Housing Finance

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A house is a building or structure the primary function of which is to be occupied for habitation by humans or other creatures. The term house includes many kinds of dwellings ranging from rudimentary huts of nomadic tribes to complex structures composed of many systems. English-speaking people generally call any building they routinely occupy "home". The social unit that lives in a house is known as a household. Most commonly, a household is a family unit of some kind, though households may be other social groups, organizations or individuals.

The English word house derives directly from the Old English Hus meaning "dwelling, shelter, home, house," which in turn derives from Proto-Germanic Khusan (reconstructed by etymological analysis) which is of unknown origin The house itself gave rise to the letter 'B' through an early Proto-Semitic hieroglyphic symbol depicting a house. The symbol was called "bayt", "bet" or "beth" in various related languages, and became beta, the Greek letter, before it was used by the Romans.

Inside the house

Ideally, architects of houses design rooms to meet the needs of the people who will live in the house. Such designing, known as "interior design", has become a popular subject in universities. Feng shui, originally a Chinese method of moving houses according to such factors as rain and micro-climates, has recently expanded its scope to address the design of interior spaces with a view to promoting


harmonious effects on the people living inside the house. Feng shui can also mean the "aura" in or around a dwelling. Compare the real-estate sales concept of "indoor-outdoor flow". The square footage of a house in the United States reports the area of "living space", excluding the garage and other non-living spaces. The "square meters" figure of a house in Europe reports the area of the walls enclosing the home, and thus includes any attached garage and non-living space How many floors, or levels, the home is will play a big role in determining the square footage of a home.


Floor plan of a "foursquare" house Many houses have several large rooms with specialized functions and several very small rooms for other various reasons. These may include a living/eating area, a sleeping area, and (if suitable facilities and services exist) washing and lavatory areas. Additionally, spa room, indoor pool, indoor basketball court, and so forth. In traditional agriculture-oriented societies, domestic animals such as chickens or larger livestock (like cattle) often share part of the house with human beings. Most conventional modern houses will at least contain a bedroom, bathroom, kitchen or cooking area, and a living room. A typical "foursquare house" (as pictured) occurred commonly in the early history of the US where they were mainly built, with a staircase in the center of the house, surrounded by four rooms, and connected to other sections of the home (including in more recent eras a garage).



2.What is Housing Finance
Housing finance is a broad topic, the concept of which can vary across continents, regions and countries, particularly in terms of the areas it covers. For example, what is understood by the term ―housing finance‖ in a developed country may be very different to what is understood by the term in a developing country. The International Union for Housing Finance, as a multinational networking organisation, has no official position on what the best definition of housing finance is. However, the selection of quotes below is offered as a snapshot of what housing finance as a topic covers: ―Housing finance brings together complex and multi-sector issues that are driven by constantly changing local features, such as a country’s legal environment or culture, economic makeup, regulatory environment, or political system‖ (2009) Loïc Chiquier and Michael Lea, Housing Finance Policy in Emerging Markets. In addition, the concept of housing finance and housing finance systems has been evolving over time. Looking at definitions from the mid-1980s, we see that housing finance was defined primarily in terms of residential mortgage finance: ―The purpose of a housing finance system is to provide the funds which home-buyers need to purchase their homes. This is a simple objective, and the number of ways in which it can be achieved is limited. Notwithstanding this basic simplicity, in a number of countries, largely as a result of government action, very complicated housing finance systems have been developed. However, the essential feature of any system, that is, the ability to channel the funds of investors to those (1985) Mark Boleat, National Housing Finance Systems – A Comparative Study, However, in more recent years, a number of other much wider definitions have appeared: ―Put simply, housing finance is what allows for the production and consumption of housing. It refers to the money we use to build and maintain the nation’s housing stock. But it also refers to the money we need to pay for it, in the form of rents, mortgage loans and repayments.‖(2009) Peter King, Understanding Housing Finance – Meeting Needs and Making Choices.



Affordable housing is that which is deemed affordable to those with a median household income.[1] In Australia, the National Affordable Housing Summit Group developed their definition of affordable housing as housing which is "reasonably adequate in standard and location for lower or middle income households and does not cost so much that a household is unlikely to be able to meet other basic needs on a sustainable basis." In the United Kingdom affordable housing includes "social rented and intermediate housing, provided to specified eligible households whose needs are not met by the market." Most of the literature on affordable housing refers to a number of forms that exist along a continuum from emergency shelters, to transitional housing, to non-market rental (also known as social or subsidized housing), to formal and informal rental, indigenous housing and ending with affordable home ownership. The notion of housing affordability became widespread in the 1980s in Europe and North America. A growing body of literature found it problematic. Notably, the shift in UK housing policy away from housing need to the more market-oriented analyses of affordability was challenged by Whitehead (1991). This article discusses the principles that lie behind the concepts of need and affordability and the ways in which they have been defined. This article focuses on the affordability of owner-occupied and private rental housing as social housing is a specialised tenure. Housing choice is a response to an extremely complex set of economic, social, and psychological impulses For example, some households may choose to spend more on housing because they feel they can afford to, while others may not have a choice.In the United States and Canada, a commonly accepted guideline for housing affordability is a housing cost that does not exceed 30% of a household's gross income. When the monthly carrying costs of a home exceed 30–35% of household income, then the housing is considered unaffordable for that household. Determining housing affordability is complex and the commonly used housingexpenditure-to-income-ratio tool has been challenged. Canada, for example, switched to a 25% rule from a 20% rule in the 1950s. In the 1980s this was replaced by a 30% rule. India uses a 40% rule.



Measuring housing affordability

A perfectly balanced housing market "A common measure of community-wide affordability is the number of homes that a household with a certain percentage of median income can afford. For example, in a perfectly balanced housing market, the median household (and the half of the households which are wealthier) could officially afford the median housing option, while those poorer than the median home could not afford the median home. 50% affordability for the median home indicates a balanced market." A community might track the percentage of its housing that is affordable to households earning 60% of median income. The Median Multiple indicator, recommended by the World Bank and the United Nations, rates affordability of housing by dividing the median house price by gross [before tax] annual median household income). This indicator rates housing affordability on a scale of 0 to 5 with categories 3 and under being affordable. From 3 to 5 the categories are rated as moderate (3.1 to 4.0), serious (4.1 to 5.0) and severe unaffordability (5.1 and over).] Using this indicator, Demographia, provides market-based annual housing affordability ratings.

Housing expenditure to income ratio tool
Determining housing affordability is complex and the commonly used housing-expenditure-to-income ratio tool has been challenged. Canada, for example, switched to a 25% rule from a 20% rule in the 1950s. In the 1980s this was replaced by a 30% rule.



Housing Affordability Index (HAI)
One of its greatest strengths of the HAI developed by MIT is its ability to capture the Total Cost of Ownership of individuals’ housing choices. In computing the index the obvious cost of rents and mortgage payments are modified by the hidden costs of those choices.

Household income and wealth
Income is the primary factor— not price and availability, that determines housing affordability. In a market economy the distribution of income is the key determinant of the quantity and quality of housing obtained. Therefore in order to understand challenges of making housing affordable, it is essential to understand trends and disparities in income and wealth. Housing is often the single biggest expenditure of low and middle income families. For low and middle income families, their house is also the greatest source of wealth. The most common approach to measure the affordability of housing has been to consider the percentage of income that a household spends on housing expenditures. Another method of studying affordability looks at the regular hourly wage of full-time workers who are paid only the minimum wage (as set by their local, regional, or national government). The hope is that a full-time worker will be able to afford at least a small apartment in the area that he or she works in. Some countries look at those living in relative poverty, which is usually defined as making less than 60% of the median household income. In their policy reports, they consider the presence or absence of housing for people making 60% of the median income.

Housing expenditures
Housing affordability can be measured by the changing relationships between house prices and rents, and between house prices and incomes. There has been an increase among policy makers in affordable housing as the price of housing has increased dramatically creating a crisis in affordable housing. Since 2000 the "world experienced an unprecedented house price boom in terms of magnitude and duration, but also of synchronisation across countries.’’ "Never before had house prices risen so fast, for so long, in so many countries." Prices doubled in many countries and nearly tripled in Ireland.


The bursting of the biggest financial bubble in history in 2008 wreaked havoc globally on the housing market. By 2011 home prices in Ireland had plunged by 45% from their peak in 2007. In the United States prices fell by 34% while foreclosures increased exponentially. In Spain and Denmark home prices dropped by 15%. However, in spite of the bust, home prices continue to be overvalued by about 25% or more in Australia, Belgium, Canada, France, New Zealand, Britain, the Netherlands, Spain and Sweden.

Causes and consequences of rise in house prices
Costs are being driven by a number of factors including:

demographics shifts o the declining number of people per dwelling o Growing Density Convergence, Regional Urbanization o solid population growth (for example sky-high prices in Australia and Canada a rising population pushes up demand). supply and demand o a shortfall in the number of dwellings to the number of households  smaller family size  the strong psychological desire for home ownership, shifts in economic policies and innovations in financial instruments o reduced profitability of other forms of investment o availability of housing finance o low interest rates o mortgage market innovations public policy o deregulation o land use zoning

Other housing expenditures
In measuring affordability of housing there are various expenditures beyond the price of the actual housing stock itself, that are considered depending on the index being used. Some organizations and agencies consider the cost of purchasing a singlefamily home; others look exclusively at the cost of renting an apartment.



Many U.S. studies, for example, focus primarily on the median cost of renting a two-bedroom apartment in a large apartment complex for a new tenant. These studies often lump together luxury apartments and slums, as well as desirable and undesirable neighborhoods. While this practice is known to distort the true costs, it is difficult to provide accurate information for the wide variety of situations without the report being unwieldy. Normally, only legal, permitted, separate housing is considered when calculating the cost of housing. The low rent costs for a room in a single family home, or an illegal garage conversion, or a college dormitory are generally excluded from the calculation, no matter how many people in an area live in such situations. Because of this study methodology, median housing costs tend to be slightly inflated. Costs are generally considered on a cash (not accrual) basis. Thus a person making the last payment on a large home mortgage might live in officially unaffordable housing one month, and very affordable housing the following month, when the mortgage is paid off. This distortion can be significant in areas where real estate costs are high, even if incomes are similarly high, because a high income allows a higher proportion of the income to be dedicated towards buying an expensive home without endangering the household's ability to buy food or other basic necessities.

Growing density convergence and regional urbanization
The majority of the more than six billion people on earth now live in cities (UN). There are more than 500 city regions of more than one million inhabitants in the world. Cities become megacities become megalopolitan city regions and even "galaxies" of more than 60 million inhabitants. The Yangtze Delta-Greater Shanghai region now surpasses 80 million. Tokyo-Yokohoma adjacent to OsakaKobe-Kyoto have a combined population of 100 million. Rapid population growth leads to increased need for affordable housing in most cities. The availability of affordable housing in proximity of mass transit and linked to job distribution, has become severely imbalanced in this period of rapid regional urbanization and growing density convergence. "In addition to the distress it causes families who cannot find a place to live, lack of affordable housing is considered by many urban planners to have negative effects on a community's overall health."


Affordable housing challenges in inner cities range from the homeless who are forced to live on the street, to the relative deprivation of vital workers like police officers, firefighters, teachers and nurses unable to find affordable accommodation near their place of work. These workers are forced to live in suburbia commuting up to two hours each way to work. Lack of affordable housing can make low-cost labour scarcer (as workers travel longer distances) (Pollard and Stanley 2007).

Labour market performance
In both large metropolitan areas and regional towns where housing prices are high, a lack of affordable housing places local firms at a competitive disadvantage. They are placed under wage pressures as they attempt to decrease the income/housing price gap. Key workers have fewer housing choices if prices rise to non-affordable levels. Variations in affordability of housing between areas may create labour market impediments. Potential workers are discouraged from moving to employment in areas of low affordability. They are also discouraged from migrating to areas of high affordability as the low house prices and rents indicate low capital gain potential and poor employment prospects.

Social costs of lack of affordable housing
Housing affordability is more than just a personal trouble experienced by individual households who cannot easily find a place to live. Lack of affordable housing is considered by many urban planners to have negative effects on a community's overall health.

Jobs, transportation, and affordable housing
Lack of affordable housing can make low-cost labor more scarce, and increase demands on transportation systems (as workers travel longer distances between jobs and affordable housing). Housing cost increases in U.S. cities[38][39] have been linked to declines in enrollment at local schools.[40] "Faced with few affordable options, many people attempt to find less expensive housing by buying or renting farther out, but long commutes often result in higher transportation costs that erase any savings on shelter." Pollard (2010) called this the "drive 'til you qualify" approach which causes far-flung


development and forces people to drive longer distances to get to work, to get groceries, to take children to school, or to engage in other activities. [41] A well located dwelling might save significant household travel costs and therefore improve overall family economics, even if the rent is higher than a dwelling in a poorer location.[2] A household's inhabitants must decide whether to pay more for housing to keep commuting time and expense low, or to accept a long and/or expensive commute in order to obtain "better" housing. The absolute availability of housing is not generally considered in the calculation of affordable housing. In a depressed or sparsely settled rural area, for example, the predicted price of the canonical median two-bedroom apartment may be quite easily affordable even to a minimum-wage worker – if only any apartments had ever been built.

Affordable housing and public policy
Policy makers at all levels - global, national, regional, municipal, community associations - are attempting to respond to the issue of affordable housing, a highly complex crisis of global proportions, with a myriad of policy instruments. These responses range from stop-gap financing tools to long-term intergovernmental infrastructural changes. In the simplest of terms, affordability of housing refers to the amount of capital one has available in relation to the price of the goods to be obtained. Public policies are informed by underlying assumptions about the nature of housing itself. Is housing a basic need, a right, an entitlement, a public good, or even, as in the case of home purchasing in the United States, a civic duty? Or is just another household-level consumer choice, a commodity or an investment within the free market system? "Housing Policies provide a remarkable litmus test for the values of politicians at every level of office and of the varied communities that influence them. Often this test measures simply the warmth or coldness of heart of the more affluent and secure towards families of a lower socio-economic status Affordable housing needs can be addressed through public policy instruments focussed towards the demand side of the market where households are assisted in reaching financial benchmarks without which housing is not affordable. This can include approaches that simply promote economic growth in general, in the hope that a stronger economy, higher employment rates and higher wages will increase the ability of households to acquire housing at market prices. Federal government policies define banking and mortgage lending practices, tax and regulatory measures affecting building materials, professional practices (ex. real estate transactions).The purchasing power of individual households can be


enhanced through tax and fiscal policies that result in reducing the cost of mortgages and the cost of borrowing. Public policies may include the implementation of subsidy programs and incentive patterns for average households. For the most vulnerable groups, such as seniors, single-parent families, the disabled, etc. some form of publicly-funded allowance strategy can be implemented providing individual households with adequate income to afford housing. Or policy instruments may focus on production strategies which facilitate increased production on the supply side of affordable housing which can include refurbished older stock and/or the construction of new housing units. China's housing policy during the period of central planning prior to the reform, included constructing and allocating virtually free and unsustainable publicly-funded housing. Currently some of the policies that facilitate production on the supply side include favorable land use policies such as inclusionary zoning, relaxation of environmental regulations, and the enforcement of affordable housing quotas in new developments. In some countries, such as Canada, municipal governments began to play a greater role in developing and implementing policies regarding form and density of municipal housing in residential districts, as early as the 1950s.[42] At the municipal level recently promoted policy tools include relaxation of prohibitions against accessory dwelling units, and reduction of the amount of parking that must be built for a new structure. Affordability often result from expanding land available for housing or increasing the density of housing units in a given area. Ensuring a steady supply of affordable housing means ensuring that communities weigh real and perceived livability impacts against the sheer necessity of affordability. The process of weighing the impacts of locating affordable housing is quite contentious, and is laden with race and class implications. The growing gap between rich and poor since the 1980s manifests itself in a housing system where public policy decisions privilege the ownership sector to the disadvantage of the rental sector.



Right to build
An article in the November 2007 issue of Atlantic Monthly reported on a study of the cost of obtaining the "right to build" (i.e. a building permit, red tape, bureaucracy, etc.) in different U.S. cities. The "right to build" cost does not include the cost of the land or the cost of constructing the house. The study was conducted by Harvard economists Edward Glaeser and Kristina Tobio. According to the chart accompanying the article, the cost of obtaining the "right to build" adds approximately $600,000 to the cost of each new house that is built in San Francisco.

Affordable housing by country
Australians in receipt of many social security benefits from Centrelink who rent housing from a private landlord are eligible for rent assistance. Rent assistance is a subsidy paid directly to the tenant in addition to the basic Centrelink benefit such as the Age Pension or the Disability Pension. The amount of rent assistance paid depends on the amount of rent payable, whether the tenant has dependents and how many dependents there are. Tenants who live in public housing in Australia are not eligible for rent assistance. Australians buying a home for the first time are eligible for a first home owner grant. These grants were introduced on 1 July 2000 and are jointly funded by the Commonwealth government and the state and territory governments. First home buyers are currently eligible for a grant of A$7000 to alleviate the costs of entering the housing market. program nationwide in 1995. It is similar to housing fund programs in other countries such as Thailand and Singapore. The Housing Provident Fund (HPF), provides a mechanism allowing potential purchasers who have an income to save for and eventually purchase a unit dwelling (which may be a formerly public housing unit). The HPF includes a sunsidized savings program linked to a retirement account, subsidized mortgage rates and price discounts. The Chinese government has embarked upon an effort to reduce the number of tenants living in publicly owned housing. In the second system, individuals privately own housing and trade it within a free market. During the past two decades the Chinese government has implemented a series of policies designed to privatize government owned housing.



 To study the background information and functioning of the major housing finance institution in india.

 To make an in depth study of the housing financing institution- Housing Development Finance Corporation in the private sector.  To assess the socio economic characteristics of beneficiaries in HDFC.  To analyse the degree of satisfaction of the beneficiaries in availing loans from home loan.  To examine the low cost housing technology and its consequent benefits.



Housing has been classified as a basic need in India and successive governments have highlighted its priority status. Despite such emphasis, housing policies largely remained statements of intent rather than being translated into implementation. Earlier Indian Governments tended to view housing from a social perspective rather than an economic one, and the policies of the time reflected this. Today, the scenario has changed. Players like commercial banks and housing finance companies have made efforts to develop the mortgage market and increase the availability and affordability of housing. The early development of housing finance in India is a result of the housing policies implemented by the government. A clear perspective on the evolution of housing policies in India can be seen in the Five Year Plans, which were based on a centrally planned mode of development. Development activities in India have been structured on the basis of Five Year Plans since 1951.

Housing in the Five Year Plans
In the first plan (1951-56), housing was introduced into the policy framework at the national level. Affordability was emphasised as the key issue and government support through subsidies and loans were deemed necessary. A separate Ministry of Works and Housing was established and the National Buildings Organisation was created. This plan in fact became the benchmark for subsequent Five Year Plans for the next two decades.



The second plan (1956-61) strengthened the schemes of the first plan by expanding coverage. However, there was a policy shift as the central government decided to provide assistance to state governments to develop low-income housing instead of directly providing loans to low-income groups. This gave rise to State Housing Boards that still remain in existence today.

The third plan (1961-66) and an annual plan (1966-69) placed emphasis on planned development and land acquisition, particularly for urban areas. Although both plans continued the schemes of the previous plans, there was an additional thrust towards targeting low-income groups.

State Housing Boards had their resources increased and were expected to address the housing shortfall in their respective states. Despite these efforts, by the fourth plan (1969-74) the government was faced with the dual problem of a rapidly growing population and a slow growing housing stock. For the first time, the government decided to encourage private and cooperative housing schemes by providing financial assistance. However, the majority of activity still remained within the public sector. The government also recognised the need to provide housing finance to low-income groups and thus set up the Housing and Urban Development Corporation (HUDCO) in 1970. HUDCO’s mandate was to provide such groups with loans below peak interest rates and with longer repayment periods. It was during the fifth plan (1974-79) that the Urban Land (Ceiling and Regulation) Act (ULCRA) was introduced. ULCRA sought to prevent concentration of land holding in urban areas and make more land available for equitable disbursal. However, it failed to achieve its goals and its repercussions are still being felt today. Significantly, as a completely private sector initiative, in 1977, the first retail housing finance company, Housing Development Finance Corporation (HDFC) was set up. HDFC sought to provide financial assistance to individuals, groups, co-operative societies and companies for staff housing.



In a move to cope with increasing urbanisation, the thrust of the sixth plan (1980-85) was aimed at increasing housing in small and medium towns. Efforts were made towards improving the conditions of the slums and the lives of its inhabitants, while emphasising the need to increase support to private groups. During this period, other housing finance companies also entered the market.

It was the seventh plan (1985-90), that brought about a radical change in government policies.It was also during this time that several reforms were made. The UN Global Shelter Strategy, of which India subscribed to, was passed in the UN General Assembly in 1988. This gave the impetus to the drafting of a National Housing Policy for the first time. Another major reform that took place at the time was the founding of the National Housing Bank (NHB) in 1988. The eighth plan (1992-97) built on the foundations of the seventh plan, again acknowledging that housing related activities belonged in the private sphere, although admitting that there was room for state intervention to provide housing to low-income groups. It was during the eighth plan that the National Housing Policy was first adopted by Parliament in 1994. Importantly, the plan recognised that urbanisation was inevitable and concentrated resources on upgrading urban centres. It recommended that reforms should be made on both, the financial and legal aspects to allow the mortgage market to develop further. It laid special emphasis on government incentives to enhance the flow of credit to the housing sector through housing finance institu Both the ninth (1997-2002) and tenth (2003-2007) plan recommended further reforms to enable the government to play its role as a facilitator and encourage the development of the mortgage market. Emphasis was particularly laid on market friendly reforms for improving both taxes and infrastructure to help increase investments into housing. Both plans stress on abolishing old laws. In 1999, the central government repealed ULCRA. The government also adopted a revised National Housing Policy in 1998 and prepared another draft in 2005. The ninth and tenth five-year plans are also characterised by the aggressive entry of commercial banks into housing finance.



3.Affortable Housing Finance
microfinance institutions in enabling the low income consumers, mostly Affordability’ can be defined as the consumers’ ability to purchase but it is relative term that could acquire different meanings under varying circumstances. With a bevy of real estate companies riding on the wave of economic growth the focus on the ―fortune at the bottom of the pyramid‖ has become an of adequate financing sources for the consumers is a major factor in determining the sale of these projects. Thus, the cost housing projects are partnering with microfinance institutions like Micro Housing Finance Corporation Ltd. (MHFC) and SKS Microfinance etc. role of employed in the informal sector in purchasing these ―Affordable houses‖ is of much importance. This is evident from the fact that real estate developersconstructing low formal sector employee do exist, chances for informal sector employees and the self Demand for Affordable housing There is an enormous unmet demand for low-income housing finance. The segment earningbetween Rs 7,000-Rs 15,000 has never been considered significant for home loan offerings. While the prospects of getting a home loan for the -employed like drivers, NGO staff, small caterers and others are bleak. This is despite the fact that they have marketable skills, steady jobs/incomesand employer/customer recommendations. Moreover, urbanization has played a key role in making India’s housing problems worse.In he present, scenario the total urban land is estimated at 2.3% of India’s total geographical area,which accommodates 30% of population. Pressure on land and infrastructure is only going to increase further with 40% of the nation expected to inhabit cities by 2020 at which time urban population is expected to be 455 million. Apart from this, with 200 million people anticipated to be living in slums and slum like conditions by 2020, the focus is bound to be on urban housing. These people have the capability and willingness to make a 20%-25% down payment on houses costing between Rs 4 lakh-5 lakh and are happy and able to take on a 15-year loan obligation, at market rates, in order to realise their dream home. Given that in these small-sized homes, the land cost represents a small


percentage of the overall cost, the speculative risk is low, with a very low probability of a drop in these property prices.India’s housing shortage is estimated to be as high as 40 million units and demand from the low income segment constitutes a large proportion of this shortage. Thus, the role of housing microfinance becomes all the more important as a facilitator to bridge this demand supply gap. Sources of finance for low income buyers:Housing microfinance delivers housing finance to low-income people, typically but not necessarily, without collateral specifically intended for housing-related endeavors, including new constructions; repairs, improvements or up gradation of existing structures; purchase of land; andb investment in infrastructure. Banks face difficulty in financing the low income consumers mostly employed in the informal sector terms of inability to accurately assess the credit risk associated with low income borrowers, lower profit margins, lack of land titles, and uncertainty of repossession. Hence, banks like HDFC indirectly fund the low income consumers by lending in bulk toorganizations like SEWA (Self Employed Womasn’s Association) and IASC (Indian Associationof Savings & Credit) which in turn lend to these borrowers. HUDCO (Housing DevelopmentCorporation) and NHB (National Housing Board) undertake the financing and refinancing oforganizations engaged in lending to the low and middle income households. Certain housing companies like Dewan Housing Corporation Ltd. are playing a major role in providing loans tothe low and middle income households. Government also promotes the rehabilitation of the urban poor by financing the State housing boards under policies like the JNURM (Jawahar Lal Nehru National Urban Renewal Mission) & National Slum development Programme but the success of these policies is limited due to corruption and nepotism. Thus, Housing microfinance with longer tenor, flexible payment options, less stringent KYC norms and lower interest rates acts as the ideal source for providing loans.



7.Income Of People
Income from salary In the case of salary earners, the income through salary can be easily ascertained from the salary slip / salary certificate. While entertaining salary slip/ salary certificate, it has to be ensured that the exact break-up of salary giving all allowances and deductions, statutory or otherwise are indicated and the authenticity of the salary slip is verified. Usually, all allowances appearing in the salary slip on a monthly basis may be taken as part of gross income except for a few specifically mentioned in this section. In case of applicant working in a small private concern, the credentials of the employer also needs to be examined that would give a basis of establishing the individual's stability of employment and accordingly decide the loan eligibility of the individual. Generally, following allowances appearing in the salary slip may be considered for calculation purposes:         Basic Salary Dearness Allowance House Rent Allowance Conveyance / Transport allowance (not reimbursement) Special allowance/ personal pay Education allowance Medical allowance (not reimbursement) City Compensatory allowance, etc.

It should be noted that the salary of an individual could consist of certain reimbursements which would normally not appear in the salary slip/ certificate such as conveyance reimbursement, vehicle maintenance, canteen subsidy, medical reimbursement, overtime, productivity linked incentive. All these reimbursements are voucher payments apart from overtime and PLI. Generally, any reimbursement appearing in the salary slip / certificate should not be taken into consideration. However, on merit of individual cases, the appraisal officer may consider a portion of such income as part of income and accordingly the loan eligibility may be worked out. But in such a case it has to be ensured that the applicant is receiving these payments regularly on a monthly basis. The applicant may be asked to produce evidence of regular receipt of these payments and the


appraising officer should verify the same through bank passbook or by any other means. In such cases, the portion of such income to be taken should not be more than 50% of such monthly reimbursement. Income From Business/Profession In case of self-employed persons, the credit appraiser should be extremely careful in determining the income arising out of the business or profession of the applicant. Careful examination of Income Tax Returns for the past 3 years along with computation of income is essential. The originality of IT returns will have to be verified in all the cases from respective IT offices. The appraising officer should also look into the following factors:        Nature of business Age of business concern Market trends Clientele of the organization Previous experience of the promoters Educational qualifications of the applicants Products

The appraising officer has also to carefully examine the profit & loss account and balance sheet for the past 3 years that would give him an idea of the profile of the applicant. It should be noted that the profit & loss account, balance sheet, IT returns etc. has to be certified by a Chartered Accountant stating "Certified True Copy" affixing his seal that should clearly depict his registration number. In case of the age of business is less than 3 years and/or the IT returns for 3 yrs are not available, the available IT returns could be considered for determining the loan eligibility. If IT returns for the past 3 years are filed with in the same financial year, such loan cases are required to be out rightly rejected unless the ROs are satisfied about the delayed filing income tax returns.



Income of spouse When both husband and wife are working and their income has been declared in the application form with supporting documents, repayment capacity of spouse can be considered up to 60%. However, the repayment capacity of the main applicant will continue to be taken at 35%. In such cases, overall IIR and FOIR may go beyond between 35% and 45%. But in cases where the income of the main applicant is either nil or not verifiable, then repayment capacity of the income of the spouse is to be taken as 35% and not 60%. Other Income Apart from regular income from salary/ business/ profession, there are certain other sources of income that an applicant might have. Depending on the nature of the income, it may be considered for augmenting the main source of income. Generally, such income should be added only if the requirement of loan amount is more than normal eligibility of the applicant(s). The additional income alone cannot be the basis for loan. In cases where additional income is irregular it has to be ignored. The other income can be:     Rental income Agricultural income Income/ Dividend from securities Depreciation

Rental Income If the applicant is having income from rental from another property, 60% of the rental income may be included into the main income. However, in such a case, the applicant should be asked to submit copies of lease agreement/ rent agreement, rent receipt I Bank statement etc. The appraising officer should be able to clearly spell out the following details out of the requisitioned documents:



 Date of rent agreement  Expiry date of rent agreement  Rent per month (Including expected rent in case the property being acquired is to be rented out)  Owner of the property If the applicant wishes to let out the property being financed, 60% of expected rental income might be taken for calculating the eligibility of loan amount. However, the expected rental income should be based on the current rentals in the market and the concerned officer should verify from all sources that the expected rental as stated by the applicant is reasonable as per the prevailing rates in the market. Here, it should be ensured that the applicant should have another house already existing to live in either through ownership or allotment of dwelling unit by the employer, and then only he can let out the property being financed. In case of Government allotment of a housing unit to its employee (the applicant), notional value of HRA should not be added back to the income from salary if the applicant wishes to continue staying in the Govt. quarter and expected rental income has been considered for loan calculation. Agricultural Income Agricultural income, by its very nature is cyclical in nature and it would fluctuate even if the land holdings of the applicant remain the same and therefore, much weight age cannot possibly be given to such income. It is also very difficult to ascertain the agricultural income, as we would need to have proof of land ownership and receipts from the "Mandi" or other Government agencies of the sale proceeds etc. In case, the applicant is able to produce evidence to show his agricultural income for the last three years either through certificates from Tehsildar or revenue authorities, receipts from Mandi Mills regarding the sale proceeds for his produce and ownership of agricultural land, 60% of the average of last three years can be considered.



Income from Dividend and Securities As far as income from dividends and interests on deposits or any other income from securities like bonds, debentures etc. are concerned, by the very nature; these incomes fluctuate depending on the holding /investment and the market conditions. Therefore, such income should be ignored and should not be considered for determining the loan eligibility of an individual. Depreciation Depreciation is a notional charge on P & L account wherein a sunken fund is created that is used to replace the existing asset. In all probability, depreciation fund is used for buying a new asset at a later date; therefore, depreciation should not be added back. Income Of Co Applicant In case of joint ownership of the property proposed to be acquired/constructed/renovated etc., 100% income of all the co-applicants could be considered.In the case of spouse becoming co-applicant, 100% income of the spouse could be considered regardless of the fact that whether he/she is co-owner of the property or not. In case of father and son /unmarried daughter, daughter -in law, 50% income of the co-applicant(s) could be considered even if the coapplicant(s) is /are not co-owner in the property. Pension Income While deciding the repayment capacity, future pension income of the applicant may also be considered which would be based on the last BASIC salary drawn before retirement. Inclination to Pay Once the ability to pay is established, it is required to have a view on the inclination to pay for the applicant, which would have very crucial implications on the repayment of loan.



The saving habits of the applicant and the repayment record of other loans, if any would broadly decide the inclination to pay, which the applicant might have taken. For this, the officer should check the bank statement for the last 6 months. The statement should be checked very carefully, as it might contain regular payments made to some agency from which the applicant might have taken a loan, which might not have been disclosed in the application form. It should be highlighted here that the borrowing habit of the applicant is a very important factor, which may adversely affect the repayment of loan, and therefore, it is a critical factor in deciding the applicant's inclination to pay. At the same time, the sources of funds must be evaluated to meet the cost of property. In this connection, provident fund statement can be checked, saving bank pass-book showing details of transaction, details of investment to be liquidated to meet cost of property, loans from employer, and loans from thrift & credit society, loans from banks/ HFIs/ informal sources. What is to be ensured is that, as far as possible, the applicant should not borrow from any other source for meeting his share of investment in the property proposed to be purchased/constructed for which regular payments have to be made. Process of Interview The first and foremost thing for conducting an interview is that the interviewer should carefully read /study the application form, salary slip/Income tax returns and the property papers etc. The person who is interviewing/interacting with the applicant should be well prepared with his questions. Observations of the interviewer should be recorded in the file for future reference. Concept of Equated Monthly Installment (EMI) EMI, as the name suggests, is equated monthly installments, which consists of principal and interest components. The equated monthly installments will be based on monthly reducing balances i.e., monthly rests. EMI is calculated in such a way that the loan becomes self amortizing i.e. with payment of all installments, total principal and interest thereon stands paid.



The formula for calculation of the equated monthly installment on monthly rests is given below. EMI = L*r (1+r) ^n [(1+r) ^n-1] Where, L = Loan amount, r = rate of interest / 12 n = number of months. The EMI will start from the month following the month in which the disbursement of loan will have been completed. Till such time when the loan is fully disbursed, pre-EMI interest is payable only on the portion of the loan availed and is calculated at the same rate at which EMI is calculated. For calculating PEMI interest for the month in which the disbursement has been done, the computation would be done on the basis of a year of 365 days. Repayment Plan Generally, the following repayment options would be available to the applicants of HUDCO NIWAS:     Standard repayment plan i.e. Fixed EMI Step up repayment facility (SURF) Step down repayment facility(SDRF) / Future lower installment plan (FLIP) Balloon payment/ Bullet payment

Combination of more than one option may also be allowed. Standard Repayment Plans i.e., Fixed EMI Standard repayment plan can be made available to any applicant who has at least the same years of service left (for salaried employees) for which he has applied for the loan. Under this repayment plan, the EMI would be same for the entire tenure of the loan.


Step Up Repayment Facility (SURF) There are many applicants of younger age who have no savings to support their own contribution to be invested in property or the savings are limited and their incomes are not high as they are in the beginning of their career. In order to facilitate such applicants to obtain a little higher quantum of loan than they would have otherwise obtained by repayment through standard EMI, we can step-up the monthly installment or graduate the monthly installment on the reasonable assumption that their income will go up every year as they progress in their career. We have to assume the maximum 5% as the incremental income for such applicants per annum. Five per cent increment has been decided; as any other percentage of increase will lead to negative amortization i.e. the EMI will not even cover interest on the loan amount in the initial installments. Following conditions are to be satisfied in order to give a step up repayment facility:  Applicant to be salaried employee of a company of repute;  Applicant to be professionally qualified;  Applicant to be around 35 to 40 years of age as this plan is ideally suited only for young applicants who are in beginning of their career and do not have much liability.  First step up at the beginning of 4th year; second step up at the beginning of 8th year and 3rd step-up at the beginning of 11th year is to be given; if necessary to give required loan amount. However, this is not at all mandatory to give all step-ups if only one or two step-up(s) serves the purpose of giving the required loan amount.  The installment to income ratio should not exceed 35% in working out the loan eligibility on his present or projected income. Here is an example to show as to how this step- up or graduated installment facility works. Example : Assume a gross income of Rs.10, 000 at the time of application. Every year we are assuming 5% increment on Rs.10, 000 on a compounding basis. Therefore, his income at the beginning of the fourth year would be Rs.11, 576, at the beginning of the 8th year, it would be Rs.14, 071 and at the beginning of 11th year,


it would be Rs. 16, 289. Let us also assume that the applicant would be able to pay an installment of 35% of his gross monthly income and that the rate of interest is 13.50%.

Therefore, the income and possible repayments would be as under: Income Possible repayments @ 35% Rs. 10,000 for first 36 months Rs. 3,500 Rs. 11 ,576 for next 48 months Rs.4,051 Rs. 14,071 for next 36 months Rs.4,924 Rs. 16,289 for next 60 months Rs. 5, 701. For calculation, we may treat: Rs. 10,000 for full 15 years, for which the loan eligibility would be Rs. 2, 69, 579 Rs. 1576 for last 12 years, for which the loan eligibility would be Rs. 39; 239 Rs. 2495 for last 8 years, for which the loan eligibility would be Rs. 51, 102 Rs. 2218 for last 5 years, for which the loan eligibility would be Rs. 33, 737. Therefore, the total loan eligibility as per above example, works out to Rs.3, 93, 657, say Rs. 3,93,000 as against Rs. 2,69,579 based on standard EMI, i.e. 1.45 times of the loan eligibility based on standard EMI. However, if we draw an amortization schedule of the same, we would observe that there is negative amortization. The EMI of the first month is not even sufficient to cover up the interest portion of the EMI, leave aside the principal. Now, as we are aware that the EMI consists of interest as well as principal, we have to decide such an EMI that covers the entire interest amount in the beginning and a small portion of principal. At 35% IIR, the EMI cannot be more than Rs. 3, 500. If we are assuming an interest of 13.50% p.a., the interest for the first month should not exceed approximately Rs. 3495 to Rs. 3499. Based on this, we have to decide an amount for which the interest for the first month falls within this range. Accordingly, we arrive at a loan amount of Rs. 3, 11, 000, i.e. 1.15 times of the loan eligibility based on standard EMI for which the interest for the first month is Rs. 3, 498 approximately. Hence, lower of the two loan amounts of Rs. 3,93,000 and Rs, 3,11,000 would be the final loan amount that means that the loan amount works out to Rs. 3, 11,00 for which the repayment plan would be as under:Rs. 3, 500 for the first 36 months Rs. 4, 051 for next 48 months Rs. 4, 717 for next 96 months.







8.Role of Banks in Housing Finance
The Reserve Bank of India’s initial efforts to encourage commercial banks in housing finance came in the form of directed credit. This included mandating banks to lend to housing finance intermediaries at the banks’ prime lending rate less 150 basis points and annually allocating 1.5 percent of their incremental deposits in the previous year for housing finance. Overtime, as the Reserve Bank of India made a bid to move away from directed credit, the mandated lending below prime rates to housing finance companies was removed in 1998, though the allocation for housing finance was increased to 3 percent of incremental deposits.

Bank lending under housing comprises three components: direct lending which entails banks themselves extending housing finance loans, indirect lending where banks lend to approved housing finance companies or state housing boards which on-lend for housing finance and lastly, investments in mortgage-backed securities underlying loans securitised by housing finance companies.

Domestic scheduled banks and foreign banks are required to extend a minimum of 40 percent and 32 percent respectively of their net bank credit to the priority sector with sub-targets for lending to various sectors. Priority sector lending inter alia comprises agriculture, small-scale industries, small businesses, retail trade, lending to state sponsored organisations for scheduled castes/tribes and education. It was as late as 1990 when the Reserve Bank of India put housing finance on its list of priority sectors (World Bank, 2004). For a direct housing loan to qualify as priority sector, each loan should not exceed Rs. 1,500,000 (US $33,333) irrespective of whether a house is in a rural, semiurban or urban area. As regards indirect housing finance, each loan should not exceed Rs. 500,000 (US $ 11,111) to qualify for priority sector lending.



It was not till the late 1990’s that banks actively got involved in housing finance. Against the backdrop of lower interest rates, industrial slowdown, sluggish credit off-take and ample liquidity, commercial banks recognised that if they had to maintain their profit margins they needed to shift their focus from the wholesale segment and build their retail portfolios. The lower interest rate regime, rising disposable incomes, relatively stable property prices and fiscal incentives made housing finance an attractive business. Further, housing finance traditionally has been characterised by low nonperforming assets and given the vast demand for housing loans, almost all the major commercial banks plunged into the business of home loans.


The home loan sector in India is the pi-vital role player in the growth of the real estate scenario in India. With tax incentives given to the housing finance sector in the annual budget of 2001, transactions related to buying and selling of residential properties increased considerably and was much higher as compared to previous years.



Since the new class of buyers are relatively younger set of customers who are more aware about legal documentation and approvals, buyers are now more 'end-users' rather than investors; the property market in India undergoes transformation to align itself with global standards with an increased emphasis on quality & cost control and documentation methods. In the current economy of India, the real estate sector has the maximum propensity to generate income and demand for materials, equipment and services. It can be said that housing finance companies were formed for co-existing with buyer's requirements of housing loans for investing in properties. Home loans are made available by financial institutions to both Indian and NRI customers at floating and fixed rate of interest and also at attractive EMI options.

For construction or buying a new home For home repairs and renovations For purchase of plots Against mortgage of property

No tax benefits are available for NRI customers unless you file returns and thereby become eligible to avail of the tax benefits. Besides home loans, commercial property loans are also available and different financial institutions in India provide commercial loans at different rates and different upper limits. Real estate loans are available to builders, promoters and real estate developers. The experience and financial standing of the builders is taken into account before the loan is granted which is to be returned with the minimum installments. Today, the amount of money that a city dweller spends on rent is roughly the same, or only slightly less than the amount he pays as an EMI on a housing loan. Earlier the home loan sector in India was solely dependent on nationalized


and public sector banks, but the entry of public sector banks into the housing finance business marked the beginning of the first round of interest rate cuts. And this reduction in interest rates has enhanced the borrowing power of customers. Moreover, HFCs are offering incentives to attract investors like
   

Some companies sanction the housing loan without requiring you to identify property as a pre-requisite for eligibility Free accident insurance & property insurance Waiving of pre-payment penalty Waiving of processing fee

There are a few documents which the finance companies require for setting up criteria for eligibility of Home loans. Salaried Employee Self-employed

The latest salary slip showing Computation of income for the statutory deductions previous two years, certified by a Chartered Accountant Form 16 (showing tax deducted at Profit & Loss Account and Balance source by employer) Sheet for the previous two years, certified by a Chartered Accountant Proof of age (birth certificate/voter Proof of age (birth certificate/voter identity card/passport/school- identity card/passport/schoolleaving certificate/valid driving leaving certificate/valid driving license license) Proof of residence (phone Proof of residence (phone bill/electricity bill/ration card). bill/electricity bill/ration card).



The realty boom in India has given a new dimension to the finance sector in india- both in Home Loans and Home insurance segments. This has not only given a competitive edge to the finance companies to provide attractive options to customers but has also contributed to the increased investments in the real estate sector. This has resulted in 13 new institutions foraying into the housing finance business in the last three years.

Major Home Loan Providers Banks & Public Sector Housing Finance Companies State Bank of India, Corporation Bank, Punjab National Bank, Central Bank, Dena Bank, Allahabad Bank, Bank of Maharashtra, Bank of Baroda Housing Finance, Can Fin Homes, GIC Housing Finance, LIC Housing Finance, PNB Housing Finance, SBI Home Finance, Centbank Home Finance, HUDCO, LIC, etc. HDFC, ICICI Ltd, Citibank, HSBC, StandardChartered- Grindlays, IDBI Bank, etc

Financial Institutions

Home Loan Interest Rates Interest Rates for Home Loans are undoubtedly the most important parameter to factor into your calculations. And in most cases is the decisive factor for an investor to narrow down on a certain housing finance company's home loan offer. The interest on housing loans in India is usually calculated either on monthly reducing or yearly reducing balance basis.



Comparative Chart on Home Loan Interest Rates Financial Institutions State Bank of India Tenure Rate of Rate (in Interest Fixed Interest years) Floating Up to 5 years 5-20 years ICICI LIC Housing Finance Ltd. 0-20 years 0-20 years 12.25% 10.75% of Processing Charges 0.50% of loan amount -

12.25 %

11.25 %

10.5% 10.5%- 11%

9.5% 9.5%

1% of loan amount 0.5 per cent of the amount (max. Rs. 5000) 1% of the loan amount +applicable service taxes and cess) 1% of loan amount 1% of loan amount -


0-20 years




0-20 years 0-20 years Up to 5 years






Canara Bank



Above 5 11.00% yrs up to 10 yrs




Standard Chartered Bank

0-20 years



1.25 % of loan amount -

Canfin Homes Ltd 0-20 years IndusInd Bank 0-20 years



10.5 % (for <20 9.25 % (for <20 1.25% of loan lakhs) lakhs) 12% (for amount 13% (for >20 >20 lakhs) lakhs) 11 10 -

Saraswat Bank

0-20 years 0-20 years


10 % (< 10 lacs) 9% (< 10 lacs) 0.5 % of loan 10.5% (>10 9.5% (>10 lacs) amount lacs) (Max. Rs.250)

Most HFCs follow the yearly reducing-balance method, which accounts for your principal repayments only at the end of their financial year. Thus, you pay interest on the principal that you have already returned to the HFC. The effective interest rate is thus higher than the quoted interest rate by around 0.7%. Banks and some HFCs, on the other hand follow the daily or monthly reducing-balance method, by which the principal on which you pay interest reduces every month as you pay your EMI resulting in a lower interest burden. Thereby, the EMI for the monthly reducing system is effectively lesser than the yearly reducing system of calculating interest. Moreover, there are two kinds of interest rates for housing finance in India - Fixed rate and Floating rate interests. Some HFC's have fixed rate of interest which means that the interest rates remain unchanged for the entire duration the loan. This basically means that you do not benefit, even if the rates of interest drop in the market while the floating rate interest fluctuates according to the market lending rate. The interest rates may vary from institutions to institutions and generally range from about 12.5% to around 16%. Repayment is in the form of EMI's (equated monthly installments) so, longer the tenure, the more you pay in interest, but your monthly payment will be less. Generally, the maximum tenure of


home loans is 15 years, with a few lenders offering tenure of 20 years or more (ICICI has recently launched a 30 year loan). The longer the tenure, more you pay in total interest, but your monthly payments will be less. So depending on your earning potential and bank balance, you can choose an appropriate tenure. An important requirement of most banks/HFCs is that you pay up the entire loan before you retire. The Housing Finance Companies and the Banks have variable interest rates depending upon the tenure and types of home loans. Though interest rates for housing finance are not very volatile, one may well be advised to look out for indication of any rate increases or decreases prior to finalizing the timing and amount of loan. TYPES OF HOME LOANS A person seeking investments for house or a property opts for Home Loans for a variety of purposes ranging from construction to renovation. The Housing Finance Companies (HFCs) now offer individuals with various alternatives to choose from while buying a home loan. And the availability of Home Loans offered is as varied as their requirements.
          

Home Purchase Loans Home Construction Loans Home Improvement Loans Home Extension Loans Home Conversion Loans Land Purchase Loans Stamp Duty Loans Bridge Loans Balance Transfer Loans Refinance Loans Loans to NRIs

Home Purchase Loans: This is the basic home loan for the purchase of a new home. Home Construction Loans: This loan is available for the construction of a new home on a said property. The documents that are required in such a case are slightly different from


the ones you submit for a normal Housing loan. If you have purchased this plot within a period of one year before you started construction of your house, most HFCs will include the land cost as a component, to value the total cost of the property. In cases where the period from the date of purchase of land to the date of application has exceeded a year, the land cost will not be included in the total cost of property while calculating eligibility. Home Improvement Loans: These loans are given for implementing repair works and renovations in a home that has already been purchased, for external works like structural repairs, waterproofing or internal work like tiling and flooring, plumbing, electrical work, painting, etc. One can avail of such a loan facility of a home improvement loan, after obtaining the requisite approvals from the relevant building authority. Home Extension Loans: An extension loan is one which helps you to meet the expenses of any alteration to the existing building like extension/ modification of an existing home; for example addition of an extra room etc. One can avail of such a loan facility of a Home extension loan after obtaining the requisite approvals from the relevant municipal corporation. Home Conversion Loans: This is 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 prepayment of the previous loan. Land Purchase Loans: This loan is available for purchase of land for both home construction or investment purposes Stamp Duty Loans: This loan is sanctioned to pay the stamp duty amount that needs to be paid on the purchase of property.



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 Loans: Balance Transfer is the transfer of the balance of an existing home loan that you availed at a higher rate of interest (ROI) to either the same HFC or another HFC at the current ROI a lower rate of interest. Re-finance Loans: Refinance loans are taken in case when a loan for your house from a HFI at a particular ROI you have taken drops over the years and you stand to lose. In such cases you may opt to swap your loan. This could be done from either the same HFI or another HFI at the current rates of interest, which is lower.



9.Government Role In home loan
As the Indian real estate market makes an upward swing, and investors opt for housing finance or home loans, tax benefits obtained from them is a lucrative option. Customers availing of Home Loans can claim a certain portion of the interest and principal that they pay towards the loan installments for reducing tax liability. Resident Indians are eligible for certain tax benefits on principal and interest components of a loan under the Income Tax Act, 1961. Moreover, an added tax benefits under Sec 80 C on repayment of principal amount up to Rs. 1,00,000 p.a. can be availed that can further reduce your tax liability by about Rs. 30,000 p.a. Tax benefits can be claimed on both the principal and interest components of the home loan as per the Income Tax Act, 1961. These deductions are available to assesses, who have taken a loan to either buy or build a house, under Section 24(b). Interest on borrowed capital is deductible up to Rs 150,000 if the following conditions are satisfied:
   

Capital is borrowed on or after April 1,1999 for acquiring or constructing a property. The acquisition/construction should be completed within 3 years from the end of the financial year in which capital was borrowed. The person, extending the loan, certifies that such interest is payable in respect of the amount advanced for acquisition or construction of the house A loan for refinance of the principle amount outstanding under an earlier loan taken for such acquisition or construction.

If the conditions stated above are not fulfilled, then the interest on borrowed capital is deductible up to Rs 30,000 though the following conditions have to be satisfied:
 

Capital is borrowed before April1,1999 for purchase, construction, reconstruction repairs or renewal of a house property. Capital should be borrowed on or after April1, 1999 for reconstruction, repairs or renewals of a house property.



If the capital is borrowed on or after April1,1999, but construction is not completed within 3 years from the end of the year, in which capital is borrowed.

In addition to the above, principal repayment of the loan/capital borrowed is eligible for a deduction of up to Rs 100,000 under Section 80C from assessment year 2006-07.

Terms and conditions for availing Tax benefits on Home Loans
1. Tax deductions can be claimed on housing loan interest payments, subject to an upper limit of Rs 150,000 for a financial year. Interest on the fresh loan can be claimed as a deduction, subject o the stated upper limit. 2. An additional loan for extension/addition to the same house and the person's deductions on the existing loan are less than Rs 150,000; he can claim further benefits from the additional loan taken, subject to the upper limit of Rs 150,000 for a financial year. 3. Tax benefits under Section 24 and deduction under section 80C of the Income Tax Act can be claimed only when the payment is made. If a person fails to make EMI payments, he cannot claim tax benefits for the same. 4. According to the Income Tax Act, only the person who has taken the loan can claim tax rebates. 5. The interest on home loans taken for repairs, renewals or reconstruction, also qualifies for the deduction of Rs 150,000. 6. A husband and wife, both of whom are tax-payers with independent income sources, get tax deduction benefits, with respect to the same housing loan; to the extent of the amount of loan taken in their own respective name. 7. If a person buys a house and sells it within the same year/after 3 years, and if any profit is made, then a capital gains tax liability arises on the same for which the individual is liable to pay short-term capital gains tax since the sale took place in the same year. But, if the sale had taken place after 3 years, then a long-term capital gains tax liability would have arisen. 8. If it is proved that the home loan is simply an arrangement between the loanseeker and the builder or with a third party for the purpose of claiming tax benefits, then tax benefits will not be allowed and benefits, previously claimed, will be clubbed to the income and taxed accordingly.



10.RBI Gudelines
1. For what purposes can I seek a first time home loan You can generally seek a first time home loan for buying a house or a flat, renovation, extension and repairs to your existing house. Most banks have a separate policy for those who are going for a second house. Please remember to seek specific clarifications on the above-mentioned issues from your commercial bank. 2. How will your bank decide your home loan eligibility Your bank will assess your repayment capacity while deciding the home loan eligibility. Repayment capacity is based on your monthly disposable / surplus income, (which in turn is based on factors such as total monthly income / surplus less monthly expenses) and other factors like spouse's income, assets, liabilities, stability of income etc. The main concern of the bank is to make sure that you comfortably repay the loan on time and ensure end use. The higher the monthly disposable income, higher will be the amount you will be eligible for loan. Typically a bank assumes that about 55-60 % of your monthly disposable / surplus income is available for repayment of loan. However, some banks calculate the income available for EMI payments based on an individual’s gross income and not on his disposable income. The amount of the loan depends on the tenure of the loan and the rate of interest also as these variables determine your monthly outgo / outflow which in turn depends on your disposable income. Banks generally fix an upper age limit for home loan applicants. 3. What is an EMI You repay the loan in Equated Monthly Installments (EMIs) comprising both principal and interest. Repayment by way of EMI starts from the month following the month in which you take full disbursement. (For understanding how EMI is calculated, please see annex).



4. What documents are generally sought for a loan approval In addition to all legal documents relating to the house being bought, banks will also ask you to submit Identity and Residence Proof, latest salary slip ( authenticated by the employer and self attested for employees ) and Form 16 ( for business persons/ self-employed ) and last 6 months bank statements / Balance Sheet, as applicable . You also need to submit the completed application form along with your photograph. Loan applications form would give a checklist of documents to be attached with the application.Please do discuss and seek more information on any waivers in terms and conditions provided by the commercial bank in this regard. For example some banks insist on submission of Life Insurance Policies of the borrower / guarantor equal to the loan amount assigned in favour of the commercial bank. There are usually amount ceilings for this condition which can also be waived by appropriate authority. Please read the fine print of the bank’s scheme carefully and seek clarifications. 5. What are the different interest rate options offered by banks Banks generally offer either of the following loan options: Floating Rate Home Loans and Fixed Rate Home Loans. For a Fixed Rate Loan, the rate of interest is fixed either for the entire tenure of the loan or a certain part of the tenure of the loan. In case of a pure fixed loan, the EMI due to the bank remains constant. If a bank offers a Loan which is fixed only for a certain period of the tenure of the loan, please try to elicit information from the bank whether the rates may be raised after the period (reset clause). You may try to negotiate a lock-in that should include the rate that you have agreed upon initially and the period the lock-in lasts. Hence, the EMI of a fixed rate loan is known in advance. This is the cash outflow that can be planned for at the outset of the loan. If the inflation and the interest rate in the economy move up over the years, a fixed EMI is attractively stagnant and is easier to plan for. However, if you have fixed EMI, any reduction in interest rates in the market, will not benefit you. Determinants of floating rate: The EMI of a floating rate loan changes with changes in market interest rates. If market rates increase, your repayment increases. When rates fall, your dues also fall. The floating interest rate is made up of two parts: the index and the spread. The index is a measure of interest rates generally (based on say, government securities prices), and the spread is an extra amount that the banker adds to cover credit risk, profit mark-up etc. The amount of the spread may differ


from one lender to another, but it is usually constant over the life of the loan. If the index rate moves up, so does your interest rate in most circumstances and you will have to pay a higher EMI. Conversely, if the interest rate moves down, your EMI amount should be lowe Also, sometimes banks make some adjustments so that your EMI remains constant. In such cases, when a lender increases the floating interest rate, the tenure of the loan is increased (and EMI kept constant). Some lenders also base their floating rates on their Benchmark Prime Lending Rates (BPLR). You should ask what index will be used for setting the floating rate, how it has generally fluctuated in the past, and where it is published/disclosed. However, the past fluctuation of any index is not a guarantee for its future behavior. Flexibility in EMI: Some banks also offer their customers flexible repayment options. Here the EMIs are unequal. In step-up loans, the EMI is low initially and increases as years roll by (balloon repayment). In step-down loans, EMI is high initially and decreases as years roll by. Step-up option is convenient for borrowers who are in the beginning of their careers. Step-down loan option is useful for borrowers who are close to their retirement years and currently make good money. 6. What is monthly reducing balances method? Borrowers benefit more from a loan that's calculated on a monthly reducing basis than on an annual basis. In case of monthly resets, interest is calculated on the outstanding principal balance for that month. The principal paid is deducted from the opening principal outstanding balance to arrive at the opening principal for the next month and interest is computed on the new, reduced principal outstanding. In case of annual resets, principal paid is adjusted only at the end of the year. Hence, you continue to pay interest on a portion of the principal that has been paid back to the lender. 7. How does tenure affect cost of loan? The longer the tenure of the loan, the lesser will be your monthly EMI outflow. Shorter tenures mean greater EMI burden, but your loan is repaid faster. If you have a short-term cash flow mismatch, your bank may increase the tenure of


the loan, and your EMI burden comes down. But longer tenures mean payment of larger interest towards the loan and make it more expensive.

An amortization schedule This is a table that gives details of the periodic principal and interest payments on a loan and the amount outstanding at any point of time. It also shows the gradual decrease of the loan balance until it reaches zero. Pre-EMI interest Sometimes loan is disbursed in installments, depending on the stages of completion of the housing project. Pending final disbursement, you may be required to pay interest only on the portion of the loan disbursed. This interest called pre-EMI interest. Pre-EMI interest is payable every month from the date of each disbursement up to the date of commencement of EMI. However, many banks offer a special facility whereby customers can choose the installments they wish to pay for under construction properties till the time the property is ready for possession. Anything paid over and above the interest by the customer goes towards Principal repayment. The customer benefits by starting EMI payment earlier and hence repays the loan faster. Please check with your banker whether this facility is available before availing of the loan. Security will you have to provide The security for a housing loan is typically a first mortgage of the property, normally by way of deposit of title deeds. Banks also sometimes ask for other collateral security as may be necessary. Some banks insist on margin / down payment (borrowers contribution to the creation of an asset) to be maintained / made also.Collateral security assigned to your bank could be life insurance policies, the surrender value of which is set at a certain percentage to the loan amount, guarantees from solvent guarantors, pledge of shares/ securities and investments like KVP/ NSC etc. that are acceptable to your banker. Banks would also require you to ensure that the title to the property is free from any encumbrance. (i.e., there should not be any existing mortgage, loan or litigation, which is likely to affect the title to the property adversely).



Strategy in dealing with the banks Give yourself comfortable time. Do not hurry your purchase or loan in any case. Shopping around for a home loan will help you to get the best financing deal. Shopping, comparing, seeking clarification and negotiating with banks may save you thousands of rupees. a) Obtain information from several banks Home loans are available from mainly two types of lenders--commercial banks and housing finance companies. Different lenders may quote you different rates of interest and other terms and conditions, so you should contact several lenders to make sure you’re getting the best value for money. Find out how much of a down payment you are required to pay, and find out all the costs involved in the loan (including processing fees, administrative charges and prepayment charges levied by banks). Knowing just the amount of the EMI or the interest rate is not good enough. Similarly, ask for information on loan amount, loan term, and type of loan (fixed or floating) so that you can compare the information and take an informed decision. The following is some important information that you will require. i) Rates Ask your lender about its current home loan interest rates and whether the rate is fixed or floating. Remember that when interest rates in the economy go up so does the floating rates and hence the monthly re-payment.If the rate quoted is a floating rate, ask how your rate and loan payment will vary, including the extent to which your loan payment will be reduced when rates go down by a certain percentage. Ask your lender to what index your floating home loan is referenced / linked and the periodicity of updation of that index. Also ask your bank whether the index is internal or external and how and where it is published. ii) Reset Clause Check the reset clause, especially in the case of fixed interest rate loan as the rates will not be fixed throughout the tenure of the loan.


iii) Spread/Mark up Check if the margin in the case of the floating rate is fixed or variable. The rate of interest you have to pay will vary accordingly. iv) Fees A home loan often requires payment of various fees, such as loan origination or processing charges, administrative charges, documentation, late payment, changing the loan tenure, switching to different loan package during the loan tenure, restructuring of loan, changing from fixed to floating interest rate loan and vice versa, legal fee, technical inspection fee, recurring annual service fee, document retrieval charges and pre-payment charges, if you want to prepay the loan. Every lender should be able to give you an estimate of its fees. Many of these fees are negotiable / can be waived also. Ask what each fee includes. Sometimes several components are lumped into one fee. Ask for an explanation of any fee you do not understand. Also, remember that most of these fees are perhaps negotiable! Do negotiate with your bank before agreeing to a particular fee. See how the all inclusive rate compares with the all inclusive rates offered by other banks. While planning your finances, don't forget to include the costs of stamp duty and registration. v) Down Payments / Margin Some lenders require 20/30 percent of the home’s purchase price as a down payment from you. However, many lenders also offer loans that require less than 20/30 percent down payment, sometimes as little as 5 percent .Ask about the lender’s requirements for a down payment and also negotiate with him to reduce the down payments. b) Obtain the best deal Once you know what each bank has to offer in terms of rates, fees and down payments, negotiate for the best deal. Ask the lender to write down all the costs associated with the loan. Then ask if the bank will waive or reduce one or more of its fees or agree to a lower rate. Do make sure that the bank is not agreeing to lower one fee while raising another or to lower the rate while raising the fees. Ask for clarification in case you do not understand any particular term. All banks are obliged to explain the most important terms and conditions of the home loan in


detail.Once you are satisfied with the terms you have negotiated, written offer letter from the lender and keep a copy with you. Read the offer letter carefully before signing. Can you repay your loan ahead of schedule? Is pre-payment of loan allowed Yes, most banks allow you to repay the loan ahead of schedule by making lump sum payments. However, many banks charge early repayment penalties up to 2-3% of the principal amount outstanding. Prepayment penalty may vary according to the reasons and source of funds - if you obtain a loan from another bank for prepayment the charges are usually higher than when you pay from your own sources. However, you may credit more than your EMI amount into your loan account on a periodic basis and bring down your interest burden as and when funds are available with you. Most banks do not charge a pre-payment penalty if you deposit more than your EMI payable on a periodic basis. Please check such stipulations while availing the loan. Switch over charges/ balances transfer charges When other banks reduce the interest rate, you may prefer to close your account with the bank with whom you are banking, to avail of the loan from the bank offering reduced rates of interest. You have to pay pre-payment charges for doing so. In order to ensure that their customers do not approach other banks for availing reduced interest rates, banks allow customers to switch over from a higher interest loan to a lower interest loan by paying a switch over fees which is lesser than the pre-payment charges. Generally switchover fee is taken as percentage of the outstanding loan amount. Keep up-dating yourself on various changes in the home loan market. Visit the branch, discuss with the officials to get the best out of any changes in the home loan scenario. Get a tax benefit on the loan Yes. Resident Indians are eligible for certain tax benefits on both principal and interest components of a loan under the Income Tax Act, 1961. Under the current laws, you are entitled to an income tax rebate for interest repayment up to Rs. 1,50,000 /- per annum. Moreover, you can get added tax benefits under Section 80 C on repayment of principal amount up to Rs. 1,00,000 /- per annum.



Minimum standards that banks are required to follow when they sell you a home loan a. At the time of sourcing the loan, banks are required to provide information about the interest rate applicable, the fees / charges and any other matter which affects your interest and the same are usually furnished in the product brochure of the banks. Complete transparency is mandatory. b. The banks will supply you authenticated copies of all the loan documents executed by you at their cost along with a copy each of all enclosures quoted in the loan document on request. REVERSE MORTGAGE LOAN What is reverse mortgage loan? What is my eligibility and how I will get back the title deeds The scheme of reverse mortgage has been introduced recently for the benefit of senior citizens owning a house but having inadequate income to meet their needs. Some important features of reverse mortgage are:

A homeowner who is above 60 years of age is eligible for reverse mortgage loan. It allows him to turn the equity in his home into one lump sum or periodic payments mutually agreed by the borrower and the banker. The property should be clear from encumbrances and should have clear title of the borrower. NO REPAYMENT is required as long as the borrower lives, Borrower should pay all taxes relating to the house and maintain the property as his primary residence. The amount of loan is based on several factors: borrower’s age, value of the property, current interest rates and the specific plan chosen. Generally speaking, the higher the age, higher the value of the home, the more money is available. The valuation of the residential property is done at periodic intervals and it shall be clearly specified to the borrowers upfront. The banks shall have the option to revise the periodic / lump sum amount at such frequency or intervals based on revaluation of property.



Married couples will be eligible as joint borrowers for financial assistance. In such a case, the age criteria for the couple would be at the discretion of the lending institution, subject to at least one of them being above 60 years of age. The loan shall become due and payable only when the last surviving borrower dies or would like to sell the home, or permanently moves out. On death of the home owner, the legal heirs have the choice of keeping or selling the house. If they decide to sell the house, the proceeds of the sale would be used to repay the mortgage, with the remainder going to the heirs. As per the scheme formulated by National Housing Bank (NHB), the maximum period of the loan period is 15 years. The residual life of the property should be at least 20 years. Where the borrower lives longer than 15 years, periodic payments will not be made by lender. However, the borrower can continue to occupy.

This part is fine printed to help you practice reading the fine print. The loan agreement documentation runs into nearly 50 pages and its language is complex. If you thought everyone signs the same agreements with the bank, where is the need to read? You are not taking an informed decision. If you thought somebody would have pointed this to me if there was any problem, then maybe they did but you could not read or listen to it. Think again! Borrowers' and lenders' rights may not be expressed clearly in a transparent manner in all the loan agreements. The home loan agreement may not be provided to you in advance so that this could be read and understood before you sign the agreement. Every method may be used to delay handing over a copy to the borrower in sufficient time. Some areas you may focus are a) check the ―reset clause‖ incorporated by some banks in their home loan agreements that allows them to change the interest rate in the future, even on fixed rate loans. Banks may set their reset clauses for 3 or 2 year intervals. They say a lender cannot have an agreement that a fixed rate is set for the entire tenure of 15 to 20 years as this will cause an asset-liability mismatch. Talk to your bank. b) Please seek clarifications on the term ―exceptional circumstances‖ (if stated in the loan agreement) under which loan rates can be unilaterally changed by your bank. c) A common person thinks that default ideally means non-payment of one or more loan installments. In some loan documentation it can include divorce and death (in individual case) and even involvement in civil litigation or criminal offence. d)


Does the loan agreement say that disbursement of the loan may be made directly to the builder or developer and in the case of a ready-built property to the vendor thereof and/or in such other manner as may be decided solely by bank? It is the borrower whose original property papers are retained with the bank, so why disburse to the builder. Possession of property has been delayed in some cases when the cheque was issued in the name of the builder and the builder refused to pay delay penalty to the borrower e) Does the agreement enable assignment of your loan to a third party? You take into account reputation and credibility of the bank before entering into a loan agreement with it. Are you comfortable with third party takes over or should you also be allowed to move your home loan from one bank to another in that case? Look for ambiguous clauses and discuss with the banker. Some agreements say changes in employment etc. have to be informed well in advance without quantifying the term ―well in advance‖. f) In one case the loan documentation says ―issuance of pre-approval letter should not be construed as a commitment by the bank to grant the housing loan and processing fees is not re-fundable even if the home loan is not processed‖. This is never ending it seems. The above are only indicative instances of what has been observed / reported/ indicated by various sources. However, our main objective was to get you into the habit of reading the fine print. If you have read this, you would have understood the importance of reading fine print in any document and we have achieved our objective. I only wish I could have made the print smaller as in the real cases.



We have study in Housing finance has come of age in India. Today , over 20 major housing finance Companies have a mortgage loan Portfolio of over Rs.100 billion The total flow of funds for housing from all major Institutions, including the Insurance companies and provident funds, is estimated to be about Rs 194 billion over the period 1992-97.

The housing industry is being Viewed as an engine of economic growth with a major role to play in the distribution of economic resources, with recent developments in the financial sector, there is need in the country to think carefully on the overall direction of reform in the housing finance sector, focusing on expansion of financial intermediation, development of secondary mortgage markets, down marketing of housing finance on market-based terms, and overhaul Of the legal and regulatory System.




www.altavita.com , Establishment of housing finance

www.msn.com , Housing Finance Companies

www.google.com , all information related to search




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