F-HRE-01

Introduction To Housing Finance

Trainings by Vidya Bhagwat

• A home loan is a loan taken for buying or constructing a home or to make improvements to a residential property. You can get a loan from banks and registered housing finance companies

• Your home loan is secured against the property that you buy. This means that in case you are unable to repay the loan, the lending bank will have the right to take possession of your home

• Housing is primary human need next to food and Clothes. Housing is a major expenditure and cannot be funded out of family’s normal monthly income or savings.

What is home loan?


• Introduction• Characteristics of housing finance• Tenure• Impact of tenure on return on funds• Insurance• Security• Quantum of finance• Margin• Debt servicing capacity

Basics of Housing Finance


Introduction• A home loan based on mortgage is like any other loan which is

offered to a borrower against security. • Here the home loan is offered to borrower to purchase or

build new house on the basis of his/her eligibility and basic lending rules.

• It is popularly known as loan against property. Normally 80% of the property value is granted as loan amount. It can also exceed 85 to 90%.



Characteristics of housing finance• The characteristic of home loan impacts different aspects of

housing finance like funding, liquidity management and loan management over a longer period.

• The Land and property related legislation tends to change over time reflecting the change in the political will and other developments in society including the changing expectations of people.

• The third characteristic that impacts home loan is change in the lending institutions’ organizational structure, lending policies, personnel etc.



Tenure• The amount of a consumer / retail loan would normally be the

equivalent of an individual`s gross monthly income of, say, three months to a couple of years. But, a house values at about 6/8 years of the gross earnings of a young professional at the beginning of his career.



Impact of tenure on return on funds• The lender must carry loan in his books for the entire tenure

until the borrower makes full repayment of the loan in the normal course .This period ranges up to 20 years, with an average of perhaps 15 year.

• Longer tenure also increase the transaction cost for the lenders, as they have to monitor / manage the loan portfolio for long periods.

• The longer tenure of home loan increase both interest rate risk and credit risk. To manage interest rate, interest rate Derivatives are available in short tenures .



Insurance• Insurance is a risk mitigation strategy. • The insurer indemnifies the risk for a fee, called the risk

premium. • In the event of loss of insured property, the insurance

company pays the insured amount to the insured or the assignors.

• Some financing institutions have arrangements with insurance companies for cover at discounted rate. Some financing institution go a step further and insure the life of their borrowers for an amount equal to the loan granted under housing finance.



Security• The primary security for a home loan is the housing unit.• Limited supply of quality land for housing.• Cost of land development.• Amenities available.• Price appreciation / depreciation in real estate market.• Cost of maintenance and insurance.• Quality of construction which has a bearing on the longevity

of the structure.



Quantum of finance• The amount of loan that a person can avail is based on

multiples of the net annual income of applicant or percentage of the project cost whichever is lower.

• As a thumb rule, a celling is stipulated at either 36 months’ gross salary or 60 months net salary of the individual concerned.

• Income from other sources such as interest on investments, rental income etc



Margin• A borrower is asked to contribute a minimum of 10 to 15% of

the total cost as margin. This stake is expected to keep the borrower committed to the project.

• The borrower is asked to bring in his entire contribution prior to disbursement of the loan for purchase of a “Ready to occupy” flat.

• . The value of land owned by an applicant can be taken his or her margin, if the loan is for construction of a house or flat on that plot of land.



Debt servicing capacity• For a “Salaried Class” borrower with a take home pay of less

than a stipulated amount, say Rs. 20,000/- to Rs. 25,000/-, a debt servicing ratio of 1:1.5 is stipulated.

• A minimum of 40% of gross income should be available at the disposal of the borrower to meet the household expenses.



• Repayment Period • Interest Rate • Reducing Balance • Down Payment • Prepayment • Fees

Home Loan Key words


A) Objectives:• Basics of Home Loan– Types of Home Loan– Some salient features of home loans are

• Process– Sanction– Disbursement

• Interest Ratea) Principle

b) Interest

Essentials of Home Loan


B) Basic home loan types:

• For new properties• Resale• Resale- Re-finance• Balance Transfer (BT)• Loan against property (LAP)• Commercial loan



C) Some Salient Features of Home Loans

• Loans are available for salaried, self employed and Non Resident Indians (NRIs)

• Loans are available for builder flats, under construction properties, and residential plot with construction due to start

• Flexible repayment options, ranging from 12 months – 300 months (1 year – 25 years)

• Repayment with easy Equated Monthly Instalments (EMI)• Loan transfer facility in case you want to change your lender• Pre-payment facility in case you want to pay back more of

your loan



A) Sanction:

• Collection of documents• File checking and inward – cibil• Verification (office and residence)• Sanction system generated SMS and email• Sanction letter

Home Loan Process


B) Disbursement:

• Original property documents• Technical site visit• Legal docs check• Disbursement date fix• Disbursement

Home Loan Process


C) Interest rate• Fixed rate: Where the interest rate remains fixed during the

life of the loan• Floating rate: Where the interest rate floats or changes

depending upon market interest rates

D) Principle amount• This is the total loan amount that the lender gives you

Home Loan Process


E) Some salient features of the home loans are:• Loans are available for salaried, self employed and nonresident

Indian’s (NRI)• Loans are available for builder flats, under construction properties

and residential plot with construction due to start. Loans are also available for resale of flats for constructions below 25 years of age

• Flexible repayment options, ranging from 12 months – 300 months (1 year – 25 years)

• Repayment with easy equated monthly installments (EMI)• Loan transfer facility in case you want to change your lender• Pre-payment facility in case you want to pay back more of your loan

Home Loan Process


1. Principal amount:• This is the total loan amount that the lender gives you2. Interest rate:• This is the cost of the loan that you pay to the lender• The amount of the loan, i.e. the principal that you can avail of is decided by

the lender based on:– Your income– Your loan repayment capacity– The house (property) you wish to purchase

• As a borrower, you can choose the type of interest rate that you will pay. You

can either pay:– Fixed rate: Where the interest rate remains fixed during the life of the loan– Floating rate: Where the interest rate floats or changes depending upon

market interest rates

Interest Rate


Rate of Interest Factors– Prime Lending Rate (PLR) or Retail Prime Lending Rate (RPLR)

Both, PLR and RPLR, are the same. PLR is a bank's benchmark interest rate. Based on this rate, banks fix rates on various loan products. For instance, let's assume a bank fixes its home loan floating rate at 0.5 per cent above its PLR. So, if the PLR of the bank is, say, 10 per cent, then the floating rate on its home loan will be 10.5 per cent.

• Rate is depend on RPLR - (spread) = rate` • 16.50% - 6.00% = 10.50% (Floating) • NOTE: Spread is applicable @ the time of disbursement & it is fixed for entire

tenure.• In future if RPLR goes up or down u will get effect on rate of interest• For example RPLR - 15.50% -6.00% =9.50%• For example RPLR - 13.00% -6.00% = 7.00%

Interest Rate


Objectives:

• Home Loan Transaction Cycle• Enquiry• Call• Fix Meeting• Home Loan Requirement• Queries Solution• Sanction Eligibility• Disbursement Eligibility

Home Loan Follow up & Process


Home Loan Transaction Cycle:

• Enquiry• Call• Fix Meeting• Home Loan Requirement• Queries Solution

Home Loan Process


Sanction Eligibility

• It depends on monthly income.• Formula:• Loan Amount =Monthly Fixed Income*50% / Per Lac EMI• Sanction Eligibility • Ratio divided into 2 Parts• IIR• FOIR

Home Loan Process


What is Instalments to Income Ratio (IIR)?• Installment to Income Ratio is also used by the lender. It is

generally used by the banks or the lender companies to evaluate the eligibility of the borrower. It is very similar to FOIR.Under IIR, there are a percentage of installments of home loan paid each month. This is normally near about 50%.

• IIR Formula = Monthly EMI / Gross Salary




What is Fixed Obligation to Income Ratio (FOIR)?• It is type of ratio which is done through bank or company

providing loans. Through FOIR, they lender tries to evaluate the eligibility of the borrower. This ratio refers the EMI to be paid by every month by the borrower. PF, profession tax, LIC premium, Recurring Deposit scheme, charity to a trust etc. are not included in it in the form of default EMI (Fixed Obligation).

• FOIR Formula= Present EMI + All EMI /Gross Salary


• Financial Institute disburse the amount against 80% of Cost of Property.

• Cost of Property =

Agreement Cost (Area x Rate) + SD + REG + MSEB + PARKING + STAX + VAT

Disbursement Eligibility


• Home loans are given for construction of new house/flat, purchase of old house/flat. There is no restriction by lenders on the number of houses owned by the borrower.

• Home extension loans: for additional alteration to the existing house

• Home improvement loans for repairs, renovations including water proofing, plumbing, compound wall, digging of tube well, flooring, tiling, additions like built in cupboards, shelves, internal repairs including replacing doors, windows etc.

• Home equity loans: The value of the house, left after covering the mortgage amount, keeps increasing – With regular repayment– With appreciation in property values.

Bank scheme for home loan


Target groups• Individuals: Salaried class, businessmen, professionals and

self employed people who have certain minimum period of service/experience, age of the person and residual years of service.

• Non- Residential Indian’s: (NRI) Professionals with regular income or gainfully employed abroad with residual contract period of service of at least 3 years. Loans can also be given to NRI as a principal borrower with a residential guarantor. Such loans can also be given when an NRI owns the land jointly with relative who is a resident.

Bank scheme for home loan


Step 1: Application• Home loan completed & submitted lender with relevant document• Lending institution will process application to check individual’s

eligibility for loan, personal profile of applicant & his income.

Step 2 Verification• The Bank’s credit officer visit address provided by applicant to

establish current residence of customer to verify information submitted in application form.

• The bank’s credit officer visit the property & supporting documents listed under appropriate.

• The bank’s credit officer visit property & current residence of customer.

Steps involved in sanctioning of home loan


Step 3: Appraisal• Check that application form with all enclosure• Check information provided in forms is complete and validated

through independent reports of credit verification agency, employer, valuer, credit officer etc.

• Check applicant meet lender’s qualification criteria in terms of age, income level, credit rating history & is not in the negative list.

• Check property value is reasonable, compare with similar home loan data available with lender.



• Check cash flow & personal financial of applicant. Validate his income level & financial status to service loan & meet margins, without stretching.

• Finalize interest rate, based on credit rating of applicant , mortgage cover available , security , applicant’s credit history etc.

• Sign off recommending home loan for approval by appropriate sanctioning authority.

Sanction letter:• Sanction letter is a letter issued to customer on

completion of appraisal process.



• Step 4 Documentation• This process includes submission of the original property documents &

loan agreement to the lender. The documents are usually taking place; equitable mortgage on the property is created at this office.

• Step 5 Disbursal• A home loan disbursed as term loan• The lender verifies that he funds released for each stages. At each

stage, • This is though calling for verification & certification of expense by

chartered accountant & verification of construction through charted Accountant & verification of construction through chartered Engineer.

• Purchase of land



• Risk assets Acceptance Criteria• Commitment Fees• Carpet area• Clear title• Common areas• Encumbrance• Khata/Kharedi Khat• Legal scrutiny report• Margin amount • Marketable title• Marketable value• Purchase of land• Constructed houses

Home Loan Key Words


• An important thing to note about home loans is the processing fee.

• Banks charge a processing fee for every home loan application. This fees is non refundable.

• The processing fee varies from bank to bank and is generally between 0.50% to 1% of the loan amount. This fees is used by the bank to start and maintain the home loan process including completing the various formalities during the entire period

Processing Fees


• A home loan is a loan taken for buying or constructing a home or to make improvements to a residential property.

• You can get a loan from banks and registered housing finance companies

• Your home loan is secured against the property that you buy. This means that in case you are unable to repay the loan, the lending bank will have the right to take possession of your home

• There is a strict process followed in home loan.

Summary


1. Collect the interest rate chart from at least five different banks.

2. Take a common example and solve using all the formulas mentioned in this chapter.

3. Make a report on home loan and home loan process.

Assignment


Thank You

F-HRE-01

Education

home housing

loan management

loan portfolio

housing unit

consumer retail loan

rate trainings

vidya bhagwat derivatives

home pay