1. Higher Loan to Value Ratio: 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 a person is 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, 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, he avail loan from a bank, he have to pool in Rs 26 from his pocket and his effective loan to value ratio is 75.47%.
Considering, he 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 he can avail Home Loan of 80% of Rs 106 i.e. Rs 84.8. In this case, he have to pool only Rs 21.2 from my pocket. For simplicity purpose, he 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 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. It is 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. Seen cases wherein people 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 people 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. Always 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. It is always suggest buying a property with min 40% self-contribution.
Source-secondary
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