Types of Housing Finance

What are the types of Home Loans available?

There are a variety of home loans available in India, offered by various financial institutions like Banks and Housing Finance Companies. They are :-
1) Home Purchase Loan
2) Existing Home Improvement Loan
3) Home Construction Loan
4) Home Extension Loans
5) Home Conversion Loans
6) Land Purchase Loans
7) Bridge Loans
8) Balance Transfer Loans
9) Refinance Loans
10) Stamp Duty Loans
11) Loans to NRIs

Home Purchase Loans: There are the basic home loans for the purchase of a new home.
Home Improvement Loans: These loans are given for implementing repair works and renovations in a home that has already been purchased by you.
Home Construction Loans: These loans are available for the construction of a new home.
Home Extension Loans: Are given for expanding or extending an existing home. For example addition of an extra room, etc.
Home Conversion Loans: Are available for those who have financed the present home with a Home Loan and wish to purchase and move to another home for which some extra funds are required. Through a Home Conversion Loan, the existing loan is transferred to the new home including the extra amount required, eliminating the need for pre-payment of the previous loan.
Land Purchase Loans: These loans are available for purchase of land for both home construction or investment purposes.
Bridge Loans: Bridge Loans are designed for people who wish to sell the existing home and purchase another. The bridge loan helps finance the new home, until a buyer is found for the old home.
Balance Transfer: Balance Transfer loans help you to pay off an existing home loan and avail the option of a loan with a lower rate of interest.
Refinance Loans: These loans help you pay off the debt you have incurred from private sources such as relatives and friends, for the purchase of your present home.
Stamp Duty Loans: These loans are sanctioned to pay the stamp duty amount that needs to be paid on the purchase of property.
Loans To NRIs: Are tailored for the requirements of NRIs wishing to build or buy a home in India.

EMI of Housing Finance

 EMI is the Equated Monthly Installment payable till the loan is paid back in full. It consists of a portion of the interest as well as the principal.
Some of the Incentives Offered Lending Institutions

a) Some companies sanction the loan without requiring you to identify a property as a prerequisite for eligibility.

b) Free accident insurance

c) Discounts

d) Waiving of pre payment penalty

e) Waiving of processing fee

f) Free property insurance

Handy Tips for Housing Finance

Rate of Interest:
Interest rates are different from institution to institution and generally range from about 12.5% to around 16%. The interest on home loans in India is usually calculated either on monthly reducing or yearly reducing balance.

Monthly reducing:
In this system the principal on which you pay interest reduces every month as you pay your EMI.

Annual reducing:
In this system the principal is reduced at the end of the year, thus you continue to pay interest on a certain portion of the principal which you have actually paid back to the lender. Which means the EMI for the monthly reducing system is effectively lesser than the second system of calculating interest.

The best way to select the cheapest Home Loan is to keep the loan period constant and calculate the total amount paid for the home through the different loan options available.

What are the repayment period options?

Repayment period options range generally from 5 to 15 years.

What is fixed rate of interest?

Some institutions have a fixed rate of interest which means the rate of interest remains unchanged for the entire duration of the loan. This means you do not benefit, even if rates of interest drop in the market.

What is floating rate?

This is the rate of interest that fluctuates according to the market lending rate. This means you stand the risk of paying more than you budgeted for in case the lending rate goes up.

Other costs that usually accompany a Home Loan:

Home loans are usually accompanied by the following extra costs:

 a) Processing Charge: it’s a fee payable to the lender on applying for a loan. It is either a fixed amount not linked to the loan or may also be a percentage of the loan amount. The loan amount received by you cannot be less than the processing fee.

b) Prepayment Penalties: when a loan is paid back before the end of the agreed duration a penalty is charged by some banks/companies, which is usually between 1% and 2% of the amount being pre paid.

c) Commitment Fees: some institutions levy a commitment fee in case the loan is not availed of within a stipulated period of time after it is processed and sanctioned.

d) Miscellaneous costs : it is quite possible that some lenders may levy a documentation or consultant charges.

e) Registration of mortgage deed.

 How do HFCs decide what amount your loan should be?

Usually most companies give upto a maximum of 85% of the cost of the house. The other 15% sometimes called ‘seed money’ will have to be provided by a loan applicant. Out of the 85% the amount the applicant is eligible for, is decided by the age, income, no. of dependents, monthly outgoing and repayment capacity. This varies from case to case.

Securities required:
In most cases the property to be purchased itself becomes the security and is mortgaged to the lending institution till the entire loan is repaid. Some institutions may ask for additional security such as life insurance policies, FD receipts, share or savings certificates.

Guarantors:
Some institutions ask for 1 or 2 guarantors, others require no guarantors at all.

Applying for Loan of Housing Finance

Loans may be applied for before or after selection of property. The loan amounts are sanctioned in principle to let buyers know what amounts they can avail of. This helps them decide their budgets and purchasing power. Actual disbursements are made after satisfactory verification of all necessary documents and completion of specific procedures.

Time required for loan application approval:About 0-15 days.

Time required for disbursement: On an average, loans are disbursed within 3-15 days after satisfactory and complete documentation and completion of all relevant procedures, including proof that 15% of the cost has been paid up front to the seller of the property.

Joint applications: Most institutions are willing to consider the joint incomes of the applicants for deciding the loan amounts. Some institutions do not require the co-applicants to be co-owners of the property to be purchased.

Documents Required for Housing Finance

Latest salary slip (proof of income for salaried individuals)

• Photographs
• Proof of age
• Identity papers
• Proof of residence
• Bank statements for the previous six months

For self employed, certified copies of balance sheet, profit and loss statement and tax challans for the previous 3 years

For partnership/private limited companies, the Articles of Association, partnership deed and details about the firm

Before actual disbursement

Before disbursement all documents pertaining to the property, including the agreement for sale is required to be handed over to the lending institution.

Tax benefit information

Both principal as well as interest attract tax benefits. Section 88 of the Income Tax Act allows a 20% rebate on the principal repaid, subject to a principal ceiling of Rs. 10,000 per annum. For loans availed after April 1, 1999 a deduction on interest paid with a ceiling of Rs. 75,000 is allowed. For loans availed before April 1999, a deduction on interest paid with a ceiling of Rs. 30,000 is allowed.

Home loans taken to repay existing home loans are not eligible for tax benefit.