Few points to be kept in mind while doing down payment
Normally, lenders (banks, financial
institutions) would require some amount to be paid upfront as a ‘down payment’
because normally banks do not offer a ‘100% loan’. A ‘down payment’ simply put
is the difference between the purchase price of a property and the mortgage
loan amount. It underlines the buyer’s commitment to complete the deal and
indicates the buyer’s fidelity in making the loan payments.
The system of down payment exists
because:
- It indicates borrower’s credit worthiness due to access
to the down payment
- The amount of real investment a borrower has in their
purchase, and their fidelity in continuing to make payments regularly are
linked
- It acts as a sort of insurance for lenders, since
borrowers know that if they default on their loan; they will not only lose
the property but their down payment as well
- It ensures that the buyer (borrower) has some stake in
maintaining the property
- It ensures that banks are protected from fall in
interest rates since the amount that they lend is lower than the market
value of the house. Therefore, if there is a fall, they can still recover
the losses
Here are some important facts
regarding down payments:
Amount of down payment: Normally, down payments range from 15% to 20% of the total
value of the property.
For e.g., If a property costs Rs.
20,00,000, and if the down payment required by the lender is 15%, then the down
payment will be Rs. 3,00,000.
Limit of the down payment: There is no set upper limit to the amount you can pay as
down payment - it all depends on how much cash you can manage to set aside. The
more you are able to pay as down payment, the lesser is the amount of loan
taken from a bank, resulting in easier monthly payments or shorter loan tenure.
Try to put down a sizable amount of down payment.
Age of the property affects down
payments: The older the property, the more
apprehensive banks are to finance them. This increases the amount of the down
payment required. Look for properties, which are not very old.
‘Zero-down payment’ loans are not
necessarily helpful: Banks might offer you a ‘zero -down-payment’ loan
based on good credit history. Typically, zero-down-payment loans are offered
for smaller homes and are hard-to-get and hard-to-qualify. Moreover, ‘zero down
payments’ mean that you are borrowing more, making your monthly installments
higher and defaulting on even a single payment might initiate foreclosure
proceedings against you.
Down payments do not include
miscellaneous costs: Down payments normally do not
include costs such as property taxes, registration charges, transfer charges
and stamp duty costs. Most banks include these costs in the total loan amount.
In case you are wondering how you
would arrange the down payment, here are some tips:
Plan early - The earlier you start planning to buy a house, the sooner
you can come up with the down payment amount.
Save every month - Regular savings go a long way in building up a sizable down
payment amount.
Borrow from parents/relatives - It’s not unusual for parents or relatives to help with the
down payment.
Apply for a personal loan -Based on your cash flows, apply for a personal loan for the
down payment.
Save from tax refund - Save your tax refunds as fixed deposits in a bank.
Try pledging securities -Try to see whether pledging fixed deposits, insurance
policies or shares are considered against making the down payment.
Look for straightforward solutions: Try asking for a raise or getting a higher paying job.
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