Down payment in home loan is the upfront payment the borrower makes to the bank or non-banking financial company such as Bajaj Finserv. According to the RBI rules, lenders in India can only provide 80% of the property value as a home loan, while the borrower has to arrange for the balance 20%.
When an applicant is going for a home loan, he or she has to consider a few points about the home loan down payment. Lenders demand 20% of the total value of the property as down payment in home loan. However, there is no maximum limit for the down payment in home loan. In fact, a higher down payment leads to a smaller home loan amount, and in turn that reduces the home loan EMI as well. Therefore, applicants should go for a higher down payment whenever possible.
If the applicant is buying a house that is 15 years or more in age, this can become a limitation while seeking a home loan from a lender. Lenders usually offer lower amounts of home loans for older houses, increasing the down payment for the borrower. Applicants must also note the down payment in home loan does not cover the registration and related costs. These are additional to the amount the borrower pays for a down payment.
Lenders do not accept payments below 20% of the total value of the property as down payment. Therefore, this can be considered the minimum down payment for a home loan.
However, for old houses, older than 15 years or more, lenders may sanction home loan amounts not exceeding 50% of the total market price of the house at the time of valuation. In such cases, the minimum down payment for a home loan becomes more than the earlier limit of 20% of the total value of the property.
Lenders may also charge a fee to borrowers who pay a smaller down payment in home loans. This fee is on top of the premium for the mortgage insurance. The borrower has to pay this at closing, and the smaller is their down payment in home loans, higher is the fee. The lender may charge a higher interest rate in place of the fee when the down payment is low.
Although buyers can purchase houses with minimum home loan down payment, there are several advantages in making a higher down payment.
Property values can fall as well as rise. When the value of the property falls below the outstanding mortgage balance the borrower may not be able to sell the property. By making a higher down payment in home loan, the borrower reduces the likelihood and severity of the price decline that can put him or her in a negative equity situation.
For a conventional home loan, the lender may ask for a private mortgage insurance be added to the monthly payment if the borrower is offering only the minimum down payment for home loan. This can increase the EMI substantially.
Since a large down payment means a smaller home loan amount, it also means the monthly payments will be lower for the borrower. Additionally, a borrower offering a higher down payment will get a better home loan interest rate and better terms. This may be important if the borrower has bad credit.
With a higher down payment, the applicant increases his chances of the loan being approved. Lenders treat a higher down payment in home loan as an indication of the borrower’s ability to save money. This increases the creditworthiness of the borrower.
A higher down payment makes it easier for a borrower to pay off the home loan faster. The higher down payment in home loan reduces the EMI, allowing the borrower to make a greater amount of payment towards the principal.
Also Read: What is Own Contribution in Home Loan?
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