, you must be very careful to look into various factors and adopt a different approach. The first step here would be to inform the prospective buyer of the outstanding loan on your property even before negotiating a final price.

List of Documents Needed

Since, all the original documents of a property which is bought on loan would have been submitted to the bank, photocopies of the important documents mentioned below is needed to be able to proceed further with the sale.

1. Sale deed & Mother Deed

2. Encumbrance Certificate

3. Electricity Bills

3. Property Tax Receipts

4. Loan related documents

5. Society NOC etc.

Tax Implications

Along with property specification, the main factor to mull over is the tax implications on the sale of the property. Capital Gains Tax (CGT), either short term or long term is applicable under the Income Tax Act 1961. Hence it has been suggested to avoid selling your property within one year of purchase except in contingency to be able to evade higher tax implications. These taxes can be mitigated:

a) If the property is sold within two years of purchase, Short Term Capital Gains (STCG) tax has to be paid on the profits earned from the sale. The percentage is restricted from 10% to 37% based on your income and the tax bracket you fall under. However, these tax deductions can be mitigated if the seller purchases another house from this money within two years. It is better to avoid selling the property within two years of its purchase since you’ll then have to pay higher tax amount.

b) If the property is sold after two years of purchase, Long Term Capital Gains (LTCG) taxes are applicable on the profits earned and is capped at 20% based on your income. But if the seller decides to invest in purchasing another house, then you can save on the tax deductions under Section 54 of the Income Tax Act. The exemption is restricted only to the capital gains on the sale and not the entire amount paid to purchase a new property. The new property could either be bought one year before the sale of the property or two years after the sale.

Various Approaches to Sell a Mortgaged Property

There are a few scenarios which are discussed below based on the buyer’s paying capacity.

1. If the buyer decides to pay with his own funds/ savings:

This could be the ideal and a pretty straightforward situation from a seller’s viewpoint. First, the seller would have to get a letter from the bank agreeing to handover all the original documents of the mortgaged property after the payment of the outstanding loan amount. The buyer would then be required to pay the outstanding loan amount to the seller’s loan account after which the bank will start the process of releasing all property related documents. The time duration given to the seller to make this payment needs to be worked out with the bank directly. In case, the buyer does not transfer the money to the bank on a specified date, then the bank can charge a penalty apart from on the principal outstanding amount. The process of releasing all original property documents from the bank along with ‘no due’ letter takes around 5-10 working days after which the seller could transfer it to the new buyer who then remits the remaining amount to him.

2. If the buyer decides to go for a loan with the seller’s bank/ lender:

In this situation, the process will be a lot quicker since the bank already possesses all the property related information. The bank will just have to check the loan eligibility of the buyer depending upon his payback capacity. All the three parties such as buyer, seller and the bank/institution will sign a tripartite agreement. The bank will then release the amount required to settle the loan of the seller and the remaining amount is handed over to buyer so he could make the final settlement to the seller. The buyer has to incur a processing fee as the buyer is now treated as the new home loan applicant.

3. If the buyer decides to go for a loan from a different bank/ lender:

In this case, the buyer would have to obtain all the required property documents from the seller’s bank along with a letter from the seller’s bank stating his outstanding loan amount. Once the seller’s hands over all these, the buyer can then submit them at his lending bank. After thorough scrutiny of the documents, the buyer’s bank then releases only the outstanding loan amount to the seller’s bank. After which the seller’s bank releases all the original property documents. Upon handing over of these documents to the buyer’s bank, he will receive the remaining loan amount which has to be paid to the seller for final transfer of ownership.

Conclusion

There are quite a few advantages of selling a property that is already on loan. The banks normally conduct due diligence for the property that they are providing loans for. So the buyer will have a benefit of having all the necessary approvals and the legality of all documents checked by the banks already. The procedure is a lot simpler as the banks have already done the job. Also, mortgaged properties are sold at a much reduced price when compared to new ones.