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What is a reverse mortgage?

A reverse mortgage, as the name suggests is opposite of normal housing loan (mortgage) and is available only to senior citizens.

How does it work?

Once you pledge your house for reverse mortgage, the bank after carrying out its due diligence will arrive at the value of the house. After creating the room for interest cost and price fluctuations, the bank will disburse the balance amount to you depending on the payment amount you choose.

With every payment that the bank gives you, your equity in the house decreases. This line of credit is open, typically for 15 years. Simply put, any senior citizen opting for reverse mortgage will get annuity (reverse EMI) from the bank for 15 years. Even after the tenure you can continue to stay in the house. Only if you leave the property permanently, or in case of death, the lending institution will seel the property, and from the proceeds it will take the amount that is payable by you to the bank; the balance will be distributed to your legal heirs.

What are the features of a reverse mortgage?

• Any house owner over 60 years of age is eligible for a reverse mortgage. Married couples will be eligible as joint borrowers provided one of them is above 60 years of age and age of spouse is not below 55 years at the time of application.

• Should be the owner of a residential property (house or flat) located in India in his/her own name.

• The maximum loan is up to 60% of the value of the residential property. So, for example if you pledge a property worth Rs 50 lakh (INR 5 million), then the loan amount that you can get is Rs 30 lakh (INR 3 million).

• The maximum period of property mortgage is 15 years with a bank or HFC (housing finance company).

• The borrower can opt for a monthly, quarterly, annual or lump sum payments at any point, as per his discretion.

• The revaluation of the property has to be undertaken by the bank or HFC once every 5 years. This is to ensure that the value of the house is more than the amount payable by you.

• The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability.

Reverse mortgage rates can be fixed or floating and hence will vary according to market conditions depending on the interest rate regime chosen by the borrower.

What happens after the death of one or both of the spouses?

If one of the spouses dies, the other can still continue living in the house. If both die, the bank will give their heirs two options — settle the overall outstanding loan and retain the house, or the bank will sell the house, use the proceeds to settle the outstanding loan and give the rest to the heirs.

Which are the financial institutions offering reverse mortgage?

Punjab National Bank, State Bank of India, Union Bank of India, LIC Housing Finance, Dewan Housing Finance, Canara Bank, Andhra Bank, Corporation Bank, Indian Bank, Central Bank of India.

This is a post from: The Orange Paper ~ A blog about Personal Finance, Indian Stock Market, Financial Planning, Investing, Wealth Building, Taxes and more.

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Tax benefits on home loans have turned out to be an important aspect of home buying . Here is how you can benefit from the same.

Tax breaks

For self-occupied house property, the annual value of the house property is considered to be nil. Further, an individual could claim a deduction for the interest paid on the home loan (for purchase or construction) up to Rs 1.5 lakh, subject to certain conditions. This would result in a loss under the head house property of up to Rs 1.5 lakh, which could be set off against other income. If the property is let out, the actual amount of housing loan interest, without limit, could be claimed as deduction. Also, an individual can claim a deduction up to Rs 100,000 for re-payment of the principal amount U/S 80C of the Income Tax Act, 1961.

Joint benefits

This advantage gets multiplied if the property is acquired in a joint name, as each individual is entitled to claim tax benefits. Thus, if a husband and wife have a property with equal share, both are entitled to claim these deductions. There is no restriction as to who the co-owner should be and there is no limit on the number of joint owners. Property can be jointly owned with your spouse, brother or parents.

Here, the following points merit consideration: First, the house should be bought in the joint name and proof of co-ownership should be maintained. Second, the housing loan should also be taken in joint names.

The repayment of loan should preferably be made individually by the co-owners directly, if feasible, or from a joint bank account in which funds for repayment of loan should be contributed by the co-owners in proportion to their ownership/loan. All the co-owners should have their independent income sources from which the loans are re-paid.

Typically, the tax benefits are available in proportion to the joint ownership and the loan taken by the co-owners.

Additional benefits

Buying a house jointly facilitates a larger loan as income of all the co-owners would be considered by the lenders. Also, in many states, a lower property registration fee is levied in case the property is owned by women either individually or jointly. Further, in case of husband and wife, joint ownership also helps reduce succession issues.

A point to be noted here is that under the proposed Direct Tax Code, these tax benefits are proposed to be restricted. Till then, however, one can enjoy the same.

This is a post from: The Orange Paper ~ A blog about Personal Finance, Indian Stock Market, Financial Planning, Investing, Wealth Building, Taxes and more.

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Did you apply for a loan but the bank turned it down without giving you sufficient details on why they turned down your application?

The Reserve Bank of India has been receiving a number of complaints, including under the Right to Information (RTI) Act, 2005, that customers are unable to get their own credit report from the banks.

The provisions of sub section (1) of Section 21 of the Credit Information Companies (Regulation) Act, 2005, provides “any person, who applies for grant or sanction of credit facility, from any credit institution, may request such institution to furnish him a copy of the credit information obtained by such institution from the credit information company”. Further, sub-section (2) of the said Section also specifies that every credit institution shall on receipt of request, as indicated in sub-section (1), shall furnish to such person a copy of the credit information subject to payment of charges specified by the The Reserve Bank under the Regulations.

Reserve Bank, in Credit Information Companies Regulations, 2006, framed under the Act, has already prescribed in Regulation 12(3) a maximum fees of Rs.50/= (Rupees fifty only) for the purpose.

Access to own Credit Report

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Buy land. They’ve stopped making it. – Mark Twain.

Banks and housing finance companies (HFCs) in India provide loans for purchase of plots (land). Usually, the banks/HFCs insist that the plot of land is purchased from a recognized authority like a development authority, from a society, or from a recognized developer. Financing purchase of plots is a bit risky because of difficulty in documentation.

The main requirement is that the land should be developed and clearly demarcated, and should have been approved for residential purposes. In addition to the general documentation, some additional documents are required to avail land loans. The site should not be categorized as an agricultural site as per the land records. In case it is so, permission to convert land from agricultural use to non-agricultural use should be obtained.

Documents needed to get a loan include:

• No encumbrance certificate from the registrar’s office certifying that the land is not already mortgaged.

• Layout and drawing (as approved by the city development or planning authority) of the location where the plot of land is, giving details of the precise location and its surrounding areas.

• No objection certificate (NOC) from the society for sale and transfer of land.

• Revenue receipts confirming payment of land dues to the government and tax receipts for taxes paid by the owner of the land.

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The application for the home loan is a very simple procedure. Most banks offer a home banking facility wherein the bank’s executive visits you at a convenient time, at your home or office. He liaises between you and the bank, also suggesting schemes, added benefits, interesting insurance policies and educating you on the best rate of interest. However certain homework is essential about the interest rate offered by other banks for a comparative analysis and also enquiring about hidden charges in processing fees and penal interest.

Here’s a ready reckoner for the list of documents to avail home loans.

FOR SALARIED APPLICANTS

• Photographs of recent nature. The number of photos specified by the bank.
• Identification with photographs in the form of Election Identity Card/ PAN card/ valid driving license/ valid passport.
• Form 16 with current employer. In case of change of job (in an assessment year) then it is necessary to submit Form 16 from both the employers.
• Exact proof of address is done with Passport/ telephone bill/ electricity bill/ agreement of house rent in case of rental residence.
• The salary slips of the past three or six months has to be submitted to the bank in original, which features the salary statement for the past six months.
• The initial cheque for the processing fee favoring the bank has to be submitted for processing the loan.

In case, you wish to avail the loan with a co-applicant or the property is to be shared with a person, additional requirements on documentation are required to be furnished.

FOR THE SALARIED CO-APPLICANT

• Photographs in the quantity specified by the bank.

• Identification with photograph via a PAN card/ Election Identity card/ valid passport/ valid driving license.

• Exact proof of address is done with Passport/ telephone bill/ electricity bill/ agreement of house rent in case of rental residence.

• In case the loan is to be shared then all the above details of the salaried applicant is essential.

FOR A SELF-EMPLOYED APPLICANT

• Income tax returns for the last three years.

• Balance sheet of the company.

• Profit and loss statement of the company.

• Proof of age-related documents in the form of valid passport/ valid driving license/ accurate voters card/ birth certificate or the school leaving certificate.

• Address proof in the form of Ration card/ House rent agreement/ electricity bill/ telephone bill and a valid passport.

• Proof of office address, virtual address location.

• Photo identity via PAN card/ election card/ valid driving license/ valid passport.

• An introduction of the nature of business, branches, specified industries, credit or other loans applied or in process, staff strength, expansion plans in India or overseas or diversifying the business plan.

• Personal qualification and other business of the applicant.

• An updated bank statement for the past six months in the current as well as the savings account.

• Partnership deed in case of a partnership account.

• The initial cheque for the processing fee favoring the bank has to be submitted for processing the loan.

RESALE PROPERTY RELATED DOCUMENTS FOR A HOME LOAN

• A complete set of past history of the agreement in the correct link.
• The registration and stamp duty receipt.
• A draft agreement.
• Front and bank photocopy of share certificate/s.
• Occupation certificate.
• Commencement Certificate (CC).
• Permanent Resident card copy in the form of voters or ration card.
• Assessment Tax Receipt.
• The latest maintenance bill.
• The latest electricity bill.
• No-objection certificate.

NEW PROPERTY RELATED DOCUMENTS FOR A HOME LOAN

• The development agreement
• Power of attorney (in case)
• The history of the title report
• Title certificate
• Sanctioned plan
• NOC (No-objection certificate)
• Approval to the builder as per ULC (Urban Land Ceiling and Regulation) act
• CC (commencement certificate) and IOD (Intimation of disapproval)
• A draft agreement

POA (Power of Attorney)

• Authority letter as per the bank’s format has to be signed by all applicants.

• The power of attorney document is specified by the bank’s format and full signatures of all the applicants is required.

NRI power of attorney

• The NRI is not required to be physically present to formalise the loan application process. The POA can represent the NRI in this case and conduct all the formalities. The embassy forwards the documents to the NRI and hence the signatures are validated.

• GPA or general power of attorney is mostly adopted by NRI to conduct their ongoings in India. The power of attorney has to be an Indian as the execution of loan formalities is easily authorized in a GPA.

NRI Guarantor

• In case the loan guarantor resides abroad (NRI) then the following documents are essential.

  • Address proof of overseas includes the latest premium receipt on insurance/Utility bill like water or electricity/ valid driving license.

  • Visa copies and existing passport of the NRI guarantor.

Loan documentation is hassle-free with justified requirements from banks. Maidens with their new name, need to furnish name change affidavit in case their official name change is yet to be affected. In case the name change is in process, the bank will require a marriage certificate attested, marriage photograph and the name change application proof. It is prudent to preserve all old documents, balance sheets, bank accounts and updating your ration card as changes occur. Furnish recent photographs and make complete enquiries about fixed and floating rates before you finalize the ROI (rate of interest).

This is a post from: The Orange Paper ~ A blog about Personal Finance, Indian Stock Market, Financial Planning, Investing, Wealth Building, Taxes and more.

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A friend of mine recently applied for a personal loan from a leading bank and was shocked to know that she would be paying almost 50% of the loan amount as interest, spread over a period of 5 years. The purpose of this personal loan was to settle some outstanding credit card dues. Agreed, the rate of interest on a personal loan (16-22% per annum) is lesser than that of a credit card (35-44% per annum). But is a personal loan the only way out? Nope.

She can go in for a secured loan. Owing to the fact that secured lendings such as loans against gold jewellery, overdraft against fixed deposits and stocks/mutual funds are sanctioned against a collateral, they are cheaper than personal loans. Overdraft against FDs attract an interest rate of 9-10% while against stocks/MFs is around 11-12.5%. And this is the main reason why more she should be more careful while choosing the mode of credit. Besides the rate of interest and repayment period, her key deciding factor should be the speed of disbursal and urgency of her need. Personal loan is not the right choice for her if she requires a loan for just a couple of months and that’s because a personal loan is given for a minimum tenure of 12 months. The processing time involved in loans against stocks/MFs is 3-5 working days, after completion of the documentation procedure. Hence secured loans are most desirable and should be her first choice.

Another viable option is loan against gold jewellery. Indians are known to be fond of investing in gold and this can be used to fund that short term need. It is one of the cheapest borrowing avenues available today. She can borrow upto Rs 10 lakh (Rs. 1 million) and 80% of the ornaments value, and needn’t specify the purpose, unless it is for speculative or anti-social activities. The repayment term usually ranges from 3-12 months. Some banks allow a choice between repaying the loan at maturity or via the EMI mode.

Secured loans constitute one method of reducing the interest burden and helping you avoice getting trapped by the debt net.

This is a post from: The Orange Paper ~ A blog about Personal Finance, Indian Stock Market, Financial Planning, Investing, Wealth Building, Taxes and more.

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India has experienced a real estate boom in the last few years whereas the US had its share of a real estate boom but as of today their financial sector is in crisis. The share prices of real estate companies in India have fallen. There is a bearish sentiment in the Indian stock market, so does that mean the Indian financial sector too will face a similar crisis?

First let’s understand why the US financial sector is in a crisis situation. Traditionally, US mortgage lenders checked the creditworthiness of borrowers and then provided 80% of the home loan amount; the remaining 20% had to be paid by the borrower. So, even if the price of the house dropped it would still be higher than the bank’s loan thus giving an incentive to the borrower to repay it. However, in the recent years in order to increase lending volumes and profits the US banks followed a relaxed approach (many lenders even stopped checking the creditworthiness of the borrowes) by giving loans that were EQUAL to the entire value of the house, so the borrowers had no personal stake at all. Ultimately, this led to loans that were given to people who did not have any documented income, job or assets.

The US financial system created something called securitisation of home loans. Instead of retaining loans on their own books, banks sliced and bundled thousands of loans and labelled them as mortgage-backed security (MBS). These MBS were then sold to investors who earned a high return provided borrowers paid regularly. As we all know bankers have known to be smart (fooling people?), so in effect the banks originating home loans re-sold those loans and had to no longer worry about the defaults. Now, many banks started to offer loans that initially carried very low interest rates which after a few years were re-set to much higher rates. Many low income people borrowed loans because the monthly installments were low initially. But when the loans re-set higher some poor borrowers could not repay. The banks did not bother much coz they had already sold those loans to investors.

Result? US home lending and prices shot up. Eventually housing prices rose and then fell. Owners who had taken 100% loans started feeling the pinch coz their homes were valued at prices that were less than their outstanding loans. Many borrowers simply opted out, did not pay back their loans and gave up their home keys to the bank. This put the US banks in a tight situation where on one hand borrowers couldn’t pay due to lack of income or due to their pay back amount being higher than the property value. As home loan defaults rise the value of mortgage-backed securities are falling. This has inflicted huge losses on the mortgage-back security holders including the biggest banks in the world – Bank of America and Citibank.

Here in India, banks do finance 100% of the entire property value. But borrowers here do not walk away from their homes and handover the keys to the banks. This is because a large proportion of home buyers pay up almost half the of the money in black. If a house is sold for Rs 60 lakhs, the official registered value will typically be only Rs 30 lakh, with the balance paid under the table in cash. Thus the owner’s contribution is not zero and in order to preserve that black investment, he will keep paying his installments even if house prices dip.

US banks give non-recourse loans, that is, the loan is secured only by the mortgaged property, and the borrower becomes debt-free if he returns the property. This is not so in India, where the borrower remains personally liable even after returning the mortgaged property, so the bank can seize his other assets. And this is the very reason that discourages default. The Indian legal system is slow yet we don’t see people defaulting. The reason is banks enjoy this cushion provided by the black money that’s paid by every home owner. And to sustain this very black investment, borrowers will do their best not to default and lose their property. Ironically, black money enforces loan discipline in India, far more effectively than formal contracts or legal processes.

This is a post from: The Orange Paper ~ A blog about Personal Finance, Indian Stock Market, Financial Planning, Investing, Wealth Building, Taxes and more.

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Most Americans have an enormous debt load. Many of them feel that this fact is simply a part of modern living. With the focus of consumers more and more on credit as a form of currency, it can seem downright impossible to reduce debt load. However, there are ways to do this, including short term loans such as a cash advance. The key thing to remember is to do it responsibly.

How can you reduce that debt load and still have the latest gadgets, doodads and other hot items? That’s where the situation gets sticky. If you are going to live debt free, you have to get past the “gotta have it now” mentality that pervades American society. Remember, that new cell phone, iPod, HD TV or pair of shoes is a luxury, not a necessity. Quite a few people have forgotten the meaning of the word “luxury” and have begun to feel that anything they want is by nature a necessity. In short, they feel that they need all of these extra items.

Breaking that mindset is the first step. Stop spending. Stop wasting your cash. Take that money and begin to pay off your debts. Don’t miss any more payments on other loans; you can use short term lenders for this purpose, just make sure that your cash advance is paid off immediately, when due. Why should you live without debt? This is simply because your future earnings are not something that you should mortgage away. Your financial future is in your hands. If you don’t prepare for it, no one else is going to do it for you.

In today’s increasingly bleak economy, it is more vital than ever to break free of old spending habits and old ways of thinking about money. Financial responsibility should be the watchword of the new century.

This is a post from: The Orange Paper ~ A blog about Personal Finance, Indian Stock Market, Financial Planning, Investing, Wealth Building, Taxes and more.

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There are a number of factors that have a bearing on eligibility for a housing loan. The banks have their own criteria to determine the eligibility and quantum of housing loan. It would do well for borrower to be aware of some such factors.

To begin with, it is the information on the application form. The information submitted in the application form by the individual is verified from various primary and secondary sources – through interviews, calling up the employer, verifying from the database etc. In case of wrong information or inconsistencies, the loan application is liable to be rejected.

The financial strength of an individual is an important determinant. The loan eligibility as well as the repayment capacity depends on the financial position of the borrower. His income level, net income, liabilities etc determine the amount of loan he is eligible for.

The requirements include a particular minimum income or a fixed and certain source of income. The credit history of the borrower also plays an important role. Usually, the lenders maintain a database of borrowers and verify the credit history to check for previous repayment defaults, even from other lenders.

The personal profile of the individual is also important. These include factors like educational qualification, profession, number of dependents, assets owned, liabilities owed, savings history etc. A higher number of dependants or existing liabilities implies lower repayment capacity.

The individual’s age plays a major role to determine earning life, and the lifecycle stage at which the individual is. In case the property is co-owned , the co-owner cannot be a minor. Also, the co-owner cannot be above a certain age limit. The age limits are set to minimise ownership disputes. The age limit also affects the tenure of the home loan and EMIs.

The applicant’s retirement age is also considered. For example, if the applicant is 45 years of age and is set to retire at 60 years, the maximum loan tenure available will be 15 years.

Also, in case the bank has a 75-year age limit for a co-applicant , if the applicant is 40 years old and the co-applicant is 60 years old, then the home loan will be sanctioned for a maximum period of 15 years only.

The reputation of the builder also counts. Each bank has a list of pre-approved builders. Their credentials are already verified by the bank and as such loans are easily available for their properties.

Location of property also affects the eligibility. Banks have specific norms with respect to a minimum area of a flat too.

This may be builtup area or carpet area. The age of the property is also an important consideration in case of purchase of existing properties.

Home loans on resale properties are sanctioned only if they are less than 50 years old. Banks conduct legal and technical appraisal of the property to see whether the title of the property is clear, there are no ownership disputes, the property is free from any encumbrances etc.

In case there are any objections in these appraisals, the loan application is bound to be turned down.

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What are the options that immediately come to your mind when you are in need of money? Banks, financial institutions, friends and relatives. Generally, the idea of borrowing money from near and dear ones settled abroad is never considered seriously. But it is an option that people should not ignore and should keep themselves abreast of the procedural details.

The Reserve Bank of India allows individuals residing in India to borrow funds from these sources, subject to fulfillment of certain specified conditions. Before borrowing funds, the loanee needs to take note of the foreign exchange regulations in this regard.

As per the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations 2000, a person resident in India is restricted from borrowing in foreign exchange from a person resident outside India. A general permission, however, has been granted under the said regulation for individuals.

An individual resident in India is allowed to borrow up to $2,50,000 or its equivalent (in other currencies) only from his/her close relatives residing outside India, provided certain conditions are satisfied. These include: the minimum maturity period of the loan has to be one year; the loan has to be free of interest; and the amount of loan has to be received directly from overseas through normal banking channels or from the Non Resident External (NRE) / Foreign Currency Non Resident (FCNR (B)) account of the non-resident lender.

If any of the above mentioned conditions is not satisfied for instance, if an individual borrows funds from a friend or his/her father’s friend then the borrower has to seek specific permission from the RBI.

It is also imperative that adequate documentation is maintained by the borrower and the lender to prove that the said conditions are met. This will help avoid any tax/regulatory issues at a later date. In this connection, a letter of request from the borrower to his close relative for the loan and a confirmation to this effect from the lender to grant the loan should be maintained for future reference. Further, documentary evidence (an audit trail) of the bank documents in respect of the receipt of loan funds and its subsequent repayment should also be kept in records for future reference.

All this means that if you have a relative who is willing to lend you funds for some time without charging interest, you could consider borrowing the funds under the automatic route i.e. without seeking any permission from the RBI.

It is pertinent to note that funds can be borrowed only from the “close relatives” as defined by the regulation. For the purposes of such borrowing, close relative refers to:

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