Raising funds for a home loan down payment can be challenging, but there are ways to deal with it. In this article, everything regarding down payment for home loan has been covered. Give a quick read as it will aid your financial decision.
What is the Down Payment on the House Purchase?
If you plan to buy a house on loan from a bank or a housing finance company, you will not get credit for the entire cost of the house. You will have to raise a certain amount of money in advance from your own resources as a down payment. The down payment is the difference between the price of the house and the amount of the loan the bank is willing to offer you. To put it in other words home loan down payment is the amount you pay at the time of purchase. This amount is not from your loan money.
What is the Minimum Down Payment for Home Loan?
Banks or other financial institutions keep an upper limit on the amount they can lend for a house purchase based on the Reserve Bank of India’s guidelines and their own credit policies. At present, banks and other financial institutions in India offer credit up to 90 percent of the value of a property for loans up to Rs 30 lakh. This means you have to pay the remaining 10 percent of the property’s price from your own resources. The bigger the price of a property, the higher the down payment. For loans above Rs 30 lakh, banks and housing finance companies generally ask you to pay somewhere between 20 percent to 30 percent of a house’s value to the owner of the property before they finance the rest of the amount.
Tips for Reducing House Loan Down Payment
Making a down payment on a house loan upfront may not be easy for most homebuyers, but there are ways to get it reduced. Following are the options that help reduce down payment.
01. Choose the Right Lender
The Reserve Bank of India gives banks and housing finance companies enough leeway within the framework of its guidelines to determine lending parameters such as interest rates, eligibility criteria, and down payment. Making use of this freedom, some financial institutions offer credit with a lower home loan down payment than others. The borrower should look for a lender which asks for the minimum down payment.
02. Negotiate with the Lender
You should negotiate the home loan down payment with your lender. If you meet your lender’s requirements, you may get some relaxation.
03. Enhance your Eligibility by Reducing Liabilities
Being debt free before applying for a home loan will increase your eligibility for lower down payment. So, you must try to close your personal loans and pay credit card dues before applying for a home loan.
Moreover, you may add a co-applicant in home loan application. A close family member can be co-applicant. A co-applicant with good credit score having good income may help you with a reduced house loan down payment demand from the lender.
04. Make sure you Choose the Right Property
The value of your house is a factor in determining your eligibility for a home loan as well as a typical down payment on a house purchase. While choosing a house, you must ensure that its market value matches the loan you are seeking. The location of the property, its age, the reputation of the builder, and the quality of construction are some of the attributes of a property that determine its value. Choosing the property of high value will establish trust in your lender who will then provide you higher loan, decreasing your down payment.
05. Proportionate Release
This can minimize your down payment only if the property you are purchasing is still under construction. With this option you as a borrower pay the down payment in small proportions over the than rather than one large lump sum. In addition, as construction takes years, the borrower may pay the down payment periodically, based on which the lender would release the loan disbursements. This reduces the burden of making a large lump sum down payment.
What is the Maximum Down Payment for a Home Loan?
There is no upper limit of down payment. One can pay any higher amount as down payment and it is acceptable. Moreover, paying higher down payment comes with its own pros and cons. Lets have a look at them and then decide on whether to pay minimum down payment on home loan or maximum.
Benefits of Higher Down Payment
- Reduced Loan Amount: Making higher down payment reduces your home loan amount. This gives you more ownership of your home, reducing your liabilities. Additionally, loan will be paid in less time.
- Easy Loan Approval: The process of getting home loan becomes easy. Higher down payment ensures lender about your financial capabilities and trusts you easily with loan making, making your home loan process easy and quick.
- Lower Interest Rates: Loan amount is directly proportional to interest rates. Therefore, less loan money implies lesser interest rates which further means less EMI (equated monthly installment).
Drawbacks of Higher Down Payment
- Stretch you Financially: Making bigger down payment requires more money which can stretch your finances in order to arrange that money. You may have to cut down on various things to make big down payment.
- Affect Emergency Funds: One might end up using emergency funds to make bigger down payments. Having used up emergency funds or a portion of it have it own consequences at the time of emergency.
How to Gear Up For Down Payment?
By now you know that down payment is required for home loan, so let us move on to how can you arrange for same.
Take a Loan from your Employer
Some companies or organizations offer their employees loans for their emergency needs (down payment here) or as part of incentives to retain talent. Some employers do not charge interest at all, and only deduct the principal amount from an employee’s salary in installments.
Borrowing from Family and Friends
Buying a house is a major investment in one’s life and family members and friends usually encourage such investments. Ask them for down payment money. In fact, it is quite common in Indian families to support one another in an hour of need.
Save for a Home Loan Down Payment
A good way to prepare yourself for a home loan down payment is to save in advance. You can opt for a monthly savings plan or a small fixed deposit. Regular investment in mutual funds through SIP (Systematic Investment Plan) is another good way to start saving. Small savings go a long way in creating a corpus to meet emergency expenses. If you have a strong corpus, you can tap into it for clearing a part of the home loan down payment. However, you must keep some cash handy for any unexpected expenses. If you have a fixed deposit, it can come in handy.
Make use of Stock Market Assets
You can use your stock market assets such as shares and mutual funds to free cash for home loan down payment. You can either sell shares or pledge them to take a loan.
Going for a Personal Loan
Taking a personal loan is a quick way to raise money for your housing loan down payment if you are ready to pay higher interest rates. It will adversely affect your eligibility for a home loan.
Withdraw from your EPF Account
Employees Provident Fund (EPF) rules allow EPF members to withdraw up to 90 percent of their corpus for buying a house. Although you lose out on interest, it is a better option than taking personal loans at higher rates. If you have been an EPF member for more than five years, you can also get a loan. You can also use your Public Provident Fund account and life insurance policies to take a loan.
In a nutshell, home loan down payment is the money you have to pay at the time of buying a house. There are ways in which it can be reduced but not exempted. So, make sure you are well prepared with the down payment money whenever you are taking a home loan.
Check below article to know the difference between home loans.