Why legal opinion is important when the property is funded through a home loan?

Taking legal opinion and help is important even when the property is funded through a home loan. Here are some compelling reasons for the same.

Why legal opinion is important when the property is funded through a home loan?

When a person buys a property they generally exhaust their savings – as well as future savings in the form of EMIs if a home loan has been availed of. For most of us, buying a home is a once-in-a-lifetime investment with lifelong implications. The laws applicable to transaction of property are complicated and are often beyond the comprehension of the lay person. This is equally applicable if you go for a home loan to buy the property. 

Let us see why taking legal opinion and help is important even when the property is funded through a home loan.

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Evaluation of property laws

The lender generally appoints a legal consultant to do the due diligence of the property for which the home loan is being granted. The due diligence done by the lawyer appointed by the lender has limited scope of ascertaining that the seller has a clear legal title to the property and there is no charge on the property which is subject matter of sale. 

The investigation is done from the angle of the lender and may not necessarily cover the aspects that a buyer is supposed to look into. As in the case of medical treatment there is a concept of ‘taking a second opinion’, where the opinion given by one doctor is validated by another doctor before actual treatment is started to rule out misdiagnosis and avoid any complication in future. 

Since you are not likely to be aware of the professional capabilities of the legal consultant appointed by the lender, it is logical for you to have your own legal consultant to carry out due diligence from your angle and derive satisfaction regarding due and proper compliance of the various laws applicable to the building, including the local municipal and state laws. 

It is not necessary that the consultant appointed by the lender is fully capable of carrying out the due diligence, especially in case of public sector lenders where one’s networking ability and other considerations often outweigh capability. Since you are putting your life savings on the line, you should not mind spending an additional 1-2 % to ensure that the property does not suffer from any legal complications. 

Importance from other angles

The due diligence done by the representative of the legal firm will cover only the aspects of compliance of laws fully in respect of the marketability of the property and title of the seller and probably not beyond that. Buying a property is not just about paying the money and taking possession. It involves compliance of various other laws as well. 

Compliance does not mean over-compliance. For instance, as a buyer you have to pay stamp duty in respect of the market value of the property. If you do not take help of any legal professional you may probably land up paying higher stamp duty than what is legitimately due. Though the stamp duty is payable on the basis of stamp duty rates as per the ready reckoner, there are certain deductions available in certain states based on whether the building has a lift, the age of the property, etc. 

Even in cases where the stamp duty rate is higher than actuals, a legal consultant can help you file an appeal with the stamp duty authorities and you may get relief from payment of higher stamp duty in certain cases.

Since buying a property is one of the most important decisions of one’s life, it is very important to understand the legal implications of various clauses of the property purchase agreement. People generally appoint estate agents to draft a property purchase agreement, which usually involves a cursory ‘find and replace’ job on any old agreement without understanding your particular situation, in a bid to cut costs. 

But beware – the small saving in cost of drafting and understanding the agreement can sometimes cost you dearly in monetary terms.

Implications under IT laws

As per Section 50C of the Income Tax Act, 1961, where the stamp duty valuation of a property is higher than the stated consideration as per the agreement, in addition to the buyer having to pay higher stamp duty on the stamp duty valuation, the difference is treated as income of the seller in case the stamp duty valuation exceeds 105% of the agreement value of the property.

It is not only the seller who has to face the music if the stamp duty valuation is higher than the agreement value but as per Section 56(2)(x) of the IT Act, 1961, for the buyer the difference is treated as his income and taxed under the head ‘income from other sources’. The difference in the hands of the buyer will be taxed if the difference is higher than Rs 50,000 and 105% of the agreement value. 

So a layman who buys a property will not be able to understand the implication of the matters discussed above and may land up paying more, or may land in trouble in future. So it is strongly advised that you should engage a legal consultant and preferably a firm of solicitors who can appreciate the implications of various aspects of the law on the deal. This can help you save cost and avoid mental agony in future. 

So do not go for self-medication to save a few pennies. Engage a professional and you can save dollars in future!

Balwant Jain an author on Newsilike. He is a renowned tax and investment expert. He is a rank holder Chartered Accountant and a Company Secretary of 1983 batch. He is also a Certified Financial Planner (CFP). Before joining corporate sector, he had his own consultancy firm of Chartered Accountant for over 2 decades. 


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