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Analysis of housing loans as tools in the progressive housing process

March 15, 2010

By Brendan McBride

Small loans from micro-finance institutions help families who receive remittances to incrementally improve their housing situation in stages. This progressive housing process often better suits the family’s particular needs and financial capabilities more so than complete home construction.

This series of case studies has described the role of remittance-backed housing loans in the housing improvement schemes of eight clients of the Local Development Fund (FDL) in Nicaragua. In each of these cases, households were already implementing strategies to improve their housing circumstances, typically in progressive stages as funds became available. Housing loans from FDL appear to have played an important role in this process. Clients consistently remarked that their loans had enabled them to speed up the progressive housing process, allowing them to accomplish more than they would have been able to with the funds they had in hand. Some clients related that it would have taken several months or years to save up the money that they had borrowed. In most cases, the loan was complemented by the clients’ contributions of their own savings or remittances, thus expanding the scope of each housing improvement.

Despite similarities among the clients in these stories, each employed a customized strategy to improve his or her family’s housing circumstances. These case studies give a sense of how the progressive housing process can be calibrated by users to suit their particular needs and match the financial and logistical capabilities of their household. They show us how housing microfinance can allow households to progressively improve their homes. Borrowers use housing microloans to purchase land, add on rooms, make repairs, improve security, and complete unfinished projects. These improvements took place over the course of days or years; households sometimes carried out improvements or construction using their own labor, in some cases they hired an outside contractor, and in other cases they combined their own labor with that of a third party. Notably, housing microloans were used in three cases to complete the improvements to a base unit constructed through some government-sponsored program. This range of loan uses and implementation strategies is a testament to the flexibility of housing microloans.

Use of remittances for housing
The clients in these stories used remittances in various ways to improve their housing conditions—whether as capital for new construction, progressive improvements, or land purchase. While further research is necessary to understand what percentage of remittances are directed toward housing uses, these interviews indicate that clients considered remittances to be an important tool for meeting their housing improvement and construction goals. Most clients also seemed to recognize that the inclusion of their remittances income in their loan application helped qualify them for an FDL housing loan, or at least made them eligible to receive a larger housing loan.

Inclusion of remittances as income
The inclusion of remittances as a source of income made a categorical difference for some households, enabling them to qualify for a loan that they would not otherwise have qualified for without including remittances as income. In other cases, households qualified for a larger loan when the analysis of their payment capacity factored in remittance income.

Two patterns emerged from the interviews that should be considered when designing future remittance-backed loans. The first is the phenomenon of “extraordinary remittances,” or remittances that are sent on a one-time or sporadic basis to cover a specific expense, such as installing a roof on a house, paying school fees for a child or purchasing medicine for an ailing grandfather. These FDL clients attested to receiving such extraordinary remittances ranging from US$50 to over US$1,000. This phenomenon raises the question of whether, and how, such irregular remittances should be factored into the analysis of a household’s payment capacity.

Secondly, some families reported that they would receive remittances but would then apportion these remittances out to other family members. The cautionary note here is that remittance receipts may reflect what clients receive in remittances but not what they keep. If remittance receipts are the sole basis for documenting remittance income, it is crucial to confirm whether or not the borrower actually retains all remittances for him or herself.

The role of the decline in remittances to Nicaragua
Like many other Latin American countries, Nicaragua has experienced a drop in remittances during the last year. Part of the motivation for this case study was to get a sense of whether or not drops in remittance receipts were playing a role in a growing late-payment and default in remittance-backed loans with FDL. The limited number of cases in this series prohibits us from drawing any conclusions about the connection between default rates and a drop in remittance income, but this series does offer some stories that shed light on the dynamics of remittances as a form of income to pay a housing loan.

In the cases where there was late-payment or default, it was primarily the result of either a change in the household’s circumstances or the occurrence of a singular event that increased their expenses, making it difficult to make their loan payment. In one family’s case, a downturn in remittances contributed to the difficulty of dealing with increased expenses, but was not per se the cause of nonpayment.

Before embarking on these case studies, it was assumed that households whose income was almost entirely derived from remittances would be more susceptible to a downturn in remittances, and thus potentially more likely to make late payments or default on their loans. The results of the interviews in this series do not support this hypothesis. One case in particular–that of Carmen Ramirez**–appeared, in theory, a prime candidate for lateness: remittances were more than 80 percent of her income and the client’s daughter, who was her main source of remittances, had recently returned permanently to Nicaragua and therefore no longer sent remittances.

Ms. Ramirez continued to receive remittances from two other children the U.S. and Costa Rica, however, and supplemented that income with her earnings as a part-time food merchant. In other words, although her income was derived almost entirely from remittances, this income was fairly diversified amongst three sources, and supplemented by non-remittance sources. This fact enabled Ms. Ramirez to withstand the disappearance of one remittance source and continue to pay back the loan.

A tentative lesson here may be that it is not the percentage of income represented by remittances that could threaten late or nonpayment, but a lack of diversified remittance income sources.

Client’s assessment of their experience with FDL
In general, families expressed strong satisfaction with their experience as clients of FDL. Most felt that they had been treated well at every step of the loan process, from the moment that they applied, through the servicing and payoff of the loan. Many families noted that they felt that they could trust the staff at FDL to have their best interests in mind during the loan process. Three clients said that they had been approached by other microfinance lenders, but had stayed with FDL out of a sense of loyalty that was based on this trust. The majority of interviewees also commented that the process of getting the loan was relatively uncomplicated, common refrains being that clients do not have to hand in too much paperwork and that FDL does not require too much “back and forth” when processing the loan.

Several clients commented that FDL had better interest rates than other lenders, a factor that cemented some clients’ loyalty to FDL. The only explicit complaint about FDL came from one client, Noé Miranda, who on two occasions was approved for a lesser loan amount than he had applied for. Mr. Miranda said that he had not received an explanation for why his original request was not approved; this embittered him, since he felt that he had been a good client of FDL and that the organization owed him an explanation for the disapproval of his original request. All other clients felt that FDL had been very clear and courteous in their communications. The client who was most in arrears, Julia Montano, commented that FDL “treated me well even when I was late on my loan.”

The role of technical assistance in construction
All of the families received technical assistance in some form, in some cases directly from FDL staff and in other cases from staff of PRODEL, an organization that collaborated with FDL to provide a technical assistance component on a number of housing loans. Technical assistance took two primary forms. In its most common form, FDL or PRODEL staff would visit the family during the application phase to assist them in preparing a budget for the proposed scope of work. In other cases, staff would help draw out a simple architectural plan and a set of specifications about how to carry out the work. The plan was usually only prepared in the case of improvements that involved the construction of structural elements, i.e. a plan would be completed for the addition of a bedroom but not for the installation of a new floor or the erection of simple partitions.

The role of technical assistance in construction varied from client to client. Some families did not recognize that they had received technical assistance, thinking that the preparation of a budget, for instance, was a standard part of the loan application process. In many cases the person providing the technical assistance and the loan officer processing the loan were the same person, perhaps leading to confusion on the part of clients as to the two roles that this one person played.

When clients recognized that technical assistance was provided, however, they related that it was a helpful aspect of the experience of borrowing from FDL. The technical assistance that was provided in preparing a budget for the work seemed to have the most directly positive impact for clients. Several clients remarked that having a budget taught them the amount and type of materials necessary to complete their project and gave them a sense of how it should be carried out. This knowledge thus positioned them to better negotiate with contractors.

Clients remarked that the preparation of a budget gave them a realistic idea of how much work could be done to their house with the amount of capital they had on hand. In one example, Amarilis Cortés had planned to add two rooms to her house by combining an FDL loan with her savings. The budget–prepared with assistance from FDL staff–made it clear that the sum of her loan and her savings would not be sufficient to cover the cost of adding two rooms. Rather than a disappointment, Ms. Cortés considered this a positive development. Without the technical assistance in preparing a budget, she said, she probably would have proceeded with her original plan of adding on two rooms, which may have stalled halfway through when her capital ran out. Under this scenario, both rooms may have remained unfinished and unusable until she gathered more capital. The assistance of a budget allowed her to have a clear idea of what was achievable. Based on the budget, Ms. Cortés and her family completed the addition of a single room, and are now saving in hopes of combining their savings with another loan from FDL to fund the addition of a second room.

These case studies also showed how families’ shifting housing improvement strategies can sometimes reduce the effectiveness of technical assistance. In some cases, clients intended to use the loan for one purpose, received technical assistance based on this, and then later decided to use their loan proceeds to address a different home improvement goal. In one example, Noé Miranda originally intended to use the loan to add a bedroom and received technical assistance to prepare a budget and draw up a construction plan for this purpose. After finding out that he received a smaller loan than he wanted, he decided to use the loan to paint his home. In this case, the technical assistance efforts were directed toward a project that never happened and thus not have an immediately beneficial impact for the client. At some point, however, Mr. Miranda may eventually draw on the technical assistance to implement the bedroom addition.

Positive impacts of housing microloans
These case studies show how small housing loans can result in improvements to a family’s housing circumstances. In almost all cases, objective improvements led to subjective improvements in the households’ quality of life. In more than one case, borrowers used loans to install fences or gates or other work that allowed them to feel more secure in their homes. Amarilis Cortés used her loan to add a room right before the birth of her daughter, and Josefa Montoya doubled the size of her a basic one room home over the course of a decade, giving her family more space to live and grow. In still another case, Auxiliadora Baltodano used her loan to augment remittances received from abroad to construct a home that now spaciously houses four generations of her family–a significant departure from the one room home her family inhabited when they first acquired their land. Other borrowers had used the housing loan to install a finished floor, marking the first time that their homes did not have a dirt floor.

In five cases, borrowers ran part-time or full-time business from their homes; three of these businesses produced goods for sale, such as tamales or shopping bags. Since the home served as the base of operations for these businesses, improvements to housing meant improvements to the households’ places of business as well. This gives a glimpse into how housing loans can play a role in improving the use of the home as a productive asset. In addition, loan capital was used to buy materials in local businesses and pay for the local labor, meaning that the spending of housing loans could be having a positive ripple effect in supporting local economies and creating employment.

For more information, please contact:

Julio Flores
General Manager
Local Development Fund

Managua, Nicaragua

Christy Stickney and María Sáenz
Housing Finance Department
Habitat for Humanity International

Latin America and the Caribbean office


*Sources: World Bank, 2009. “Remittance Flows to Developing Countries to Decline By 7.3% in 2009, Predicts World Bank,” and “US $23.4 millones menos en remesas” online at In contrast with the overall flow, the latter article notes that remittances from Costa Rica to Nicaragua have remained stable.
**The names of the families have been changed to protect their identity.