Home loans – A primer

By Pradeep Yuvaraj | March 22, 2014

Home construction loans are used to finance for the construction of newly acquired home or if you are planning to build a home. But, with so many home construction loans available in the Indian market you should decide the best one that would suit you the most and is favorable to you.

There are different types of home loans tailored to meet one’s needs. The most important thing is one should know each and every term related to Home Loans before applying for a loan. It is always advisable to consult a home loan expert or financial consultant before applying for a home loan or purchasing a property.

You can take different types of home loans like Home construction Loans, Mortgage Loans, Home Extension Loans, Home Improvement Loans, Bridge Loans, Land Purchase Loans etc for different schemes available in the market.

  • Home Purchase Loans: These are the basic forms of home loans used for purchasing of a new home.
  • Home Improvement Loans: These loans are given for implementing repair works, healing and renovations in a home that has already been purchased.
  • Home Construction Loans: These loans are available for the construction of a new home.
  • Home Extension Loans: These loans are given for expanding or extending an existing home. For eg: addition of an extra room, etc.
  • Home Conversion Loans: These loans are 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 home conversion loan, the existing loan is transferred to the new home including the extra amount required, eliminating the need of pre-payment of the previous loan.
  • Land Purchase Loans: These loans are available for purchasing land for construction purposes. But there are some strict rules related to this loan, though, as earlier many investors has used this loan for leveraging their investments and then selling the land in a short time.
  • Bridge Loans: A short-term loan that is used until a person or company secures permanent financing or removes an existing obligation. The loans are short-term (up to one year) with relatively high interest rates and are backed by some form of collateral such as real estate or inventory.

What are Home Improvement Loans?

Home improvement loans are used to finance improvements and add on to the existing set of credentials of beauty on your owned house, recently purchased property or rented accommodation. Home improvement loans are used to maintain or enhance the value of your house.

In general it includes: repairs, remodeling, energy savings related items (permanent in nature), repairs, a new kitchen, a new bathroom, terrace, an extension or general property improvements. Many improvements in landscape and even swimming pools are nowadays considered to be a part of home improvement.

What are Home Construction Loans?

Home construction loans are used to finance for the construction of newly acquired home or if you are planning to build a home. But, with so many home construction loans available in the Indian market you should decide the best one that would suit you most and most favorable to you.

What is Bridge Loan?

A short-term loan that is used until a person or company secures permanent financing or removes an existing obligation. This type of financing allows the user to meet current obligations by providing immediate cash flow. Bank of Baroda has introduced the ‘Bridge Loan’ for top rated corporate clients against expected equity flows/issues. Bank can also extend bridge loans against the expected proceeds of Non-Convertible Debentures, Global Depository Receipts and funds in the nature of Foreign Direct Investments, provided the borrowing company has already made firm arrangements for raising the aforesaid resources/funds. This facility would be available for a period not exceeding 12 months.

What are Home Extension Loans?

Home extension loans are used by customers to get loans from the banks to extend their houses, by adding more rooms, kitchens, wash rooms, terraces, or any other rooms for your growing family. It may also be used to enclose open balcony/terrace space, or constructing a Puja ghar. Home extension loan thus falls under the category of Home loans. The difference between home extension loan and home improvement loans is decreasing in the Indian market.

Maximum Amount of Home Extension Loans:

Banks generally offers about 70-85% of the total amount of home extension as loan. The amount of loan sanctioned also depends on a number of factors such as the age of the applicant at the time of loan; tenure of the loan; repayment capacity of the borrower; his/her credit history, etc.

What are Mortgage Loans?

Mortgage loans (Home Equity Loans) helps customer to en-cash the market value of the property by taking a loan by mortgaging the property. So, Home equity loans are availed by customers, who wish to mortgage his/her property to the bank for taking some loan for some other purpose. Then, it’s up to the bank’s discretion to consider the market value of the property and accordingly decide how much to pay to the customer.

Both the residential as well as non residential property can be considered for the approval of the loan, provided the mortgager is a licensed title holder and the land is free form any kind of dispute.

Home equity loans don’t restrict one to use the loan money in specific ways. It might also be used in marriage, higher education, medical expenses, etc. However care should be taken that it should not be used in any illegal or speculative purposes.

Conditions of Home Equity Loans:

  • Applicants: An individual or someone with joint account can apply for the Home equity loans. However the co-applicants need not be co owners of the property.
  • Amount of Loan: About 60-65% of the actual value of the property can be had from the bank in the form of loan, which may go as high as a few crores for commercial and residential property and its repayment period may range from 10 to 15 years, depending on individual bank’s policies.
  • Types of Interest: The rate of interest in the home equity loans can both be fixed as well as floating, according to the requirement of the customer. Banks now-a-days however are preferring the floating rate loans, as their risk is lesser with these loans.

What are Land Purchase Loans?

Land Purchase loans are used by customers who wish to purchase a plot of land for commercial or residential purpose. Everyone has his/her dream perfectly sketched in his souls and so is his ambition to get his house erected on the exact location he dreamt that to be.

Loans that are strictly for land purchase can be as scarce as good residential plots. While many lending firms around the nation compete to provide mortgages for the purchase of a house on a lot, only few institutions typically will be interested in lending for an empty plot.

Eligibility:
21 Years and above having regular income is applicable.

Maximum Loan:
85 % of the cost of the plot and is also based on the repayment capacity of the customer.

Maximum Term:
15 years, this of course takes into consideration your retirement age.

Terms for the Loan:

  • You can purchase your land, then take your time building your home (typical limits set here are that the work has to start in about 3 months and the construction has to be finished within 12 to 24 months)
  • Separate loans will also be available to construct the house. Some banks will sanction the loan for the plot based on the complete project (land + building). So the building approval also will need to be given at the time of applying for the land loan itself.

Disadvantage(s):

  • Land loans can carry higher interest rates and bigger down payments than conventional mortgage loans, to reflect the increased risk.

Documents Required by Banks for the Approval of Most Home loans:

Salaried customers:

  1. Application form with photograph
  2. Identification and Residence proof
  3. Latest salary slip
  4. Form16 or Last Income Tax Returns
  5. Last 6 months / One Year’s bank’s statement
  6. Processing fee cheque

Businessman/ Self employed professional:

  • Application form with photograph
  • Educational qualification
  • Identity and residence proof
  • Proof of business existence with business profile and last 3 year’s income tax returns
  • Last 3 years income statement and balance sheet.
  • Last 3 month’s / 6 month’s personal and business bank statements.
  • Processing fee cheque

Summary

This article has explained the different types of housing loan products available in the market and also the eligibility and documents that you will require to approve the loan from the financial institutions.

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About Pradeep Yuvaraj

Pradeep Yuvaraj is a Co-Founder and Director at Finerva Financial Solutions Private Limited, a financial education company focused on personal finance education. He has penned over 250 articles relating to Personal Finance and clocked over 500 hours of educating individuals on managing personal finance. He is a serial entrepreneur and has been associated with 7 Start-ups. His entrepreneurial experience spans industries as varied as Education, Gas Engineering, Automobile Design, Software development and more recently a Pure play presentation design company. Prior to turning entrepreneur in 2005, he has worked for 3 of the top ten companies of the world - Shell, ExxonMobil and Total SA. This experience included handling Branch Operations, Channel Sales and Business Development across 5 states over a period of 8 years. He holds an MBA from Symbiosis and an Electronics Engineering Degree from the University of Pune.

2 thoughts on “Home loans – A primer

  1. Geeta tamatta

    Thank you so much for explaining regarding different types of loan. This will definitely help me .

    Regards.

    Reply

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