AN INTRODUCTION

Housing is a primary human need next in importance only to

food and clothing. A first priority for a youngster who begins life
is therefore to plan for a house. This takes precedence over
other household expenditure and creature needs. Housing,
however, is a major expenditure and cannot be funded out of a
family's normal monthly income or savings. The prospective
homeowner must look for a loan substantial in size and so
structured that he can repay it over a longer period of time, in
many cases almost one's entire working life.

Loan is offered to a borrower to purchase or build a new house

on the basis of his/her eligibility and the bank's lending rules.
One of the important basic human needs is shelter. House is the
ultimate dream of every middle-class family. Government gave
encouragement for house finance subsidiaries by offering
number of tax concessions to individuals. With the overall
encouragement given to this sector, a number of players
entered in housing finance.

One of the most important benefits of taking a home loan is the

interest rate that is allowed on the home loan. Fixed and
variable interest rate options are also available for home loans.
Many financiers also offer home improvement loans at the
same interest rate as they offer the home loans.
 A THEORETICAL VIEW-

HOME LOAN

The section 5 (b) of the Banking Regulation Act 1949 defines

Banking as," Accepting for the purpose of lending or
investment of deposits of money from the public, repayable
on demand or otherwise and withdrawable by cheque, draft
or otherwise."

A "home loan" is a credit to a consumer for the purchase

or transformation of the private immovable property he
owns or aims to acquire secured either by a mortgage on
immovable property or by a surety commonly used in a
Member State for that purpose."

A home loan requires you to pledge your home as the lender's

security for repayment of your loan. The lender agrees to
hold the title or deed to your property until you have paid
back your loan plus interest. In simple words a home loan is
a fund or the loan which the buyer has taken from any
financial institution or bank to purchase a new home at an
agreed rate of interest specified during the contract.

Home loan is the finance borrowed from a bank or financial

institution to buy or modify a residential real estate property.
Any Resident or Non-resident individual who is planning to
buy a house in India can apply for a Home loan. If you have
decided

to buy a property in the near future you can even apply for a
loan before you select your property.

SCHEMES OF HOME LOANS:

1) Home loans for construction of new house / flat, purchase

of old house/ flat, etc.:

Initially, lenders approved a home loan for family/own

residence only. After gaining experience and more
importantly to be competitive, lenders now approve loans
even when the applicant has more than one house or
flat/apartment. Today there is no general restriction on the
number of houses owned by an individual. The only
stipulation is that the home loan funds should not be used for
commercial purposes.

2) Home extension loan:

These loans are given for expanding or extending an existing

home. These are some of the instances for which you could
take an Extension Loan.

• To construct an additional room or floor by getting

additional FSI granted.
• Using grills or sliding windows to enclose the balcony.
• Construction of a garden or garage in the building vicinity.

3) Home improvement loan:

Home improvement loans for repairs /renovation including

waterproof, plumbing, compound wall, digging of well/tube-
well, flooring/tiling, additions like built-in cupboards
/shelves, internal repairs including replacing doors/windows,
etc. A loan for purchase of household furniture including
space-saving furniture (kitchen racks, cupboards, etc.) may
also be sanctioned as a home improvement loan.

4) Home loan for purchase of housing site:

Here again, initially many banks did not approve such loans.
However, market forces have now made this a universal
feature of the home loan market. However, care has been
taken in structuring the schemes for avoiding financing for
purchase of land for speculative lotion purposes.

5) Home equity loans:

A home equity loan (sometimes abbreviated HEL) is a type of

loan in which the borrower uses the equity in their home as
collateral. These loans are sometimes useful to help finance
major home repairs, medical bills or college education. A
home equity loan creates a lien against the borrower's house,
and reduces actual home equity.
 Home loans
for
construction
of new house
/ flat

Home
Home equity
extension
loans
loan
SCHEMES
OF HOME
LOAN

Home loan
Home
for purchase
improvement
of housing
loan
site
 Rate of Interest:

The lender decides the rate of interest chargeable on the

home loan, taking the following into consideration:

1. Cost of funds:

The cost of funds is different for each lender, depending upon

the mix of liabilities, liability-raising costs (based on the
image of the bank in the market) and with different costs in
different maturity buckets.

2. Tenor of the loan:

Generally, banks have borrowed funds with maturities up to

5 years, and some capital fund surpluses, which may be
available for allocation to home loan assets.

3. Capital allocation costs:

Banks are required to allocate capital based on the risk
weight of each class of asset taken on to the balance sheet.

4. Costs of administering the specific scheme.

5. Swap costs, other funding costs

6. Profit margin

7. Tenure of the loan is an important factor in pricing the

loan

8. Special considerations like group lending, which may

bring down the administration or monitoring costs.

9. Competition:
The lender may have to levy interest at market rates, even if
his cost-plus margin is higher than competition.

SECURITY:
1) A simple registered mortgage or equitable mortgage on
 the property acquired out of the loan is taken as security.
This is the primary security for the loan.

2) In case of flats of a group housing society, tripartite

agreement shall be entered into.

3) In case of jointly owned properties, it should be ensured

that all the co-owners and co - Applicants execute the
documents.

STEPS INVOLVED IN GETTING HOME LOAN:

STEP 1:
Submit an Application form along with relevant
documents:

The finance company will process customer’s application to

check the loan eligibility based on the persons income and

personal profile. Usually an up front (non –refundable fee) of

about 0.5-1% of the loan amount must be paid before
processing begins.

STEP 2:
Verification of the property and supporting documents:
(Usually takes 5-7 working days after Step1)

A company representative may visit the property as well as

the residence to vary information submitted in the persons
application form. Further, a property valuation maybe
carried out by the company to determine the maximum
amount they are willing to lend you. Any references
submitted by the person in the Application Form may also be
contacted. The person may be personally interviewed and
any further clarifications in the documents submitted maybe
sought.

STEP 3:
Sanction of the loan:
(Usually on the 7th working days after Step 1

A sanction letter is issued which the customer will have to

sign. This letter will contain the amount and the terms of the
loan. Some companies specify the period for which the loan
sanction is valid. The person will have to pay a Commitment
fee (normally 1% of the unutilized loan amount) if you do not
draw on the entire sanctioned amount before that period.

STEP 4:
Submission of the original Property documents and signing
the loan
Agreement
(Usually on the 8-10th working days after Step 1)

The customer will be required to leave the title deed of the

property with the company as a security for the loan. He will
be required to go to the company’s office to execute the legal
loan papers.

STEP 5:
Disbursal of the Loan Cheque
(Usually on the 10 –15 working days after Step 1)
The person can draw the loan in parts depending on the
stage of construction of the building. Until such time that the
entire sanctioned amount is NOT drawn, you will pay a
simple interest on the Actual Amount drawn (without any
principal repayments). The EMI payments will commence
only after the entire Sanctioned Loan Amount is drawn.

EQUATED MONTHLY INSTALLMENTS (EMI):

The monthly repayment by the applicant is related to his

cash flow. There is an element of interest and of principal in
the monthly payments. The interest payable over the period
of the loan is calculated and added to the loan amount to
arrive at the total payable amount. this amount, divide by the
total number of monthly installments is called equated
monthly installment (EMI).

CHARGES IN HOME LOAN:

Acquiring a Home Loan doesn’t only involve the cost of home

loan interest rates but it also includes other charges & fee
accompanying at various stages of taking the Home loan.
You must consider all these charges while comparing the cost
structure across banks. Following is the detailed fee structure
incurred by banks at different loan stages:

• Processing Charge:

It is a fee payable at the time of submitting the loan

application to the bank which is normally non-refundable.
The fee ranges between 0.5 per cent and 1 per cent of the
loan amount.

• Administrative Fee:

It is a fee incurred by banks at the time of loan sanction; there

are few banks who have removed this fee so you must check
it with all the banks.

• Prepayment Penalties:
When the borrower pre-pays the loan before the loan tenure,
banks charge a penalty which usually varies between 1 per
cent

and 2 per cent of the pre-paid amount.

• Legal Charges:

Banks also incur some charges from the customer for legal
and technical verification of the property.

• Delayed payment Charges:

When there is a delay in the payment of your EMI, banks

charge a late payment fee from the borrower which normally
ranges from 2% to 3% of the EMI.

• Cheque bounce charges:

Banks charge between Rs. 250 and Rs. 500 for every bounced
cheque towards the loan payment because of lack of funds
in your account.

POINTS CONSIDERED BY BANK WHILE GRANTING HOME

LOAN:

The borrower’s eligibility of getting a home loan depend

upon his/her repayment capacity & the banks establish this
repayment capacity by considering various factors such
income, spouse's income, age, number of dependents
qualifications,

assets, liabilities, stability and continuity of occupation and

savings history.

IMPORTANT POINTERS IN HOME LOAN:

• Increase your Loan eligibility

• Credit History:
Your chances of getting a home loan are increased if you
have a good credit history which is known by banks by
checking the borrower’s Cibil score. Now it is very hard to get
a loan from another bank when you already have a bad debt
with one bank.

• Clubbing of income:

Your eligibility to take a home loan will augment when you

club your income with your spouse’s income, bank in this case
will calculate your eligibility on the basis of the clubbed
income of both the applicants. You can club incomes of
spouse, children & parents staying with you and having
regular income.

• Enhance your loan tenure:

Longer is the loan tenure, lower will be the EMIs which

further increases the repayment capacity of the borrower &
in turn enhances the loan eligibility.
• Step-up Loan:

In this type of loan EMI's remain low in the beginning &

increase gradually as and when the borrower’s spending
power increases. Therefore lower EMI's in the initial years
enhances the borrower’s ability to pay & further increases
the loan eligibility

• Increase the down payment:

You must know that in a home loan bank finances only 85 to

90% for the property & the rest amount has to be funded by
the borrower. You should increase the down payment if you
have more than required amount which will mitigate your
debt considerably.

TAX BENEFITS IN HOME LOAN:

Past record:
The home loan borrower enjoys Tax Benefits on both Interest
paid & the Principal re-paid. Under Section 24(d) of Income
Tax, the deduction of interest payable on the home loan is up
to a maximum of Rs. 1, 50,000.

Under Section 80(c) of Income Tax, Principal amount for the

repayment of loan along with other savings & investments is
eligible for tax deduction up to a
Maximum limit of Rs. 1, 00,000.

Recent changes:

According to the new policy changes of the direct tax code

bill introduced in the parliament in the month of august 2010
only upto Rs 1.5 lakh deduction is allowed on the interest
paid on the housing loan and there is no deduction available
on the principal amount. So if your equated monthly
installment is Rs 1.50 lakh, comprising interest and principal
outgo of RS 75000 each, you can avail deduction of only the
interest.
 CONCLUSION

The home loan market in India has grown at a rapid and

alarming rate of over 40% over the period of the last four
years. And from the reports from some of the industry
experts, it is evident that there is very little chance that there
will be any significant decline in growth rates in the future.
Therefore it becomes important at this point in time to
examine the key factors that have been instrumental in
triggering this high growth period. There are several reasons
that can be considered as having attributed to the growth of
the home loan market. On the demand side, the first and the
most important factor for the growth has been faster rise in
incomes as compared to property prices, thus making
housing more affordable.
Most of the housing finance companies in India have
introduced several new home loan products in order to meet
the needs of a wide variety of customers. The various home
loan schemes have their different interest rates in the
market. The customer can choose those schemes which he
feels is good for him and have the capacity to repay it on that
specified time period. If unwavering liability is what suits your
profile, then fixed interest rate home loan should be the
natural choice. On the other hand,

if you can handle risks and are willing to go the extra mile to
benefit from any further fall in interest rates, floating rate
home loans will be best suited for you.