This document provides an overview of housing finance in India. It discusses the role and purpose of housing finance systems, different types of housing loans (such as conventional, FHA, VA, fixed rate, adjustable rate, and non-qualifying loans), institutions that offer housing finance (banks, HUDCO, LICHFL, etc.), the process for obtaining housing finance, income tax implications, reverse mortgages, and RBI guidelines and prudential norms for non-banking financial companies. The essential functions of any housing finance system are to channel funds from investors to home buyers.

1. Housing finance
Module 3

2. Housing Finance: Role, Types of housing loans,
Institutions and banks offering Housing Finance,
Procedure and Interest rates. Income Tax
Implication. Reverse mortgage loan Non-Banking
Finance Companies: Types, Growth, Functions,
RBI Guidelines, Prudential Norms.

3. Housing Finance
Housing Finance:
Housing finance brings together complex and multi-
sector issues that are driven by constantly changing
local features, such as a country’s legal environment or
culture, economic makeup, regulatory environment, or
political system
The purpose of a housing finance system is to provide
the funds which home-buyers need to purchase their
homes. This is a simple objective, and the number of
ways in which it can be achieved is limited.
Notwithstanding this basic simplicity, in a number of
countries, largely as a result of government action, very
complicated housing finance systems have been
developed. However, the essential feature of any
system, that is, the ability to channel the funds of
investors to those purchasing their homes, must remain

4. Types of housing finance
Conventional Loans
Conventional loans usually are more lenient with
respect to the appraisal and condition of the
property. If you are purchasing a "fixer-upper", you
may need to use a conventional loan. Also,
expensive homes above the FHA loan limit are
generally financed with conventional loans.
FHA Loans
FHA Loans are insured by the Federal Housing
Administration.They usually require less down
payment than conventional loans and are easier to
qualify for.

5.  VA Loans
VA Loans are guarenteed by the Veterans
Administration. A veteran must have served 180 days
active service. VA loans can be done with a zero
down payment.
 Fixed Rate Loans
Fixed Rate Loans have one interest rate which is
fixed for the entire term of the loan.
 Adjustable Rate Mortgages
Adjustable rate mortgages have an interest rate that
is adjusted at certain intervals based on a specific
index. Some ARM programs fix the interest rate for an
initial period of two to five years, and adjust the rate
thereafter at pre-determined intervals.

6.  Non-Qualifying Loans
Non-qualifying loans are pre-existing loans which
can be assumed by a buyer from the seller of a
property. Without going through the qualifying
process, the buyer pays the seller for his/her
equity and then starts making payments

7. Types of Home Loans
The Home Loans that are available in the market
have different criteria to avail. They also have
number of segments that are categorized according
to varied demand of the market – different home
loans for different requirements. The following is the
list of different types of Home Loans you can avail
from the market:

8.  Home Purchase Loans
 Home Construction Loans
 Home Improvement Loans
 Home Extension Loans
 Home Conversion Loans
 Land Purchase Loans
 Stamp Duty Loans
 Bridge Loans
 Balance Transfer Loans
 Refinance Loans
 Loans to NRIs

9. Home Purchase Loans:
Home Purchase Loans are the basic home loan you
can opt for purchasing new home. This type of Home
Loan is offered by all kinds of Banks and HFCs.
Home Construction Loans:
Home Construction Loans are especially meant for the
construction of a new home. Formality of availing this
loan has a little different from the normal Housing Loan.
The plot on which the construction is being erected is
purchased within a period of one year, the cost of the
plot is then also included as the component for the
valuation of total cost of the property. But in case the
date of purchase exceeds one year to the date of
application the above condition is not applicable.

10.  Home Extension Loans:
Home Extension Loans is offered for meeting the
operating cost of alteration to an existing building.
Extension here means addition of an extra room
etc.
Home Conversion Loans:
Home Conversion Loans are offered to those who
want finance for the purchase of another home by
converting the already existing home and on
which loan is already sanctioned. Through this
loan, the existing loan is transferred to the new
home including the extra amount required and
there is no need for pre-payment of the previous
loan.

11. Land Purchase Loans:
Land Purchase Loans can be availed for purchasing land for both home
construction as well as investment purposes.
Stamp Duty Loans:
Stamp Duty Loans is offered for the payment of stamp duty in the
transaction of the property.
Bridge Loans:
Bridge Loans are offered for selling the existing home and purchasing of
another. The bridge loan assists in the finance of new home, until a buyer
is found for the old home.
Balance-Transfer Loans:
Balance Transfer of the loan is the transfer of the balance of an existing
home loan at a higher rate of interest (ROI) to either the same company or
another.

12. Re-finance Loans:
Refinance loans are availed when a loan from an
organization at a particular ROI is dropping leading
to a loss. Then the option of swap of the loan can
be availed. One can avail this from either the same
HFI or other at the current rates of interest.
NRI Home Loans:
NRI Home Loans are meant for Non-Resident
Indians who wish to build or buy a home or property
in India.

39. Institutions offering housing finance
 Housing and urban development corporation of
India (HUDCO)
 LIC housing finance limited (LICHFL)
 General Insurance Corporation Housing Finance
limited
 Diwan housing finance corporation limited
 Can fin homes limited.

40. Banks offering housing finance
 Scheduled commercial banks
 Scheduled cooperative banks
 Regional rural banks
 Agriculture and rural development banks
 Housing development Finance corporation
 State bank of India Home finance

41. Income tax implication
 Under the income tax act 1961, the indian residents are
eligible for the tax benefits and on principal and interest
components of the loan.
 Tax on principal portion of home loan: under section 80c
of the income tax act, principal on home loan is treated as
an investment. People can get an exemption upto Rs 1lac
across all their investment , in case their housing loan
principal repayment is more than a Lac they do not require
to save under any other category in order to avail tax
deduction.
 Tax savings on home loan interest: tax benefits on home
loan interest are independent and are covered under
section 24l of the income tax act.
 The interest component on home loan is treated as an
expense under the head of income from house property in
the income tax return.
Reference:
Financial Markets and service- Shashi K.Gupta.

42. Reverse Mortgage
 A reverse mortgage or a lifetime mortgage is a
loan available to senior citizens. Reverse
Mortgage is a home loan product designed for the
senior citizens by converting their fixed asset their
home or in banking terms their equity in any
house property into an income channel without
having to liquidate his equity in case of any
requirement.
 Applicant needs to have 100% equity in his
property . He should be more than 60 years and
his wife is a co applicant and she should be more
than 58 years of the age.
 In return of the house property pledged , the
borrower gets a lump sum amount or periodic

43. Procedure for housing finance
 Application form
 Personal discussion with concerned person
 Bank’s filed investigation
 Credit appraisal by the bank and loan sanction
 Offer letter -loan amount, rate of interest, mode of
repayment
 Submission of legal documents and legal check
 Technical/valuation check
 Registration of property documents
 Signing of agreements and submitting postdated
cheques.
 Disbursement of the home loan.

58. RBI guidelines and prudential norms
The below are some of the norms applicable to
NBFC’s :
 Capital adequacy ratio: the prescribed minimum
capital ratio consisting of Tier 1 and Tier 2 capital
is 10% compared to 12% for NBFC’S by March
13,2009 and 15% by March 31,2010
 Concentration of credit /investment: while the
stipulations relating to the concentration of the
credit /investment are substantially the same, a
NBFC is permitted to seek an appropriate
dispensation consistent with the spirit of the
exposure limit in the prescribed ceiling