INTRODUCTION OF HOME LOAN

The sun at home warms better than sun elsewhere.

True isn’t it, where else do you find that comfort that makes you feel so special everyday. Undoubtedly
owning a house is the most important phase in life. Not long ago, turning this dream into a reality was a
daunting task for the common man with property rates going north all the time. But now, thanks to
proliferation of home loans and housing finance companies, one can aspire to own a roof over one’s head.
Many think it is an expensive affair and beyond reach. Well, that’s not always true. It takes a little planning
and awareness to get to that home you want to call your own.
Buying a home for the first time can be daunting to any person but in today’s time various banks are
lending a helping hand to the people to purchase their dream house. Thus people look forward towards
choosing a home loan. The primary concern of a housing finance company is to determine the loan amount
that the borrower is comfortably able to repay. The most popular method of financing a home purchase is
with a mortgage. This is a loan that is secured over the home. There are a number of different mortgage
suppliers and people will have to stop around in order to get the best deal.
Home loan is one of the fastest growing retail and mass banking area. It forms an important part of the
country’s priority in 5 year plans. Almost all public and private sector banks are offering home loan at
attractive rates for purchasing their dream home. Home loan usually cover a variety of types. All banks have
come out with home loan products studded with features and value additions that make the schemes not only
attractive but also serve as a substantial source to the borrowers for owning their dream home.
Banks as financial service providers aims at providing financial support from the banking system to
the needy for purchasing a home to the resident Indians as well as non-resident Indians. The main emphasis
is that every needy person is provided with affordable terms and conditions.
HDFC-( Housing Development And Finance Corporation ) Home loan, India have been serving the
people for around three decades and providing various housing loan according to their varied needs at
attractive & reasonable interest rates. Owing to their wide network of financing , HDFC Housing Loans
provides services at your doorstep and helps you find a home as per your requirements.
Many banks are providing home loans at cheapest rate to attract consumers towards them. The more
customer friendly attitude of these banks, currently offer to consumers cheapest loan over homes.
In view of acute housing shortage in the country, and keeping in mind the social economic role of
commercial banks in the present times, the RBI advised banks to encourage the flow of credit for housing
finance.
With the RBI reducing bank rate, the home loan market rates nose-diving by 50 basis points, The
HDFC bank and standard chartered bank has become the first player in this sector to announce a housing
loan for a 20 years period. No doubt it will enhance the end cost people to plan their house over longer
duration now; it has been made easy for a person to buy that dream house which he dreamt of long ago.
HDFC also provides with improvements loan for internal and external repairs and other structural
improvement like painting, waterproofing, plumbing and electric works, tiling and flooring grills and
aluminium windows. HDFC finances up to 85% of the cost of renovation (100% for existing customers).
Current status is that HDFC reduced home loan rates by 50 basis points for all its existing floating rate
customers.

DEFINITION OF HOME LOAN:

A legal agreement in which a person borrows money to buy property
(Such as a house) and pays back the money over a period of years.
THE EVOLUTION OF HOME LOANS IN INDIA:
Banking in india is very old. Nationalised banks are
in existence since 1969. However, home loans are a comparatively new product. In the 1970s, there was no
concept of home loans in india. HDFC was the only organized player in the home loan market.
The First Home Loan Borrower:
The credit for availing the first home loan goes to one D B Remedios took a
home loan of 30,000 from HDFC in 1978 to construct his house in malad, Mumbai. The total cost of the
house was 70,000. Thus, you can see that Home Loans are just four decades old.
The Home Loan Scenario:
In the past, mentality of the people was to save and purchase. People used to dip
into their provident fund savings and retirement benefits to raise money for constructing houses. HDFC
started the trend of home loans in 1978. Banks were reluctant to finance home loans because there was no
recovery mechanism in place. The only recourse available to banks was to file a civil suit in the court of law.
The litigation expenses were higher than the actual loan amount.
It can surprise you that home loan interest rates were around 11-14% up to 1994. The average age of the
home loan borrower was about 42 years with the average amount of loan being 39,000 ( Source HDFC).
With the opening of the economy in 1991, banks started to enter the home loan market. ICICI Ltd (later on
merged with ICICI Bank) ventured into the home loan market in1999. The year 2000 saw the introduction of
the floating rate concept by ICICI Bank. The rates started plummeting from around 2003-04 when floating
rates for home loans were in the range of 7% to 7.25%. The fixed rates were around 7.5-8%.
State Bank Of India entered the market in a bid way and introduced the teaser rate concept. They could
afford to do so because of the high proportion of CASA (Current Account Savings Account) deposits. Other
banks did not have this advantage. They resorted to measures like maintaining high loan to value (LTV)
ratios to attract customers.
During the early days of home loans, the LTV ratio used to be less than 50%. The increase in the
competition saw the LTV ratios go up to even 120%. Subsequently, the Reserve Bank of India (RBI) capped
it at 80%. Banks have the freedom to go up to 90% in case the loan is for less than 30 lakhs.
SARFAESI ACT 2002:
Before 2002, there were no regulations to deal with defaults on home loans. There
was a need for strong legislation. The introduction of the Securitisation And Reconstruction Of Financial
Assets and Enforcement of Security Interest Act (SARFAESI) in 2002 gave banks the power to deal with
home loan defaults. This Act encourage the banks to foray into the home loan sector.
The Freeing Of The Interest Rate Regime:
With the opening of the economy, the RBI gave banks the freedom
to fix their rates of interest on home loans depending on the cost of funds. It blew out into an interest rate
war with banks competing against each other to offer the best rates to the customers. There was a spate of
home loan offers from banks trying to entice customers.
Even today, the floating rate regime is prevalent in the industry. Some banks offer fixed rates but only for a
specific period, after which they convert to the floating rate concept.
The Growth Of The Home Loan Sector:
As banks started feeling comfortable giving home loans, customers
began availing them. Hence, the average age of the home loan borrower began reducing. Today, the average
age is around 32 years. Customers have realized that taking a Home Loan to buy a house is better than
doing so with their savings. The Government Of India has played the role of the catalyst in the growth of the
Home loan sector by introducing concessions in income tax for home loan borrowers.
Today, these concessions are one of the principal reasons why people opt for home loans. Banks have also
come up with various new products like Home Loan Balance Transfers, loans for purchase of plots, loans
for home renovation and improvement, and so forth. Today, home loans constitute a significant portion of
bank’s loan portfolio.

TYPES OF HOME LOAN:

In india, settling down has becomes synonymous with owning a home. In this busy world, everyone dreams
of owning a perfect abode where they can find solace at the end of the day. Buying a home is also becoming
a herculean task these days owing to the mounting real-estate prices. A home loan is an easy way to fund
your house purchase given that it is not a wise idea to burn your entire savings to buy a land or a home.
Banks and other housing finance establishments offer different types of home loans these days. The demand
for home loan has increased manifold in recent years and people have different expectation s when it comes
to a home loan. To cater to the requirements of different sections of society, a lot of banks have come uo
with this concept of introducing different home loan schemes. To quote a few, several banks offer specially
crafted home loan for women, agriculturalists and loans exclusively for purchase of land.
Lenders offer home loans, not only for buying a house but also for a variety of other purposes. Some of the
popular types of home loans available in the financial market are described below.
1) Loans For Purchase Of Land:
Several banks offer loans for land purchase. Purchasing a land is a
flexible option, the buyer can save funds and construct a house whenever his finances allow or just
have the land as an investment. Up to 85% of the cost of the land is given as loan by lenders like axis
bank.

2) Loan For Home Purchase:

The most popular type of home loan is the loan for purchase of a new or a
pre-owned home. This loan is also commonly available and is offered by the many banks in different
variants. The interest rate is either floating or fixed and generally ranges anywhere between 9.85%
and 11.25%. Also, 85% of the total amount is offered as a loan by many banks.

3) Loans for Construction Of A House:

This loan is specially designed for people who want to construct a
place according to their wishes rather than buying a pre-constructed house. The approval process for
this type of loan is different for it takes into account the cost of plot also. The most important clause
when applying for a home construction loan is that the plot must have been purchased within a year
for the plot cost also to be included in the loan amount. The loan amount is decided based on a rough
estimate of the construction cost. The amount may be disbursed at one go or in multiple installments.
Popular home construction loans include the schemes offered by Bank of Baroda, UCO Bank and
Canara Bank.

4) House Expansion Or Extension Loans:

Want another balcony or an additional bedroom? No worries,
some banks also offer loans for house expansion including alteration of current structure and
construction of new rooms. HDFC Home Extension loan and house renovation loan offered by Bank
of Baroda are popular in this category.

5) Home Conversion Loans:

People who have already availed a home loan and have purchased a house
with it but want to move to a new house can opt for home conversion loans. By transferring the
 current loan to new house, borrowers can fund the purchase of the new home and also need not repay
the previous home loan. Though it offers convenience, this segment of home loan is also very
expensive.

6) Loans For Home Improvement:

Renovation and repair works like external and internal repair,
painting, construction of overhead water tank and electrical renovation certainly will make your
house look better. But if you lack the finances for repair and renovation, banks like Union Bank of
India,Vijaya Bank offer specialized home improvement loans.

7) Balance Transfer Home Loans:

This option can be availed when an individual wants to transfer his
home loan from one bank to another bank owing to reasons like lower interest rates or better services
offered by the other bank. This is done to repay the remaining loan at a revised, lower interest rates
offered by the other lender.

8) NRI Home Loans:

Specially designed to support non-resident Indians in buying a residential property
in India, the formalities and application procedure for this type of loan is different from the others.
Generally, most of the private and public sector banks offer NRI loans as a product of their housing
loan portfolio.

9) Bridged Loans:
Bridged Loans are short term loans that are designed for existing homeowners who are
planning to purchase a new property. It aids borrowers to fund the purchase of new house until a
buyer is identified for the existing property. This type of loan usually requires the mortgage of new
house with the bank and is extended for less than two years. Several banks like Vijaya bank and
HDFC Bank offer bridged loans.

10) Stamp Duty Loans:

Not a widely known segment of home loans, stamp duty loans are offered to cover
the stamp duty charges during the purchase of a property.

With home loans becoming the norm of the day when it comes to purchasing a home, it also becomes
equally important to identify your requirement and apply for the right type of home loan. Not only
will it reduce the paperwork and simplify the loan approval process, it will also allow you to enjoy a
loan at reduced interest rates. Also, make sure you use an home loan EMI calculator to know your
amortization schedule and plan the finances better.

ADVANTAGES OF HOME LOANS:

The various benefits of home loans arising to the customers are:-
1) Attractive Interest Rates:-
The various banks offer attractive interest rates to boost and help their
customers. Many banks provide loans on fixed or floating rates to facilitate consumers as per their
needs.

2) Help In Owning A Home:-

The home availed by a person with help of banks, because they provide
technical and financial assistance to customers for owning their dream home.

3) No Requirement of guarantor:-
 The commercial banks now a day, liberlise their laws regarding home
loans. Some of banks don’t even require the guarantor to grant loan to their consumers. They also
make consumers free by reliving him to find a guarantor to complete the proceedings of availing
loan.

4) Door-Step Services:-
These door to step services are provided from enquiry stage to the final
disbursement takes place such services are beneficial for customers in present busy life. Banks like
ICICI Bank and standard chartered bank provide door to step services to customers to borrow loan.

5) Loan Period:-
There are many banks which provide maximum loan tenures upto 15-20 years based on
the loan amount and the creatibility of customers. This relieves the customers to borrow loan.

6) For Accidental Death Insurance:-

Some banks provide free accidental death insurance with housing
loan which is also beneficial for the customers.
These benefits or advantages of home loans are responsible for making than so popular among
customer that a person who don’t have their home and want to buy, they do it with home loan. Home
loans help such person in making their dream home.

DISADVANTAGES OF HOME LOAN:-

The main disadvantages of home loans are high lightened as
below:
1) Delays In Processing:-
Many times, there are huge delays in processing of providing home loan because
various formulation to be fulfilled in this process. Due to these delays customers feel mentally as well
as financially week.

2) Fluctuating Interest Rates:-

Some banks give home loans at floating rates, which fluctuate at different
intervals due to some reasons. These changes sometimes, may lead to increase in interest rate which
will increase the cost of home loans to the customers.

3) High Cost:-
The public sector banks charge high processing cost for home loan’s sanctioning. They are
forced to pay serious charges at various stages to fulfill the requirements. Some consumers are not
able to pay such charges so such people could not avail the benefits of home loan schemes.
4) Problems In Disbursement:-
There are many problems in disbursement of home loan amount. There are
some delay in disbursement of loan amount to the customers due to legal formalities. This causes
problems to the customers.
These are limitations or disadvantages of home loans. But some times some banks charges high
installments to repay loan amount. Such also causes problem to customers. These limitations can be
removed by providing good and promote services to the customers.

DISBURSEMENT OF HOME LOANS :

The every bank has its own procedure to disburse the loan amount among
customers. After choosing your right home, the next step is disbursement of home loans. The loan
 amount is disbursed after identifying and selecting the property or home that are purchased and submit
the requisite legal documents. In the disbursement of home loans a clear title and full verification to
ensure that a person has full rights on his house. The 230A clearance of seller and /or 371 clearances
from the appropriate authority of income tax is also needed.
1)Eligibility Criteria:
However, if one is a resident or non-resident individual who is planning to buy a house
in India, one can apply for a home loan. If a person has decided to buy a property in the near future, he/she
can apply for a loan before even selecting the property. Once the maximum amount to put into the property
has been decided. The Housing Finance Institutions or Banks will let the customer know that how much
he/she is eligible for and this helps to plan out the budget.
2) Conditions Regarding Co-applicants:
All Housing Finance Institutions lay down conditions on who can be
co-applicants. All co-owners to the property, need to be co-applicants to the loan necessarily. These
institutions do not permit minors to join in as either coowner or as co-applicants because a minor is not
eligible to enter into a contact as per law. They do not permit even friends or relatives who are not blood
relatives to take a property jointly. However. Income of co-applicants can be clubbed together to get higher
loan eligibility. Given below is a table that throw light on acceptable relationship of a co-applicant for
clubbing of income. Income Clubbing of Co-applicants:- It is as follows:
Combination Income Clubbing: -
*Husband-Wife: - Income of husband-wife can be clubbed.
*Parent – son: It can be clubbed if only son is there but not if any male sibling exists.
*Brother-Brother: If they are currently staying together and intend to stay together in the new property, then
only, their income-can be clubbed for above purposes.
 Brother-Sister: No clubbing-is possible.
 Sister-Sister :- No clubbing is possible.
*Parent-Minor-Child: - No clubbing is possible in this case also.

(III) General Terms and Conditions: The following are the terms and conditions applicable to the basic home
loan product only. These are likely to change on the basis of the variations of the home loan product.
Typically, in general home loans, the following conditions are applicable :

1) The loan to value ratio (LTV) cannot exceed a particular percentage. This differs from product to
product and from one Housing Finance Institutional Bank (HFIB) to another. The components of the
value of the Property calculated here are covered under cost of property.

2) The maximum tenure of the bank is nominally fixed by HFI/Bs. However, HFIs/Bs do provide for
different tenures with different terms and conditions.

3) The installment that one pay is normally restricted to about-50-per cent of the monthly gross income
of the candidate.

4) The total monthly outflow towards all the loans that have been availed of, including the current loan
is normally restricted to 50% of the gross monthly income.
 5) One will be eligible for a loan amount which is the lowest as per one’s eligibility. This is calculated
as per the LTV norms, the HR, norms and the FOIR norms as mentioned above.

6) Most HFs/Bs consider the profile before they judge the repayment capacity. The judgement is based
on age, qualifications, number of dependents, employment details. Employer credentials, work
experience, previous track record of repayment of any loans that have been availed of, occupation,
the industry to which the candidate’s business relates to, if he/she is self-employed, then the turnover
in the last 3-4 years etc.

7) Some HFIs/Bs insists on guarantees from other individuals for the repayment of the loan. In such
cases, the customers has to arrange for the personal guarantee before the disbursement of the loan
takes place.
8) The property should be technically clear before the HFIs/Bs disburses the loans amount. Most of
institutions and banks have a teams of technical experts who visit the site to get a technical report
before the disbursement of loan. This is also beneficial to the customer as they check for the
technical quality and compliance with local laws.

9) The property should be legally clear before one can avail of a disbursement of the loan amount.
Housing-Finance Institutions /Banks (HFIs/Bs) take legal clearance from their lawyers before the
disbursement of amount. This proves to be beneficial to the customers as a legal expert checks
his/her documentation to ensure that he/she get a proper title to the property.

10) The disbursement of the loan is as per the progress of construction of the property unless it is a ready
property in which case the disbursement will be by one single cheque. PEMI or simple interest on the
loan amount disbursed to the customer in case of a part disbursement will be payable by the customer
on the disbursement.

11) The disbursement in most cases will be favoring the builder or the seller or the society. Or the
development authority as the case may be. The disbursement will come in the customer's favour
under special circumstances only.

12) The repayment of loan can be made either through deduction against salary, post-dated cheques,
standing instructions or Auto debit instructions to bank.

13) The principle is amortized either on annual reducing or monthly reducing basis as the case may be.
The above terms and conditions are generally true for most Housing finance Institutions/Banks
with respect to the general Home Loans. However, the specific terms and conditions vary with respect to
special Housing Finance Institutions or Banks.

(iv) Charges Applicable To Home Loans:

The different kinds of charges applicable to home loans are discussed below:

a) Processing Fees:
First of all, comes the process fee. This is a charge that is levied by most HFIs/Bs. This
has to be paid at the time of submission of the application form. It’s normally charged as a
 percentage of the loan amount sanctioned. Some HFIs also charge a flat fee based on the loan amount
instead of a percentage. When a lower amount is sanctioned the excess fees paid at the time of
submission of the application is adjusted with the charges, which one make to the HFI/B
subsequently. Most HFI/Bs refund the processing fee if the loan application is rejected.

b) Administrative Fees:
This charge is again, normally, a percentage of the loan amount sanctioned. It is
collected by the HFI/B for the maintenance of customer’s records, issuing interest certificates, legal charges,
technical charges, etc. though the tenure of the loan. It is payable by the customer when he/she accepts the
offer letter given by the HFI/B. This payment has to be made before the availment of the disbursement. The
mode of collection of these fees varies from one HFI/B to another.

c) Rate Of Interest :
This is the rate of interest applicable on the loan amount through the tenure of the
loan. It is charged on the principal monthly reducing method. Most HF1s/Bs give an option to select either a
fixed rate of interest or a variable rate of interest.
d) Legal Charges:
Some HF Is/Bs mainly Public Sector Banks levy legal charges that they incur on
getting the property documents vetted by their panel of lawyers.

e) Technical Charges:
These charges are also levied by certain Housing Finance Institutions Banks (HFIs/
Bs) to meet their expenses on the technical site visits to the customer’s property. This ensures quality
of construction and construction within the norms as stipulated by the respective approval authority.

f) Stamp Duty And Registration Charges:

HFIs that go in for a registered mortgage pass these charges on to
the customer. These are rather heavy in certain states depending on the laws laid down by the state where
one buy a property.
g) Personal Guarantee From Charges :
Since the personal guarantee provided by the customer need to be
stamped, these charges are also recovered from the customer. They are charged to him by HFIs who
demand for Guarantees.

h) Cheque Bounce Charges:

In case the cheques through which one make a payment to HFIs get
dishonored, some minimum charges are levied by the HFI. The same are recovered from the customer.
i) Delayed Payment Charges :
HFIs/Bs charge delayed payment charges from the customer if he/she
delays the payment of installments beyond the due date
.
i) Additional Charges :
These are levied as a percentage on the delayed payment charges by most HFls.
They are levied if one fail to pay the dues within the stipulated time after a delay has taken place.

k) Incidental Charge:
 This is payable in case the HFI/B sends a representative from their organization to
collect their outstanding dues. It is normally charged at a flat rate per visit. These charges are levied
by most HFls/Bs.

1) Prepayment Charges:
This is a penalty charged by HFIs/Bs from when one makes either a part
prepayment or a full repayment of the loan. This charge is levied only on lump sum payments and
not on the EMIs that one pays. This charge is levied on the amount prepaid by one and not on the
entire outstanding principal. These charges are gradually being discount. So, these are the charges
levied by most Housing Finance Institutions and Banks while granting home loan to the customers.
Now, the decision on the repayment capacity shall be talked about as follows.
(v) Judgement Regarding Repayment Capacity On The Basis Of Income:
To understand how the income of a
customer is considered. Arrive at his repayment capacity, it is first necessary to classify customers into
salaried and self employed individuals.
a) The income of the salaried individual considered in the following manner:

Gross monthly income as it appears on the salary slip

Less:- Any non regular variable income appearing on the salary slip (including overtime, etc.

Add: - 50 per cent of the average variable income of the last six months.