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Home Loan from Housing Finance Company

Housing Finance Company
Housing Finance Company

Home Loan from Housing Finance Company, Regular readers of my website must be confused. I always suggest my readers to avail Home Loan from banks like State Bank of India, ICICI Bank, Axis Bank etc. The main reason is benchmark rate for calculation of Interest Rate. On the service front, almost everyone is at par i.e. below average :). Home Loan of Housing Finance Company is linked to benchmark rate known as BPLR / RPLR / PLR whereas Home Loan of a bank is linked to Base Rate. Base Rate is more transparent & beneficial for a borrower in a long run. I explained it in my post, Floating Home Loan : BPLR vs Base Rate. For the benefit of 1st-time visitors, In India some of the leading Housing Finance Company are HDFC Ltd, LIC Housing Finance, Indiabulls, DHFL etc.

Recently, i was going through one of the research reports on Home Loan Market Share. I observed that in last 10 years, the market share of Housing Finance Company or HFC’s is increasing. It increased from around 27%  to 38%. I was wondering what can be the possible reason. The borrower has financial relation with banks therefore they trust banks more compared to Housing Finance Company. Another stupid but valid reason which came to my mind was that Home Loan from HDFC Ltd is commonly mistaken as Home Loan from HDFC Bank. Moreover, HFC’s outnumber banks, I was able to think of few more reasons, but then i paused and decided to write about this with a free mind.

Over a period of few days, i was able to compile logical and pragmatic reasons which drive borrower to avail Home Loan from Housing Finance Company. Most of these factors are related to flexibility, marketing and convenience. The financial flexibility is because a Housing Finance Company is not governed by the Reserve Bank of India therefore they need not follow strict financial compliance process. The cost of funds for Housing Finance Company is high because they don’t have CASA deposits like banks & they raise funds on their own. Because of the high cost of funds, there is a huge pressure to redeploy the funds asap through Home Loan. NHB, which regulate Housing Finance Company is an almost non-existent regulator. Another reason is that the business model of a Housing Finance Company is PUSH based that is they have a more aggressive sales team to get business compared to banks. The only exception is HDFC Ltd as by default it gets leads from HDFC Bank for Home Loan. On the other hand, banks because of wider reach get business on their own i.e. PULL based. The potential borrower himself approach the bank to avail the Home Loan. These reasons are more from a business perspective. Let’s check customer’s perspective

Reasons for Home Loan from Housing Finance Company

1. Higher Loan to Value Ratio: In my opinion this is the biggest plus point for a Housing Finance Company. As HFC is not governed by RBI therefore they can include stamp duty and registration charges towards the cost of the property. Let’s understand from an example if i am buying a property worth Rs 100. The stamp duty and registration cost of the property are Rs 6 i.e. 6% (Average). In this case, my total cost of the property is Rs 106. Depending on my Home Loan Eligibility, Bank will approve LTV of 80% on Rs 100 i.e. Rs 80 as bank will not include Rs 6 towards the cost of a property. In short, if i avail loan from a bank, i have to pool in Rs 26 from my pocket and my effective loan to value ratio is 75.47%.

Considering, i avail Home Loan from Housing Finance Company. In this case cost of property for Home Loan will be considered as Rs 106 and Loan to Value ratio of 80% effectively means that i can avail Home Loan of 80% of Rs 106 i.e. Rs 84.8. In this case, i have to pool only Rs 21.2 from my pocket. For simplicity purpose, i explained with an example of Rs 100 but it will be substantial amount considering the High Value of Home Loan. To summarize, Own contribution in case of Home Loan from Housing Finance Company is lower compared to bank thus higher home loan value.

2. Tie up with builders: Builders also deserve equal credit for the success of Housing Finance Company. It’s a win-win situation for both the parties as HFC’s offer higher commission to builders, are bit lenient on the legal process and most importantly, offer subvention schemes. Banks cannot offer subvention schemes due to strict RBI guidelines. Builders push loan from HFC very hard especially small  builders. USP is Pre Approved Project, therefore, minimum documentation and hassle free processing. Buyer is not able to understand the disadvantages of this trap. Builders de-sell, banks or Home loan providers who have not approved his project. As a thumb rule, you should never invest in a project which is not approved by at least 5-6 Home Loan Providers including 2-3 Banks. Buyers fail to understand that HFC’s are very lenient on Legal Check process therefore they have to be careful. Any project which is not approved by any of the banks and only by HFC/s is a big NO. The strategy of the builder is to get the project pre-approved at the time of launch and then there is a large scale deviation from approved layout plan. Banks don’t approve such projects.

3. Higher Home Loan Eligibility: A Housing Finance Company is a bit lenient in fixing the Home Loan Eligibility depending on the income, liabilities, risk assessment etc. As i mentioned there is high pressure to re-deploy the funds due to high cost. Moreover, they have to compete with big boys. As a thumb rule, you can expect 10% more Home Loan Eligibility through Housing Finance Company compared to Banks. It’s a big incentive for the borrower as it means less burden on their pocket.

4. Self Employed & Businessmen: In India, we suffer from the colonial mindset of being a Servant. In Hindi, Private Job is called “Naukri” and though we don’t like but an employee is “Naukar”. We prefer “Naukri” over entrepreneurship because of steady income. The same mindset is a roadblock at the time of availing loan. It is very difficult for self-employed and small businessman to avail Home Loan. Loan requirements are stringent compared to Salaried class. At the same time, Housing Finance Company is a bit lenient in terms of calculation and consideration towards business income of non-salaried class. I observed that non-salaried class i.e. self-employed and small businessman prefers Housing Finance Company for Home Loan requirement.

5. Low weightage to CIBIL Score: A Housing Finance Company especially small HFC’s are lenient on CIBIL score consideration. I have seen cases wherein my clients with CIBIL Score of 700 received Home Loan approval. Whereas with banks score of less than 775 means end of the dream to own a house. This point is very subjective and depends on case to case basis. There is no general rule, but normally HFC’s are also bit lenient on CIBIL Score requirement. The only word of caution is that Many of my clients with low CIBIL score paid a commission of 5% – 10% of Home Loan value to DSA to get Home Loan approved. It’s an unethical practice. Please note that DSA’s of HFC’s take undue advantage of the borrowers. They can’t influence even 0.1% of Home Loan Process. I always suggest my clients to deal with a responsible employee of Bank / Housing Finance Company to process Home Loan. You may utilize the services of DSA only for the operational part.

To summarize, Selection between Bank and Housing Finance Company is a sort of prisoner’s dilemma. By being lenient on Home Loan process, a Housing Finance Company is doing more harm to a borrower than good. Whereas borrower perceive it otherwise. Because of this reason, you may observe that Home Loan default is more common among HFC’s Borrower compared to Big banks. Risk Assessment of a borrower should be non-negotiable. From borrower’s perspective, it better that Loan is rejected at initial stages instead of EMI default at later stages. I always suggest buying a property with min 40% self-contribution.

Copyright © Nitin Bhatia. All Rights Reserved.

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Raj
Raj
9 years ago

I guess the point number 1 is no longer valid. Last week, I got a mail from my builder regarding a circular sent to HFCs by NHB. It has instructed HFCs not to fund the SD & registration cost in home loans, as this will have an impact on LTV ( Loan to Value ratio). As per the HFC’s this would be applicable with immediate effect & for all the cases which has got sanctioned but not disbursed.

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Raj

If you have copy of this letter, can u please mail me at info@nitinbhatia.in

I could not find any such details on NHB site.

GISR
GISR
9 years ago

Hi Nitin,

I am planing to take one BMRDA aproved plot in bangalore. They are saying LIC, HDFC and Axis banks are giving loans for that site. I asked for SBI and they are saying now if you want to go for SBI they will take 2 to 3 months time to aprove and we don’t have that much time to regsiter, please choose among these 3 banks for loan.

In among these 3 , whcih is preferable LIC, HDFC and Axis and can please explain me why it is better ? Which one will do legal verification strongly ?

We can say that if we get loans from banks for a property then that will be having clear titles or still some deputes we can expect ?

Please help me in this regards,
GISR

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  GISR

You may opt for Axis Bank. In this case, legal verification has no meaning as LICHFL, HDFC Ltd and Axis Bank must have done legal verification sometime back. Assuming legal verification was done 1 year back therefore if you avail loan today from either of these three then you carry risk of any legal development in last 1 year.

I suggest you to avail loan from SBI even if it will take time..Be assured, it will not take 2-3 months but it may take max 1 month. Seller is only discouraging you to avail Loan from SBI.

GISR
GISR
9 years ago
Reply to  Nitin Bhatia

Thanks for your quick reply. Your postings are really helpful for many people.

1) We can say that if we get loans from banks for a property then that will be having clear titles or still some deputes we can expect ?

2) As they have done this verification 1 year back, Will they again do verify legal now or will they take it as granted ? Anyway they are collecting legal verification charges by us right.

3) This is BMRDA approved plot and the plot which I selected is not yet released by concerned authority, the developer is expecting that this will happen this week.

4) My Plot is survey number : 40 and my friend’s is also in it. All the plots under one survey number will come under same legal opinion right ?

5) Can you please explain in what areas axis bank is better than LICHFL and HDFC Ltd ?

6) Why Seller is discouraging yo avail loan in SBI (is there any special reason like legal issues) or he is only thinking sbi will be delayed in disburting the amount ? how can we convince him.

Thanks & Regards,
GISR.

GISR
GISR
9 years ago
Reply to  GISR

One more thing is the seller is land developer and it has total around 500 plots. They are saying only few (20 to 30) are left. Why we need to take that much risk to go with SBI/ICICI and again providing all the documents and all that is headache for us. Anyway this approved by all these remaining banks you can go with these banks and we were able to sold almost all plots without SBI/ICICI also. Like this they are claiming. is it valid or not ? How can I proceed now ? without SBI can I proceed or try for SBI only ?

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  GISR

This is marketing and pressure tactics..Real Estate market is in very bad shape…If he is claiming that he has sold almost 470 plots then either he has sold at very heavy discounts or he is presenting wrongs facts. Secondly, as i always suggest to opt for projects which are approved by min 5-6 Home Loan providers including 2-3 banks.

GISR
GISR
9 years ago
Reply to  Nitin Bhatia

Thank a ton sir for your valuable suggestions.

1) Do I need to go for legal verification after release the plot or I can Do it now itself?

2) For this developer this is phase-3 in the same layout, he is saying phase-1 and phase-2 sold very long back. In Phase-3 also he is only showing some of the plots in availability list. I inquired one person who has taken the released plot in phase-3 , he told he has taken this plot 7 months back that time 1200/per sqft. Now I am taking other plot for 1350 per sqft.

3) May be he is using pressure tactics, how can we handle this ? As of now Axisbank, HDFC Ltd and LICHFL are already approved. I forced him to get laon from SBI and others, he is not encouraging as way I explained earlier. Is it safe to go with this project or not ? Your suggestions will help me a lot.

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  GISR

1. After release
2 & 3. As i have not checked project documents therefore cannot comment whether you should go ahead or not.

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  GISR

1. I have already answered. Legal verification should be done at the time of purchase which in your case Axis, LICHFL and HDFC will not do.
2. It will not be done again
3. Hope you are aware that recently one of the BDA site in Banashankari is declared illegal. If this site is not released then builder cannot claim that it is BMRDA approved plot till approval is received. I suggest to wait till approval is received
4. Thats correct but subject to certain conditions and approved layout plan
5. Please check my posts on Home Loan
6. Legal check of SBI is most stringent and it is difficult to get project approved from SBI. From buyer’s perspective, it is good.

GISR
GISR
9 years ago
Reply to  Nitin Bhatia

If I go with Axis which one is preferable on land loan (fixed or floating or 3 years fixed then floating)?

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  GISR

Floating only

Raj
Raj
9 years ago

Hi Nitin,

I am planning to buy a floor in Gurgaon. Market value is around 1 cr. Registry value is 50 L as per circle rate. I came to know HDFC/ICICI banks do give loans upto 140% of registry value or 80% of market value which ever is less. My eligibility is not an issue. I want to avail loan amount of 70 L (as 140% of 50 L). Mathematically figures are in range but I am not sure what legal docs I have to produce to obtain loan amount of 70 L.

Bank told me I have to furnish a renovation estimate from a contractor/architect in addition to “Agreement to Sell”. That renovation estimate is from a contractor stating the excess amount required. Kindly let me know how much amount should i show in the renovation estimate. And do I have to submit the bills related to renovation after the loan amount got sanctioned?

Pls advice me.
Raj

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Raj

I am not sure why bank is asking for renovation estimate. It seems bank is processing your loan in 2 parts i.e. Home Loan and Home Improvement Loan. Which imply, market value of Property is lower. Also interest rate on Home Improvement Loan is higher than Home Loan.

Raj
Raj
9 years ago
Reply to  Nitin Bhatia

I am not sure if they are processing it as 2 loans. They told me I will get 2 checks 90% value i.e. 45 L on party name and another 25 L on my name that I can use any way. I have an agreement to sell that states property consideration value as 50 L. I like to know what documentation is required to avail loan of 140% on registry value when actual property value is much higher as in most cases.

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Raj

It seems your loan is processed in 2 parts. You may check with bank for more clarity.

Deepak
Deepak
9 years ago

I was took home loan from hdfc bank, now I want to prepay full amount and close my loan. so how much amount payable to bank and can I do this payment through NEFT or online without visit a Bank.
my account information as follows
Thanking You

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Deepak

You may ask for Loan closure statement from HDFC Ltd. You can pay through cheque/DD at HDFC Ltd Branch.

GISR
GISR
9 years ago

Hi Nitin,

If we take a loan for under construction property (flat), which type of loan is preferable ? Pre-EMI or Full EMI ? or is there any best other options. I am planning to take a home loan from SBI. Please suggest to which type loan repayment option I can opt.

Thanks for your suggestions.

Indra.

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  GISR

You may opt for Pre-EMI option

kapil kumar
kapil kumar
9 years ago

Hi Sir,
I have certain queries with regard to my loan with LIC HFL. I took a loan of Rs. 23,70, 0000 (ROI 10.10% fixed for 2 years) in January and are paying EMI or Rs. 23,059/-.
Now, I got married and planning to get my wife included as co-applicant in the said loan to diminish the tenure from 20 years to 10 years as a result of which the EMI can be enhanced and principal amount can be repaid faster . i knew that my wife will not get any tax benefit. LIC has denied to take my wife as co-applicant. LIC has recommended that you can enhance your EMI based upon your salary. However, my salary has not increased yet. Therefore, i want to club my wife’s salary to pay the home loan faster.
I discussed and explored the possibility for taking home loan transfer @ 9.9% from ICICI and HDFC, they are ready to take my wife as co-aplicant and provide loan for 10 years tenure.
However, there are charges @ 2% for closure of the loan account.
Given the scenario, i request your help to opt for the best option.
Best regards,
Kapil

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  kapil kumar

I suggest you to wait till Jan’17 when your Home Loan will shift from Fixed to floating interest then you can include your wife as a Home Loan Co-applicant through Home Loan Transfer. 2% Prepayment is not financially beneficial for you.

kapil kumar
kapil kumar
9 years ago
Reply to  Nitin Bhatia

Dear Sir,
Many thanks for your prompt reply.
I appreciate your comments. I discussed the possibility to enhance my EMI with LICHFL, they agree to the same without inclusion my wife as co-applicant. The official said that as per the process, your EMI can be enhanced upto Rs. 28,000/- per month. Consequently, the tenure would also reduced to 13 years.
Please let me know if I can go with the enhanced EMI. Can enhanced EMI save my money.

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  kapil kumar

You may go ahead. It will help to save interest.

kapil kumar
kapil kumar
7 years ago
Reply to  Nitin Bhatia

Hi Sir,

My fixed rate interest period (ROI – 10.10%) is to expire on Jan, 2017 from LICHFL.

I request you to suggest me the best available options for balance transfer which is beneficial for me for now and in long run. From your posts, I noticed that you prefer SBI, ICICI or Axis, which one best suits me. I believe SBI will not provide me loan amounting to Rs. 22 lacs since registration amount of property is Rs. 16 lacs in papers. Please suggest. I will be guided by your instructions.

Best regards,
Kapil

Karthikeyan N
Karthikeyan N
9 years ago

Hello Sir,

I am planning to purchase a land and construct a house at Hosur. The land comes outside municipal/Corporation limits of Hosur. It has panchayat/local authority approval. The engineer has tie up with India Bulls, DHFL for loans. The plan is to go for plot + construction, composite loan. Which is good to opt for? Are the land legal checks will be performed properly done here?

Is it a good idea to obtain a loan from here at initial stage and transfer it to Banks? Otherwise get a plot loan here and obtain a home loan from Banks will take care of land verifications?

Please provide your valuable suggestions.

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Karthikeyan N

I suggest you to hire a lawyer for title search. In my opinion, for such cases banks will not provide loan because of high risk. You cannot avail plot loan and home loan separately from 2 different institutions. You can only avail Composite loan from single loan provider.

Rahul
Rahul
9 years ago

Hello Nitin Sir,

I have taken Home loan of 20 lacs for 25 yeras, from LIC HFL in April-2013.
interest rate was 10.25% flat for two years (festive offer), Now after 2 years floating rate of interest applied 12% and also EMI increased.

to get reduced rate of 10.5%, LIC asking me to pay 0.5% and service tax (approx Rs.11500 of my o/s amount)

And for home loan transfer, processing fee for HDFC is approx rs.21000 ( will get 9.8% of rate of interest )

which will be more beneficial? (my salary not eligible to get loan of 19 lac by SBI)

Also in which bank / HFC should I transfer loan ?

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Rahul

You may transfer to ICICI Bank or HDFC.

Parishekh Garg
Parishekh Garg
9 years ago

Hi Sir,
I read through your article which is a eye-opener for me.
Currently I have booked at property at Dehradun and as per builder it is approved by PNBHFL and the builder is insisting on taking loan from PNBHFL only.

Kindly help me to understand if I want to take loan from banks like SBI/Axis/HDFC what is the procedure for the same ? Can I myself approach to banks if I have a copy of Project Approval letter from PNBHFL ?

Regards,
Parishekh

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Parishekh Garg

You can directly approach the bank for home loan.

Rajendra Patro
Rajendra Patro
8 years ago

Nitin, Thanks for sharing very valuable tips for the investors. All your articles are truly very educating. I in the process of buying a new flat in Hyderabad. While I have shortlisted a property by Prestige, I am yet to decide on the home loan provider. I am considering HDFC, ICICI and SBI as these have approved the property already. I am opting for pre-emi waiver for two years. After going through your articles, what I considered as advantages, now seems to be my big risks. After 20% margin payment, I am asked to pay 24 equal installments over 4 years, not linked to construction. Strangely, the banks have approved the property and offering home loans in the builder terms.

If RBI has regulations on construction linked disbursement, how come SBI and ICICI Bank are not following the rules for this project. Prestige is a reputed builder no doubt, but can it get away with not following the norms?

Picking HDFC vs ICICI vs SBI is becoming a tough choice for me. While HDFC and ICICI are offering door step service and I don’t have to run around or take leave from office to process documents, SBI might not offer me this luxury. The floating interest rates I am offered are almost same with ICICI and HDFC at 9.85%. SBI comes a bit lower at 9.7%. I like to know which one is more transparent and fair in passing benefits of future lower interest rates to its customers? Further, which one gives better experience for pre-payment and conversions to lower interest regimes in future?

Appreciate your suggestions.

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Rajendra Patro

As i have not seen details therefore cannot comment how such scheme can be provided. Considering the scenario, ICICI Banks seems to be better choice.

wings of fire
wings of fire
8 years ago

Hello Sir, I select a house for buying but to get home loan from Sbi bank the house must be on Vastu land , which is not .The owner is trying to convert the land to vastu,but according to him it takes time.In the mean time if any person ready to buy the house without vastu,he will sell that. For this I am worried. Now a DSA told me that he will arrangement loan from SBI or any national Bank, but demand 1% value of sanctioned home loan. What can I do now? Is it OK to give him(DSA) money or I will wait? Thank you.

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  wings of fire

It is bribe and you should not fall in this trap. Let the seller sell if he finds a buyer. You can wait till the requirement of SBI for home loan is met. Buyer is only putting a pressure on you to close the deal asap.

wings of fire
wings of fire
8 years ago
Reply to  Nitin Bhatia

Thank you for suggestion.

Niiki
Niiki
7 years ago

HI Nitin

Ruparel Builder is offering subvention plan 5:90:5 for their new project in dadar east /Ruparel Elavia that Builder will pay the Pre EMI’s until possession ,How realistic is this promise considering the property is in the heart of Mumbai and promised possession date is Dec 2018 .

The Subvention scheme is through L&T Home finance , Please advise if this deal can be considered or not .

kapil kumar
kapil kumar
7 years ago

Hi Sir,

My fixed rate interest period (ROI – 10.10%) is to expire on Jan, 2017 from LICHFL.

I request you to suggest me the best available options for balance transfer which is beneficial for me for now and in long run. From your posts, I noticed that you prefer SBI, ICICI or Axis, which one best suits me. I believe SBI will not provide me loan amounting to Rs. 22 lacs since registration amount of property is Rs. 16 lacs in papers. Please suggest. I will be guided by your instructions.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  kapil kumar

You may check with ICICI Bank if SBI is not willing to lend.

kapil kumar
kapil kumar
7 years ago
Reply to  Nitin Bhatia

I checked with SBI, they have taken documents from me for balance transfer.

I also checked with LICHFL for reduction in my interest rate, LICHFL are agree to shift my ROI to 9.00 by paying a nominal fee of Rs. 1000 + ST. On the other hand, SBI is lending @8.55%. LIC will provide only one reduction in the interest rate.

What you suggest would be the better option keeping in mind that SBI will charge processing fee, legal and valuation fee of approx. 13000/-.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  kapil kumar

It requires financial calculation. Prima facie it seems that you can retain your home loan with LICHFL. In future, if the difference increases then you may transfer to SBI.

kapil kumar
kapil kumar
7 years ago
Reply to  Nitin Bhatia

Dear Sir, thanks you for your advice and suggestion.

Do you believe that the lending rates will be further decreased during this year? I would be highly obliged for this act of kindness.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  kapil kumar

Yes. Lending rates may decrease but downside is limited.

kapil kumar
kapil kumar
7 years ago
Reply to  Nitin Bhatia

Thank you sir for your advice.

What do you mean by “downside is limited”. Is there any limitation on the interest rate? what would be rate cut and when? Will RBI mandated any interest limitation.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  kapil kumar

There is NO limitation but i think banks will not reduce further.

Nitin Bhatia
Nitin Bhatia
7 years ago

I will prefer to go ahead with the banks like SBI, ICICI Bank or Axis Bank.

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