Housing is a basic human necessity but its increasing rates in the real estate market can be a major hurdle for people, especially those who live in developing countries like Pakistan. Mostly, people who desire to buy a house cannot afford it all on their own and hence, require loans from private lenders such as banks, credit unions, and mortgage companies. Many banks provide low-cost housing plans offering affordable house loans to lower and middle-income families. This is referred to as House Financing, which can be divided into two main categories:
- Conventional house financing in which loans are provided to you. These have to be paid off, coupled with an interest, in order for you to gain complete ownership of the house.
- Islamic house financing in which you and your bank buy the property. Eventually, you have to periodically pay off the bank’s share to gain ownership of the house. This is also known as Diminishing Musharakah.
As you prepare yourself to buy residential property, you will need to learn everything possible about house financing and mortgages. This is one of the biggest points of confusion, worry, and downright failure for many would-be homeowners as inadequate knowledge and mismanagement of funds can end up disastrous for already struggling house buyers.
Procedure for House Financing
Step 1
The first step is getting in touch with an institution that is involved in the business of house financing. In Pakistan, numerous commercial banks, whether private or state-owned, are engaged in the business of house financing like the Apna Ghar scheme of the Bank of Punjab (BoP). Other banks like UBL, HBL, and MCB also deal in providing financing plans for housing. An institution that stands out in this business and is purely devoted to this task, is the government House Building Finance Corporation (HBFC). Nonetheless, you may select any institution as per your preferences.
Step 2
Contact the selected institution and apply for the house financing scheme on the prescribed application form provided by the institution. You may be charged an application fee for this process. The institution would then normally demand the following documents from you:
- Your Computerized National Identity Card (CNIC)
- Your income certificate
- Tax return of Federal Board of Revenue (FBR)
- Any other document specified in the requirements of the company you have chosen
- Details of your present residential status.
Step 3
Once all required documents are verified and you are proven eligible, the institution provides you with a number of options. These are:
- The institution provides you with a housing option as per your mentioned requirements.
- You get to choose a house in any preferable area of the city and request the institution to handle extra payments on your behalf.
- You can search for residential plots and construct your house on it as per your liking.
Step 4
The institution then appoints a team of professionals to determine your financial capacity. These teams usually gather details regarding your sources of income, financial resources, and whether you have taken any loans in the past. Once the institution is convinced that you are a trusted and qualified individual, they grant you the loan as per agreements. An advance amount of payment would then be paid by you in favor of the institution, which is termed as a down payment. The percentage of this down payment may vary amongst institutions. With the clearance of this fee, you will be provided with an installment plan which will provide you with details of what payments you will be making monthly, and for how long. If you fail to pay these installments, the bank holds the right to file legal action against you. Further details about legalities are mentioned under the Terms & Agreements section of the contract.
Pros and Cons of House Financing:
Pros
- Home loans ensure that you become a homeowner despite the increasing rates of land and construction costs.
- You can pay off the house loan in monthly installments in case the amount is lower than your monthly income. The duration over which the loan is to be paid can be chosen based on your age and the years left for your retirement.
- You are subjected to receive income tax benefits. The amount of tax that has to be paid to the government is minimized as the money that you pay as interest, is deducted from the overall income tax value.
Cons
- Even though the interest rate on a house loan is lower than other loans, you eventually end up paying significantly more than the amount you initially borrowed.
- Another downside of house financing is long repayment periods.
- You cannot possibly expect any profit.
Considering the aforementioned points, you can determine whether you can afford to borrow a house loan or not. If you do sign up for it, you should always look out for the consequences and risks involved in such dealings.