Home buying: All about the down payment

A dream that most of us nurture when living in a rented accommodation is purchasing our own house. When you cannot provide cash upfront, a home loan is the best possible way of making the purchase.

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 per cent loan'.

'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; and
• 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 per cent to 20 per cent of the total value of the property.

For example, if a property costs Rs 20,00,000, and if the down payment required by the lender is 15 per cent, 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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