Home Loan from 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.

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