F-HRE-01

Introduction To Housing Finance

What is home loan?
• 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
Trainings by Vidya Bhagwat
family’s normal monthly income or savings.

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

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 .

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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 by Vidya Bhagwatand insure the life
step further
Trainings
of their borrowers for an amount equal to the loan
granted under housing finance.

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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. Trainings by Vidya Bhagwat

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.


Home Loan Key words
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Repayment Period
Interest Rate
Reducing Balance
Down Payment
Prepayment
Fees


Essentials of Home Loan
A) Objectives:
• Basics of Home Loan
– Types of Home Loan
– Some salient features of home loans are
• Process
– Sanction
– Disbursement
• Interest Rate
a) Principle
b) Interest

B) Basic home loan types:
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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 facilityTrainings by Vidya Bhagwatchange your lender
in case you want to
• Pre-payment facility in case you want to pay back more of
your loan

Home Loan Process
A) Sanction:
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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:
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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 inTrainings by want Bhagwatback more of your loan
case you Vidya to pay

Interest Rate
1. Principal amount:
• This is the total loan amount that the lender gives you
2. 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

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– 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%Trainings by Vidya Bhagwat
-6.00% =9.50%
For example RPLR - 13.00% -6.00% = 7.00%

Home Loan Follow up & Process
Objectives:
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Home Loan Transaction Cycle
Enquiry
Call
Fix Meeting
Home Loan Requirement
Queries Solution
Sanction Eligibility
Disbursement Eligibility

Home Loan Process
Home Loan Transaction Cycle:
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Enquiry
Call
Fix Meeting
Home Loan Requirement
Queries Solution


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

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

Disbursement Eligibility
• 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


Bank scheme for home loan
• 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
Trainings by Vidya
mortgage amount, keeps increasing Bhagwat
– 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 Vidya Bhagwatalso be given when
loans can
Trainings by
an NRI owns the land jointly with relative who is a
resident.

Steps involved in sanctioning of 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.

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

Home Loan Key Words
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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

Processing Fees
• 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

Summary
• 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.

Assignment
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.


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