This article is written by Yash Bagra, a student of Institute of Law, Nirma University.
Real estate sector is the second largest employer in India. The contribution of Indian real estate sector to India`s GDP is approx 6.3%. Funding for real estate projects can be done in multiple ways like through banks, Non-banking financial institutions, or via External commercial borrowings (ECBs). Real Estate is India’s rapidly developing business segment and multiple financial institutions including banking and non banking are offering Loans for New Construction. Loans & Advances are extended to the Promoters/Developers of real estate who are well-known and established in their area of work at least for a period of two to four years.
Finances are given to builders who have a good repute in the market and have an excellent track record of his past projects and are managed in a highly professional manner. It is necessary on their part to have an experience of at least three years in this field and must have completed two to three projects before availing the finance. The last audited balance sheet should show a satisfactory financial position of the builders/promoters. Commercial viability and sufficient cash generation to repay the loan will affect the financing for the project.
A Builder/Promoter is required to make a project report before approaching Banks or any other financial institutions for finance purposes. In project report he is supposed to include following information:
- Details of the project cost and means of finance.
- Profitability statement.
- Annual Cash Budget for the duration of the loan showing monthly/quarterly cash inflows of the specific project along with repayment schedule.
- Audited financial statements for the last 3 years, the current year’s estimate and projections for next 3 years or till the completion of the project.
- Original Title Deed of the land, detailed estimate of the proposed construction from a Chartered Engineer/Architect and permission from the competent authority of the property in case it is falling under Urban Land Ceiling Act.
- Documents like non-encumbrance certificate, certified copy of renew/Municipal receipts, Lawyer’s opinion on ownership and marketable title and sanctioned plan.
- The Bank should enter in to a legally vetted tripartite agreement with promoter and buyer that should ensure among other covenants adherence to National Building Code (NBC).
Quantum of Loan
The quantum of advance depends on a number of factors like financial status, repaying capacity, tenure of the loan etc.
(a) Primary: The primary security will be the building which is being constructed and also the land on which it is constructed. The amount of Bank finance should be adequately covered by the value of primary security.
(b) Collateral: Collateral in the form of equitable/registered mortgage of other land and building of adequate value of promoter/ guarantor may be taken. There has to be 25% (minimum) Margin between the amount of loan and collateral property. Constructed site should be fully insured against fire, riots and other damages according to Bank’s clause.
Processing & Up-Front Fees
- Processing fees: There will be processing fees depending upon the loan type and amount. This fee differs from banks to banks and other financial institutions.
- There will be upfront fee on loan amount sanctioned.
Delivery of Credit
The credit/quasi credit requirement of a Builder by way of cash credit/short term loans/overdraft linked to each specific project for a maximum period covering the period of construction plus 12 months will be considered on merit. Loan amount is not given to the builder/promoter in lump sum manner, the extension of loan will be in phases depending upon the progress of work as certified by Chartered Engineer/Architects.
Repayment is to be made in pre decided installments after completion of the project and sale of the flats as decided earlier. It is prohibited to use sales realizations of one Project in another Project. Loan amount has to be paid before and then builder can use the left amount in other projects.
Home loan procedure for general Public
With the increasing competition in the market for offering Home Loans, the otherwise tedious process of availing loans has gone a tremendous change in the recent years. However, there is still some process involved in the procurement of Home loan. It is advisable for you to first look at the different stages required for obtaining a Home Loan. The followings are the step by step procedure of getting home loan:
Step 1: Application form: Initial step involved in applying for housing loan is the procurement of application form from the HFC (Housing Finance Companies) of choice. The Performa of application of every HFC is different from the other but the information to be furnished is same up to 80% of the total information to be provided. Necessary documents like address proof, age proof, proof of income, bank balance etc. are also to be attached with the application form before it is submitted to the HFC. HFCs also ask for processing fee of the home loan that varies 0.25% to 0.50% of the total loan amount with the application.
Step 2: Personal Discussion: When the application form is filled successfully and is submitted to the authority, the next step is a face to face conversation with HFC or Bank where the person has applied for the home loan. The submitted papers are evaluated by the bank first and then it calls the applicant for the personal discussion regarding the loan she/he has applied for. It is advisable to carry all the original documents of whose copy have been submitted along with the application.
Step 3: Field Investigation: Now field investigation is done by the HFC or banks. Representatives are sent by them to the existing residence of the applicants or their offices so that validation of submitted documents can be done. Through this banks establish trust between them and their customers.
Step 4: Credit appraisal by the bank and loan sanction: This is the most important stage of the loan process as it is the make or break stage of the process. The bank or HFC here establishes repayment ability based on applicant`s age, qualifications, employer, experience, income, nature of business etc. to access applicant`s credential. The bank has power to refuse any loan application if it finds discrepancy at any stage. However, if all the procedure and formalities goes according to the required conditions formulated between the parties then the bank or HFC sanctions the loan which might be unconditional or with some conditions imposed.
Step 5: Offer Letter: After the Home Loan is sanctioned, the applicant receives offer letter from the bank or HFC with the following details:
- General terms and conditions of the loan
- Loan amount
- Rate of Interest
- Tenure of the loan
- Mode of repayment
- Special conditions, if any
The applicant has to sign the duplicate copy of the offer letter if the terms and conditions are agreed and then it is to be submitted to the Bank or HEC.
Step 6: Submission of legal documents & legal check: Now bank or the HFC demands for the Legal documents of the land or property for which home loan is applied for. All the legal documents of the land or property concerned have to be properly submitted. The bank makes all the legal checks of the land or property. All the documents need to be with the bank until repayment of the Home loan is done.
Step 7: Technical / Valuation check: Then technical valuation of the property is done by the banks or HFC. The officials of the bank go and inspect the site that has to be purchased by the applicant and they value it as per the existing rules and regulations. The most important aspect that the bank considers before financing any property is the valuation of the property so it is done very carefully and with due care.
Step 8: Property documents Registration: After the legal and technical valuation of the property, now the documents have to be registered and stamped by the lawyer or notary public, and it has to be cleared by them accordingly.
Step 9: Submitting post-dated cheques and signing of agreement: Now, The final agreement of the loan has to be signed. After the signing of the agreement number of Post dated cheques are to be submitted as agreed on the agreement paper.
Step 10: Disbursement: Finally, It`s time for the Disbursement of the Housing Loan. When it is ensured that financing the property is safe and no risk is involved, the final amount is given however, the mode of payment varies from full to part payment. If the property is under construction the mode so followed is part payment and if the property is in a state of ready possession amount given is full and final.
In Loan application several documents are required, list of required documents are as follows:
Supporting Documents required for availing a loan:
- Application form should be duly filled with the signature of all the applicant`s.
- Passport size photograph of each of the applicant.
- Age proof and residence proof. The documents which could be submitted for the same are: Passport, Driving License, Election ID, PAN Card, Ration card, Utility bill.
- Personal Guarantee of two individuals with comparable income and age along-with proof of residence & identity slip.
- Photocopies of updated bank statements of all the applicants for the last six months of both the operating account.
- Agreement to Sale and Purchase for an purchase of Built up house
- Allotment letter, Receipt of Payment made, Buyer’s Agreement, NOC for an co-operative group or Housing Society
- Registered Title Deed of the property on which an house is to be constructed, Approved Map from competent authority, detailed construction estimate from Govt. approved agency for Construction purpose.
For Salaried Individuals:
- Salary slip / Certificate with deductions
- Form No: 16
- Bank statement for last six months.
For Self Employed Individuals:
- Last three years profit and loss accounts and balance sheets for self employed and/or business class.
- Last three years income tax returns for both self employed and business class.
- Bank statement for the last six months of the operating business account.