Own-contribution for home purchase & complexities around it
When a home loan buyer is looking for a home loan to buy a property, self contribution becomes a tricky area. Here is some information you should not miss.
"How much money will I need to pay from my pocket to get a Home Loan?".....This is a common question that we hear from almost all the potential borrowers. This is irrespective of whether he has money or not, whether he is buying a Rs 25 Lakh worth home or Rs 25 crore. Let us understand this own contribution element in detail. I will be glad to answer more queries. A.What is own contribution (OC)? Also known as self contribution, OC is one of the most important factors in all home loan transactions. All lenders require the borrower to pay a certain percentage of the property cost from their own source of funds first, so that the commitment is established. This equity contribution by the borrower is determined through the money receipts issued by the builder/seller and, some smart lenders also require the bank statement of the borrower as a supporting document where they look at the debits happening, without which it can be a mere 'understanding' between the parties which defeats the purpose. This amount is the 'own-contribution' and these receipts are called margin money receipts (MMR) or more popularly, own contribution receipts (OCR). B.How much should be the minimum own contribution? Recently, both RBI and NHB have specified the OC amount for different amounts of borrowings. The purpose is to avoid bad debts and to engage the borrower in the property at a higher level than that was earlier. One could easily get a 90% funding on the basis cost plus the stamp duty and registration in 2008, but that is all changed now. For priority sector funding, the margin money can be as low as 10%, for loan between Rs 25-75 Lakh it is 20% and for loans above Rs 75 Lakh the requirement increases to 25%; thus making the LTV (Loan to Value ratio) as 90%, 80% and 75% respectively. Stamp duty and registration costs are not funded anymore as they don't enhance the value and is merely an acquisition cost. C.What if I fall short of my own funds? If you fall short of your own funds, there are two options broadly available: (a) you have to wait for the disbursement of loan until you can arrange for the balance, or (b) opt for a parallel funding scheme, if the lender has the product. In a nutshell, the parallel funding is defined as a proportion of funding which is same as the proportion in which the borrower releases his OC, subject to a minimum percentage criterion. This subject is vast, and I will surely write a full blog on this very soon. D.Is borrowing for own-contribution a good idea? If the borrower has sufficient income and can support another unsecured loan, it is okay, but if you look at it from a credit angle, it is not good since the entire property is on loan and in case of any eventuality, both loans will go bad. Though the title will be mortgaged with the home loan lender, the feeling of the 'borrower not having any money vested in this property' isn't a good feel. E.What if I have paid excess own-contribution to my seller/builder? If you have paid in excess to your basic minimum requirement, that amount can be returned back to you by the lender. For example, if your property cost is a crore and your loan sanctioned in Rs 75 Lakh, but you have paid Rs 40 Lakh already instead of Rs 25 Lakh, then the additional Rs 15 Lakh can be given back to you by the lender as the first disbursement tranche, provided date of payment to the builder is not six month prior to date of disbursement. However, terms and conditions apply in all cases. Lenders do take profile-based calls and do refund even 24 month-old payments. The property in question and the genre of the builder is also important. F.How does it differ in case of a ready-to-move-in property vis-a-vis an under-construction apartment buying? Till last month, it didn't matter. But now NHB has taken a note on it and instructed all NBFCs to restrict such refund to borrowers. This amount, if refunded, has been asked not to consider as 'home loan'; as a result, the rate of interest, will apply that of a LAP, which is higher and also will be without tax benefit. To my surprise, however, this strictness has been shown only towards the ready properties and the under construction properties have been spared. G.Is there a regulation or lenders take their own call on this subject? Lenders take their own call in this refund-matter. It is a general understanding that the borrower must have had excess liquidity whilst he paid the contribution, but now realising the error wants to get the cash back in his hand for other investments or self-use. Home Loan, is a superior and complex product and the product-policy has evolved over a period of time. An average borrower cannot even imagine the depth of it. I have been suggesting that borrowers must indulge into mortgage-advisory before they opt for a home loan on their own, just by 'comparing rates and applying'. Not all popular web-portals nor the frontline bank salesmen really know how to do a structuring that helps you shell out less. If you have the option of paying less, why pay more? There are more needs like buying life insurance, education, healthcare which requires your hard money. There could be plenty more questions around this subject and one leads to another. If you want to reach out to me, please put your queries here.
When a home loan buyer is looking for a home loan to buy a property, self contribution becomes a tricky area. Here is some information you should not miss.
"How much money will I need to pay from my pocket to get a Home Loan?".....This is a common question that we hear from almost all the potential borrowers. This is irrespective of whether he has money or not, whether he is buying a Rs 25 Lakh worth home or Rs 25 crore. Let us understand this own contribution element in detail. I will be glad to answer more queries. A.What is own contribution (OC)? Also known as self contribution, OC is one of the most important factors in all home loan transactions. All lenders require the borrower to pay a certain percentage of the property cost from their own source of funds first, so that the commitment is established. This equity contribution by the borrower is determined through the money receipts issued by the builder/seller and, some smart lenders also require the bank statement of the borrower as a supporting document where they look at the debits happening, without which it can be a mere 'understanding' between the parties which defeats the purpose. This amount is the 'own-contribution' and these receipts are called margin money receipts (MMR) or more popularly, own contribution receipts (OCR). B.How much should be the minimum own contribution? Recently, both RBI and NHB have specified the OC amount for different amounts of borrowings. The purpose is to avoid bad debts and to engage the borrower in the property at a higher level than that was earlier. One could easily get a 90% funding on the basis cost plus the stamp duty and registration in 2008, but that is all changed now. For priority sector funding, the margin money can be as low as 10%, for loan between Rs 25-75 Lakh it is 20% and for loans above Rs 75 Lakh the requirement increases to 25%; thus making the LTV (Loan to Value ratio) as 90%, 80% and 75% respectively. Stamp duty and registration costs are not funded anymore as they don't enhance the value and is merely an acquisition cost. C.What if I fall short of my own funds? If you fall short of your own funds, there are two options broadly available: (a) you have to wait for the disbursement of loan until you can arrange for the balance, or (b) opt for a parallel funding scheme, if the lender has the product. In a nutshell, the parallel funding is defined as a proportion of funding which is same as the proportion in which the borrower releases his OC, subject to a minimum percentage criterion. This subject is vast, and I will surely write a full blog on this very soon. D.Is borrowing for own-contribution a good idea? If the borrower has sufficient income and can support another unsecured loan, it is okay, but if you look at it from a credit angle, it is not good since the entire property is on loan and in case of any eventuality, both loans will go bad. Though the title will be mortgaged with the home loan lender, the feeling of the 'borrower not having any money vested in this property' isn't a good feel. E.What if I have paid excess own-contribution to my seller/builder? If you have paid in excess to your basic minimum requirement, that amount can be returned back to you by the lender. For example, if your property cost is a crore and your loan sanctioned in Rs 75 Lakh, but you have paid Rs 40 Lakh already instead of Rs 25 Lakh, then the additional Rs 15 Lakh can be given back to you by the lender as the first disbursement tranche, provided date of payment to the builder is not six month prior to date of disbursement. However, terms and conditions apply in all cases. Lenders do take profile-based calls and do refund even 24 month-old payments. The property in question and the genre of the builder is also important. F.How does it differ in case of a ready-to-move-in property vis-a-vis an under-construction apartment buying? Till last month, it didn't matter. But now NHB has taken a note on it and instructed all NBFCs to restrict such refund to borrowers. This amount, if refunded, has been asked not to consider as 'home loan'; as a result, the rate of interest, will apply that of a LAP, which is higher and also will be without tax benefit. To my surprise, however, this strictness has been shown only towards the ready properties and the under construction properties have been spared. G.Is there a regulation or lenders take their own call on this subject? Lenders take their own call in this refund-matter. It is a general understanding that the borrower must have had excess liquidity whilst he paid the contribution, but now realising the error wants to get the cash back in his hand for other investments or self-use. Home Loan, is a superior and complex product and the product-policy has evolved over a period of time. An average borrower cannot even imagine the depth of it. I have been suggesting that borrowers must indulge into mortgage-advisory before they opt for a home loan on their own, just by 'comparing rates and applying'. Not all popular web-portals nor the frontline bank salesmen really know how to do a structuring that helps you shell out less. If you have the option of paying less, why pay more? There are more needs like buying life insurance, education, healthcare which requires your hard money. There could be plenty more questions around this subject and one leads to another. If you want to reach out to me, please put your queries here.
Happy Investing
Source:Moneycontrol.com
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