Choosing The Right Home Loan Partner For Low CIBIL Score

You’ve already decided you want to purchase a home. Yes I know, that’s why you are here reading this article. As Indians, we innately aim to reduce costs and maximize returns, and we try to explore low cibil home loan options. Nothing to be ashamed of, I personally do this very proudly.

The home loan terms you get such as interest rate, loan tenure, the sanctioned amount, etc all play a vital role in your dream home purchase. A shortcoming in these factors will push you to reconsider purchasing your dream home.

The interest rate and loan tenure specifically can heavily dent your pocket if they are unfavorable. Besides this, if established banks reject your home loan, you will be left with HFCs and NBFCs as options.

First things first, what on earth are all these terms you’ve come across? I’m sure you’re aware of what banks are, it’s that place where your parents ask you to make FDs.

Banks do more than accept deposits, they lend to make money as well. But, are terms like NBFCs and HFCs going over your head? I’ll explain it to you clearly.

NBFCs and HFCs: What are they?

HFCs stand for Housing Finance Companies. Whereas, NBFCs stand for Non-Banking Financial Institutions.

They are institutions that perform and provide bank-like financial services but do not own any banking license. They are regulated by both RBI and the Companies Act. 

What are these “bank-like” services? This includes activities such as lending loans and advances, accepting deposits, issuing bonds, etc. 

HFCs were introduced to address increasing home loan demands by consumers. They specifically offer just home/mortgage loans as the name suggests. 

They were initially regulated by the National Housing Bank (NHB), but later in 2019 regulatory power was shifted to the RBI. Apart from this, volume-wise, HFCs disperse more home loans compared to Banks. 

Now that you have a simple overview, let’s dive into the more important aspects like interest rates, loan eligibility requirements, etc. These different institutions. Finally, let’s understand which of these institutions will be the best choice for your dream home purchase for low cibil score home loans.

Factors to look into before choosing a lending institution

All these institutions come with their pros and cons. Banks usually will offer you a better interest rate, along with favorable tenures. Meanwhile, NBFCs and HFCs have more flexibility when it comes to eligibility criteria. 

Hence, it’s vital for you to understand and compare all of the below factors before proceeding with a lending institution. 

1. Interest Rates and Processing Fees: Home loans have a huge tenure. And considering how EMIs work, you’ll be paying off most interest in the first few years, and only later will principal payments kick in. High interest rates can definitely dent your pocket big time. Processing fees can come as an unplanned expense because they tend to be hidden. Make sure to enquire about this. 
2. Eligibility Criteria: Getting approved for loans can be a headache. Multiple criteria are looked at before giving you approval. Hence, it’s vital to check the eligibility criteria of various lenders. This will save you tons of time and resources, and you can avoid application rejections as well. And you can get a home loan with a low cibil score.
3. Loan Tenure & EMI Affordability: Longer tenures will give you lower EMIs. But it’s also important to understand that longer tenures mean, higher interest payments. It’s a trade-off and mostly will depend on how much you can pay back. As a general rule, make sure your EMIs aren’t more than 50% of your income. 
4. Customer Service & Support: Most people tend to neglect this. The service post disbursement of the loan is equally important as the service before. Services such as quick message updates, an app showing you loan balances, EMI reminders, etc go a long way.  
5. Reputation & Track Record: This is highly important. We as loan seekers definitely aim to repay the loan.  But at times, unfortunate circumstances can lead to 1-2 defaults. During these times of distress, you don’t want to be harassed by loan retrieval agents. Therefore, make sure to research the lender’s reputation. 

Comparison of NBFCs, HFCs, and Banks for Home Loans

Now comes the most interesting part. Which lender should you choose? Let’s go over a few important aspects and how they will impact your decision to apply for a home loan:

Interest Rate Dilemma

Banks calculate your interest rate based on the repo rate. Whereas HFCs and NBFCs will lend after discounting it from their PLR (Prime Lending Rate). Which enables you to get a home loan with a low cibil score.

For Example: Let’s assume here a bank would charge you 6.7% interest pa. Here the bank will charge a mark-up of 2.7% over the repo rate of 4%. On the other hand, a NBFC or HFC will give you a discount from its PLR. Here the figures would be 16.05% of PLR – Discount of 9.35% which is 6.7%.

In simple terms, even if you start with the same interest rate, you may end up paying more in interest to a HFC or NBFC over time. This is because banks will need to immediately adjust the rates with respect to a change in repo rate.

Eligibility Criteria & Documentation

Banks have a very strict lending policy. This means your profile needs to meet a variety of criteria to be eligible for a loan from a Bank. High Income, great credit score, well-documented property details, etc are a few of the things banks look at. 

The problem is that only people who meet these criteria will be eligible for a loan from a bank. On the other hand, HFCs and NBFCs have more relaxed eligibility criteria. They will lend loans to people with lower income / credit scores as well. 

They also have less stringent rules for property documentation. And at the same time, loan disbursement will be processed faster compared to banks. And you can avail low cibil home loans.

Stamp Duty and Registration

Not just this NBFCs and HFCs can include costs such as stamp duty and registration charges within the market value of the property. This lets you borrow more when compared to a bank because banks will ask you to pay for these costs yourself.

Here is a table comparing home loan details for banks, NBFCs (Non-Banking Financial Companies), and HFCs (Housing Finance Companies):

Feature	Banks	NBFCs	HFCs
Interest Rates	Usually lower than NBFCs and HFCs	Slightly higher than banks	Slightly higher than banks
Processing Fees	Typically lower than NBFCs and HFCs	Higher than banks	Higher than banks
Loan Tenure	Up to 30 years	Up to 20 years	Up to 30 years
Loan-to-Value (LTV) Ratio	Up to 80-90%	Up to 70-80%	Up to 80-90%
Eligibility Criteria	Stricter, based on credit score, income, and repayment capacity	More relaxed than banks	Similar to banks
Documentation	Extensive, requires more paperwork	Less extensive than banks	Similar to banks
Prepayment Charges	Typically no charges for floating rate loans	Higher charges compared to banks	Similar to banks
Turnaround Time	Longer, due to strict verification process	Faster than banks	Similar to banks
Customer Service	Established network and customer service	Improving customer service	Specializes in home loans, better customer service
Regulatory Authority	Reserve Bank of India (RBI)	Reserve Bank of India (RBI)	National Housing Bank (NHB)

How to Make an Informed Decision

Now that you know the pros and cons of each of these different financial institutions, let’s discuss how you can decide which one to go with. 

1. Assess your financial situation: Do you meet the eligibility criteria mentioned by banks? If yes, it’s a no-brainer to look at multiple banks and decide on one of them which offers the most favorable conditions. If you don’t meet the criteria, HFCs and NBFCs are still an option for home loans with low cibil score, but make sure to under how much extra interest you’ll pay. 
2. Compare offers from multiple lenders: It’s best to have 2-3 different options when looking at lenders. But be careful about applying for too many loans as your credit score may take a hit. Make sure to understand if you meet the eligibility criteria before applying to avoid rejections unnecessarily. 
3. Read the fine print: Banks can hide important information within the fine print. It’s fair to say they love to play hide and seek. Make sure to read it and clarify any doubts you have. Sometimes bank agents may forget to mention important terms and conditions, and this can dent your pocket in the future if you’re unaware. 
4. Seek Advice from Financial Experts: Still unsure about whether you should choose between an NBFC an HFC or a Bank? Get in touch with our experts at Credit Dharma. We will understand your financial situation and recommend what’s the best course of action you can take to buy your dream home.

Frequently Asked Questions [FAQs]

Conclusion

To conclude, choosing an institution will majorly depend on certain factors like your eligibility criteria, personal preferences, convenience, etc. 

If you meet all eligibility criteria, you’ll get the best deals and offers from across all lenders. Then you get the freedom to choose. Banks will offer better interest rates compared to NBFCs and HFCs. Whereas, NBFCs and HFCs are more relaxed when it comes to eligibility criteria. 

NBFCs/HFCs will also include registration and stamp duty charges within the property value, allowing you to lend more compared to banks.

Pay equal importance to services such as customer support and facilities like good banking apps. Make sure to research the reputation of the lender as well. 

Finally, access your financial situation, look at the pros and cons mentioned, and choose a lender that best suits your needs.