Home loan from a bank vs housing finance company

Buying a home is a significant financial decision, and choosing the right lender can make all the difference. Homebuyers in India can secure loans from either banks or housing finance companies (HFCs), but each option comes with its own benefits and limitations. While banks are regulated by the Reserve Bank of India (RBI) and typically offer lower interest rates, HFCs—regulated by the National Housing Bank (NHB)—are known for their flexible eligibility criteria. This article will help you understand the key differences between banks and HFCs, allowing you to make an informed choice based on your financial situation.

 

Difference Between Banks and Housing Finance Companies (HFCs)

Both banks and HFCs provide home loans, but they operate under different regulatory frameworks and have varying lending approaches.

• Regulatory authority: Banks fall under the RBI’s supervision, ensuring strict compliance with monetary policies. HFCs, on the other hand, are regulated by the NHB, which provides them with slightly more operational flexibility.

• Interest rate calculation: Banks link their home loan interest rates to external benchmarks such as the repo rate, making them more transparent and responsive to policy changes. HFCs determine their rates based on their cost of funds, which may result in slightly higher interest rates but greater stability.

• Loan approval process: Banks generally have stricter eligibility criteria, requiring a higher credit score and stable income proof. HFCs are more accommodating, making them a preferred choice for self-employed individuals or those with irregular income patterns.

• Loan-to-value (LTV) ratio: Banks usually offer loans covering up to 75-90% of the property’s value, while HFCs may go higher, making homeownership more accessible to borrowers with lower initial savings.

• Processing time: Banks typically have a longer and more stringent loan approval process, whereas HFCs offer quicker disbursement with less paperwork.

Home loans from banks: Pros and cons

Banks are a popular choice for home loans due to their lower interest rates and strict regulatory oversight. However, while they offer security and cost benefits, their stringent eligibility criteria and slower processing times may pose challenges for some borrowers.

Pros of taking a home loan from a bank

• Lower interest rates: Banks generally offer lower home loan interest rates since they are linked to external benchmarks like the repo rate, ensuring transparency and competitive pricing.

• Regulated by RBI: Being under the Reserve Bank of India (RBI) ensures strict compliance with financial regulations, offering borrowers greater security and standardized lending practices.

• Balance transfer facility:  Banks allow borrowers to transfer their home loan to another bank at lower interest rates, helping save on overall loan costs.

• Better customer protection: RBI regulations mandate fair lending practices, ensuring borrowers are safeguarded against arbitrary interest rate hikes or unfair policies.

• Longer loan tenure options: Many banks offer repayment periods of up to 30 years, making EMIs more affordable for borrowers.

Cons of taking a home loan from a bank

• Stricter eligibility criteria: Banks have stringent requirements for credit scores, income stability, and employment history, which may make it harder for self-employed individuals or those with irregular income to qualify.

• Longer processing time: Due to extensive verification processes, documentation requirements, and regulatory checks, home loan approvals from banks can take longer compared to housing finance companies (HFCs).

• Lower loan-to-value (LTV) ratio: Banks typically offer loans covering only 75-90% of the property value, requiring borrowers to arrange a higher down payment.

• Repo rate-linked fluctuations: While repo rate-based loans can reduce interest rates, they may also lead to frequent fluctuations, increasing uncertainty in monthly EMIs.

Home loans from Housing Finance Companies (HFCs): Pros and cons

Housing Finance Companies (HFCs) cater specifically to home loan borrowers, often providing more flexible lending options than banks. They are regulated by the National Housing Bank (NHB) and are a popular choice for self-employed individuals or those with lower credit scores. Here’s a look at their advantages and drawbacks.

Pros of taking a home loan from an HFC

• Easier eligibility criteria: HFCs have more relaxed requirements, making it easier for individuals with irregular income, low credit scores, or self-employed professionals to qualify.

• Higher loan-to-value (LTV) ratio: Compared to banks, HFCs often finance a higher percentage of the property’s value, reducing the borrower’s initial down payment burden.

• Faster processing and approval: With simpler documentation and fewer regulatory formalities, HFCs generally offer quicker loan approvals and disbursals.

• Customised loan products: Many HFCs offer flexible repayment options, step-up EMIs, or tailor-made loan plans to suit different borrower profiles.

Cons of taking a home loan from an HFC

• Higher interest rates: Unlike banks, HFCs do not follow repo rate-linked lending, which often results in higher interest rates. Borrowers may end up paying more in the long run.

• Limited regulatory oversight: While HFCs are regulated by the NHB, they do not follow RBI’s strict banking norms, which may lead to variations in transparency and customer protection.

• Higher processing fees: Many HFCs charge higher loan processing and administrative fees, increasing the overall cost of borrowing.

• Fewer balance transfer benefits: Some HFCs have restrictions on transferring home loans to banks, which could limit refinancing opportunities.

Home loan from a bank vs housing finance company: Eligibility criteria

Eligibility criteria play a crucial role in determining whether you qualify for a home loan and how smoothly your application process goes. Banks and Housing Finance Companies (HFCs) have different approaches when evaluating loan applications.

Home loan from banks: eligibility criteria

• Higher credit score requirement: Banks typically require a credit score of 750 or above for home loan approval. A lower score may lead to rejection or higher interest rates.

• Strict income stability check: Salaried individuals must provide consistent income proof, while self-employed applicants need audited financial statements and IT returns.

• Employment history and stability: Banks prefer applicants with at least 2-3 years of stable employment or a well-established business. Frequent job changes can affect approval chances.

• Lower loan-to-value (LTV) ratio: Banks usually finance 75-90% of the property value, requiring borrowers to contribute a higher down payment.

• Age restrictions – Applicants must typically be between 21 and 65 years, with loan tenure determined by their retirement age.

Home loan from HFCs: Eligibility criteria 

• Lower credit score requirement: HFCs are more lenient, often approving loans for borrowers with credit scores as low as 650-700.

• Relaxed income proof norms: Self-employed individuals and those with variable income have an easier time getting approved, as HFCs accept alternative income proofs.

• Flexible loan-to-value (LTV) ratio: HFCs may offer up to 90-95% of the property value as a loan, reducing the burden of a high down payment.

• More inclusive approach: HFCs cater to a broader range of borrowers, including first-time buyers, those with informal income sources, and applicants who may not meet strict banking criteria.

Home loan from a bank vs housing finance company: Interest rates

Interest rates are one of the most crucial factors when choosing between a bank and a Housing Finance Company (HFC) for a home loan. The way these institutions determine and adjust interest rates can significantly impact your repayment amount and overall loan cost.

Home loan interest rates offered by banks

• Repo rate-linked interest: Banks offer home loans linked to the Reserve Bank of India’s (RBI) repo rate, ensuring transparency and automatic rate adjustments based on market conditions.

• Lower interest rates: Since banks have access to lower-cost funds, they generally offer lower interest rates compared to HFCs. Borrowers with a good credit score can secure even better rates.

• Periodic rate fluctuations: As repo rates change, home loan interest rates from banks fluctuate accordingly, which can lead to lower EMIs when rates drop but higher payments when they rise.

• Fixed vs floating rates: Banks offer both fixed and floating interest rate options, allowing borrowers to choose based on their risk appetite.

Home loan interest rates offered by HFCs

• Higher interest rates: HFCs usually charge slightly higher interest rates compared to banks as they rely on alternative funding sources rather than RBI-regulated deposits.

• MCLR or prime lending rate-based loans: Unlike banks, HFCs determine their interest rates based on their own cost of funds, which can lead to less transparency in rate adjustments.

• More negotiable for low credit score borrowers: HFCs are more flexible in offering loans to borrowers with lower credit scores but may charge higher interest rates to compensate for the risk.

• Fixed rate preference: Many HFCs offer fixed-rate home loans to protect borrowers from market fluctuations, though this can result in higher long-term costs.

Home loan from a bank vs housing finance company: Processing and documentation

The home loan application process involves multiple steps, including document submission, verification, and approval. Banks and Housing Finance Companies (HFCs) have different requirements and processing speeds, which can influence your borrowing experience.

Home loan processing and documentation at banks

• Extensive verification process: Banks follow stringent RBI regulations, requiring thorough background checks, credit assessments, and income verification, which can lead to longer processing times.

• Stricter documentation requirements: Banks demand detailed paperwork, including income proof, property documents, and a high credit score, making the process more complex for self-employed individuals.

• Slower approval times:Due to rigorous scrutiny and regulatory compliance, banks generally take longer to approve home loans, often requiring 7-15 working days or more.

• Higher rejection rates: Applicants with lower credit scores or unstable income may find it harder to secure a loan from banks due to their strict eligibility criteria.

Home loan processing and documentation at HFCs

• Simplified and flexible process: HFCs offer more lenient eligibility criteria, making them a preferred choice for borrowers with limited documentation or lower credit scores.

• Minimal paperwork requirements: Many HFCs accept alternative income proof, making it easier for self-employed individuals or those with irregular income streams to qualify.

• Faster loan approvals: Since HFCs are not bound by RBI’s strict lending rules, they often approve loans quicker, sometimes within 3-7 working days.

• Higher loan approval rates – HFCs are more willing to lend to borrowers with lower credit scores or non-traditional income sources, though at slightly higher interest rates.

Home loan from a bank vs housing finance company: Loan amount and tenure

The loan amount and repayment tenure play a crucial role in determining your monthly EMI and overall financial burden. While both banks and Housing Finance Companies (HFCs) offer home loans, their policies regarding loan amounts and tenure differ.

Loan amount and tenure offered by banks

• Lower loan-to-value (LTV) ratio: Banks typically offer loans covering 75-90% of the property value, requiring borrowers to arrange a higher down payment.

• Stricter loan caps: Banks determine loan amounts based on your credit score, income, and repayment capacity, often imposing stricter limits compared to HFCs.

• Longer repayment tenure: Many banks offer loan tenures of up to 30 years, making EMIs more affordable for borrowers.

• Stringent repayment rules: Prepayment and foreclosure charges on fixed-rate home loans may apply, although floating-rate loans are usually exempt under RBI guidelines.

Loan amount and tenure offered by HFCs

• Higher loan-to-value (LTV) ratio: HFCs may offer up to 90% of the property value, making it easier for borrowers with limited savings to secure a loan.

• More flexible loan amounts: HFCs are generally more accommodating, approving higher loan amounts for borrowers with irregular incomes or lower credit scores.

• Shorter to moderate loan tenures: While some HFCs offer tenures up to 30 years, many cap repayment periods at 20-25 years, which may lead to higher EMIs.

• Flexible repayment terms: HFCs often have more lenient foreclosure and prepayment policies, making it easier to repay loans early without hefty penalties.

Home loan from a bank vs housing finance company: Customer service and transparency

The quality of customer service and transparency in loan terms can significantly impact a borrower’s experience. Both banks and Housing Finance Companies (HFCs) have different approaches in this regard.

Customer service and transparency in home loans from banks

• Strictly regulated by RBI: Banks follow RBI guidelines, ensuring greater transparency in loan terms, interest rate changes, and repayment policies.

• Standardised loan agreements: Loan terms and conditions are well-defined, reducing the chances of hidden charges or unfair policies.

• Better customer protection: Since banks are under RBI supervision, borrowers are safeguarded against arbitrary interest rate hikes or unfair lending practices.

• Formal and structured service: While banks offer reliable customer support, their processes can sometimes be rigid, requiring customers to follow standard procedures for queries and complaints.

Customer service and transparency in home loans from HFCs

• Regulated by NHB (now under RBI): HFCs follow regulations set by the National Housing Bank (NHB), now governed by RBI, but their policies may not be as stringent as banks.

• More flexible loan terms: HFCs often offer customized repayment plans, but borrowers must carefully review terms to avoid unexpected fees.

• Quick and personalised service – HFCs typically provide more responsive and personalized customer service, catering to borrowers with unique financial situations.

• Less transparency in interest rate changes – Since HFCs do not always follow repo rate-linked lending, interest rate revisions may not be as predictable as those of banks.

Home loan from a bank vs housing finance company: Which one should you choose?

Choosing between a bank and a housing finance company (HFC) for your home loan depends on your financial profile, loan requirements, and priorities. Both have their advantages, and the right choice varies for different borrowers.

When to take a home loan from a bank?

• You have a strong credit profile: Banks have stricter eligibility criteria, so a high credit score (750+), stable income, and good repayment history improve approval chances.

• You prefer lower interest rates: Banks generally offer lower interest rates as they are repo rate-linked, making them a cost-effective option in the long run.

• You want more security and transparency: Being regulated by the RBI, banks follow standardised lending practices with clear guidelines on interest rate changes and repayment policies.

• You need a longer loan tenure – Banks typically offer loan tenures of up to 30 years, making EMIs more manageable.

• You want balance transfer flexibility – If you plan to switch lenders for better rates in the future, banks offer easier home loan balance transfer options.

When to take a home loan from an HFC?

• You have a low or moderate credit score: HFCs have more relaxed eligibility criteria, making them ideal for self-employed individuals or those with irregular income.

• You need a higher loan-to-value (LTV) ratio – HFCs often finance up to 90% of the property value, reducing the burden of arranging a large down payment.

• You want faster loan approval: HFCs have less stringent documentation requirements and faster processing, making them a good choice if you need urgent funding.

• You need customised loan terms: If you require flexible repayment options or non-standard loan structures, HFCs provide more tailored solutions.

Housing.com POV

Choosing between a home loan from a bank or a housing finance company (HFC) depends on your financial profile, risk appetite, and loan requirements. Banks offer lower interest rates, stricter regulations, and better refinancing options, making them ideal for salaried individuals with strong credit profiles. HFCs, on the other hand, provide greater flexibility in eligibility, faster approvals, and higher loan-to-value ratios, making them suitable for self-employed borrowers or those with lower credit scores. Before making a decision, compare interest rates, processing fees, loan tenure, and repayment terms to select the option that best aligns with your financial goals.

FAQs

Can I switch my home loan from an HFC to a bank later?

Yes, you can transfer your home loan from an HFC to a bank through a balance transfer facility. However, check for prepayment charges, processing fees, and whether the new lender offers a lower interest rate before switching.

Do banks or HFCs offer special schemes for women borrowers?

Both banks and HFCs provide special home loan schemes for women, often featuring lower interest rates, reduced processing fees, and higher loan eligibility to encourage homeownership among women. These benefits vary across lenders, so compare options carefully.

Are there any tax benefits on home loans from HFCs?

Yes, home loans from HFCs qualify for tax deductions under Sections 80C and 24(b) of the Income Tax Act, just like bank home loans. Borrowers can claim deductions on principal repayment and interest payments, subject to applicable limits.

Do banks or HFCs offer pre-approved home loans?

Both banks and HFCs provide pre-approved home loans based on a borrower’s income, credit score, and repayment capacity. A pre-approved loan speeds up the home-buying process but does not guarantee final loan disbursal without property verification.

Can NRIs apply for home loans from banks and HFCs?

Yes, both banks and HFCs offer home loans to Non-Resident Indians (NRIs). However, banks usually have stricter documentation and eligibility criteria, while HFCs may offer more flexibility. NRIs should check for specific loan terms and repayment options.

Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com