Housing Finance

Urbanization becomes a popular trend in developing countries in recent decades. This trend is both a source of development opportunities and challenges for the housing sector. Many developing countries are facing the problem of poor housing conditions on one hand and witnessing a large and growing market for housing on the other hand.

This is because of inadequate housing policies, improper property registration and limits to access to housing finance. Therefore in recent years, developing countries are giving more importance to promote housing finance.

Housing finance is a fund based financial service. In India, Housing finance was largely provided by Government till the mid-eighties. In 1988, RBI established a fully owned subsidiary bank namely National Housing Bank (NHB) exclusively for housing finance. The role of NHB is discussed later. Let us see various types of housing loans and lending practices in India.

What is Home Loan?

Home loans, also known as mortgages, use the borrower’s home for collateral. This home can be a single-family house up to a four-unit property, as well as a condominium or cooperative unit. Lenders fund home loans, but both the lenders themselves and brokers who act on behalf of the lenders originate, or process, them.

Types of Housing Loans

  • Home Equity Loans: Loan is provided to customer by mortgaging the existing house property at the market value for any purpose.

  • Home Purchase Loans: The Loan is provided exclusively for the purchase of Apartments or individual building both new and old.

  • Land Purchase Loans: Loan is provided for the purchase of land and construction of residential houses.

  • Home Extension Loans: This loan is provided for construction of additional rooms or other facilities.

  • Home improvement Loans: It is provided for renovation of old house.

Home Loan Procedure

With the increasing competition in the market for offering Home Loans, the otherwise tedious process of availing loans has gone a tremendous change in recent years. However, there is still some process involved in the procurement of Home loans. It is advisable for borrowers to first look at the different stages required for obtaining a Home Loan.

Here is a step-by-step procedure of procuring a home loan.

  1. Step 1: Application form
  2. Step 2: Personal Discussion
  3. Step 3: Banks Field Investigation
  4. Step 4: Credit appraisal by the bank and loan sanction
  5. Step 5: Offer Letter
  6. Step 6: Submission of legal documents & legal check
  7. Step 7: Technical / Valuation check
  8. Step 8: Registration of property documents
  9. Step 9: Signing of agreements and submitting post-dated cheques

Step 1: Application form

The first step involved in applying for a home loan is the procurement of an application form from the HFC of the applicant’s choice. The Performa of application for every HFC (Housing Finance Companies) is different from the other but about 80% information required to be furnished is the same.

Along with the application form necessary documents like address proof, age proof, proof of income, bank balance, etc. are also to be attached with the application form before it is submitted to the HFC. Along with all these documents, HFCs also ask for a processing fee of the home loan that varies from 0.25% to 0.50% of the total loan amount.

Step 2: Personal Discussion

After successfully filling the application form and submitting it to the authority the next step is face to face with the bank or HFC where you have applied for the home loan. The bank first evaluates the papers submitted and summons the applicant for the personal discussion regarding the home loan applied for.

Step 3: Banks Field Investigation

The next step is the field investigation done by the HFC or banks. They send representatives to the existing residence of the applicants or their offices for the validation of the documents submitted. This is the essential part for the banks to establish trust with the applicants.

Step 4: Credit appraisal by the bank and loan sanction

This is the make-or-break stage of the process. The bank or HFC will establish repayment capacity based on the applicant’s income, age, qualifications, experience, employer, nature of business, etc. to access credentials. The bank can refuse a loan application if any discrepancy is found at this stage.

But if everything goes according to the conditions negotiated by the parties then the bank or HFC sanction the loan that may be unconditional or with some conditions levied.

Step 5: Offer Letter

After the sanction of the Home Loan, the applicant gets offer letter from the bank or HFC with the following details. Loan amount, Rate of Interest, fixed or variable ROI, Tenure of the loan, Mode of repayment General terms and conditions of the loan, Special conditions, etc. If the terms and conditions are agreed the applicant has to sign the duplicate copy of the offer letter and that is to be submitted to the Bank or HEC.

Step 6: Submission of legal documents & legal check

The bank or the HFC now asks for the legal documents of the property involved for applying for a home loan. All the legal documents of the property involved have to be submitted. The bank does all the legal checks on the property. The documents remain with the bank until the repayment of the Home loan.

Step 7: Technical / Valuation check

The Banks or HFC then go about the technical valuation of the property. The experts of the bank visit the site to be purchased and value it as per the existing rules and regulations. The valuation of the property is the most important aspect that the bank considers before financing any property.

Step 8: Registration of property documents

After the legal and technical valuation of the property, the draft documents has to be cleared by the lawyer, and stamping and registration of the documents are needed.

Step 9: Signing of agreements and submitting post-dated cheques

Now it is time of signing the final agreement of the home loan. After the signing of the agreement, a bunch of Post-dated cheques is to be submitted as agreed on the

Advantages of Housing Finance 

  • Even lower middle class people can become the owner of the property.

  • Easy and convenient method of repayment (EMI) with lower interest rate is possible for borrower.

  • The borrower can get bulk finance at the time of purchase of house and the same can be mortgaged as security.

  • It creates greater employment opportunity both directly and indirectly.

  • The demand for construction materials like cement, brick, sanitary products, electrical fittings and glass industries is rising day by day due to construction of building.

  • Housing finance paves the way for infrastructure development.

  • The borrower can avail income tax exemption under the Income Tax Act for the repayment of loan (both principal and interest) subject to certain limits.

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