Down Payment for Home Loan: How Much You Need?

Buying a home is indeed a dream for many. One of the many hurdles people face in the process of buying a home is accumulating funds. Home loan is an initiative by the government and financial institutions that has helped people in making their dreams a reality. Down payment on loan is the best solution to this problem as it gives the buyer a flexibility to pay only a particular percentage of the total amount of the property. Let us understand the benefits and considerable factors of down payment on a loan through this blog.

What Is a Down Payment?

Down payment refers to the first and the upfront payment paid from the total amount of an asset such as a home or a vehicle. The remaining amount is financed by the loan taken. 

Now, depending on the cost of your property, the required down payment amount differs from one to another, this ratio is known as LTV (loan-to-value) ratio. Down payment also builds a mutual trust between the lender and the borrower. The risk for the lender is reduced as an adequate amount is already paid. 

How Much Down Payment is Required for Home Loan?

Home loans usually need a down payment of 10% to 20% of the purchasing property value.

As per the RBI norms, LTV (Loan-to-value) ratio limit has been set to a maximum of 80% for loan amounts exceeding Rs 30 lakh and up to Rs 75 lakh. For loans of more than Rs 75 lakh, the LTV ratio might reach 75%.

If the value of your property is less than 30 lakh, the banks can lend up to 90% loan and 10% will be down payment. 

Benefits of Down Payment

Following are a few advantages for a buyer if you choose to make a down payment on home loan:

• Lowers monthly mortgage payment: The higher you pay a down payment, the better it is. Down payment will reduce our monthly burden subsequently (EMIs).
• Quick loan payoff: Paying a large amount as down payment can make you debt-free sooner and pay off your loan real quick.
• Decreased risk of negative equity: Paying a large amount as down payment can reduce the risk of the property value falling below the mortgage balance (negative equity). 
• Accelerates home loan eligibility: To secure better interest rates and get your loan approved hassle-free, try paying a big amount as down payment.
• Financial Stability: This demonstrates the financial stability and managerial skills of the buyer which builds trust and enhances your creditworthiness.

Factors Considered by Lenders Before Sanctioning a Home Loan

Following are a few major points every lender checks before approving your loan:

• Credit score: Your credit score and history talks about your creditworthiness. Try to maintain a credit score above 700 to get your loan approved. If you have a clean credit history, it demonstrates that you have to repay the loan amount.
• Employment status: The lenders keep an eye on your income generation method. Once they know that you have a stable income, it is easier to trust the buyer. Income-to-expense, debt-to-income ratios are thoroughly checked.
• Outstanding loans: Try to pay off all your loans before applying for a new one. This indicates your financial conditions and having an existing loan can have a negative impact on your application.
• Age of the buyer: People who are young and have many working years ahead of them are generally preferred more than the people who have crossed the working age.
• Property details: Lenders have all the rights to check your property before sanctioning a loan. He ensures that the property can be used as a collateral for the loan.
• Documents: Lenders require various documents, such as income proofs, address proofs, and KYC documents, to verify the applicant’s details and assess their eligibility. Checkout our detailed blog on documents required for a home loan to get a better understanding. 

Tips to Save Funds for a Down Payment

If you are planning to buy any asset in the near future, following are a few tips that might help you in saving your funds for a down payment. 

• Set a budget: Evaluate the estimated amount of money you need for down payment, set a budget and small milestones. Achieve smaller targets and win your dream house.
• 50-30-20 rule: To set a budget, you can follow the 50-30-20 rule. Where 50% of earnings goes to the fixed costs, 30% for discretionary expenses and 20% savings.
• Monetizing assets: You can go for FDs, invest in stock market, or any insurance policy to accumulate funds for down payment. 
• Enhancing income sources: Increase your income sources by adding freelancing or any other additional income method to fasten up your income.
• Reduce expenses: Along with the additional income, you need to cut down the irrelevant expenses. 

Gathering funds can be a little difficult in this economy, but with a proper plan and mindset, it is no big task for anyone. Accumulate the amount of money for down payment and secure your dream house, the remaining amount will be covered through loan.