Taking a home loan to realize the dream of owning a house is probably the biggest financial commitment one makes in their lifetime. As lenders usually finance only up to 75 – 90 % of the property’s cost, the margin of at least 10 – 25 % has to be contributed by the home buyer in the form of a down payment. If not planned properly, this task of down payment accumulation can prove to be a tricky one. Also, note that if you have applied for a home loan and want to enquire whether you have got home loan approval, you can directly approach the lender for the same. For instance, suppose you have applied for a home loan from SBI (State Bank of India) and want to enquire about your SBI home loan status; for this, you can straightaway contact the lender to get an idea of when you will get the approval. You may also know if you have received the home loan at a fixed or floating rate. In the case of a fixed rate, your offered rate may be linked with the SBI MCLR rate, and in the case of a floating rate, your offered rate may be linked with the SBI repo rate.
Here are some solid tips to guide you towards the timely accumulation of an adequate corpus for a home loan down payment:
Do’s
Begin investing early for corpus creation
The famous phrase “early bird catches the worm” fits aptly when it comes to investing to achieve financial goals in life. When it comes to the accumulation of your home loan down payment’s corpus, the earlier you begin investing, the more time you allow for your money to grow and benefit from the power of compounding. Whereas the more you delay, the higher the chances of non-accumulation of the target corpus due to the shorter span of time available for accumulating the required corpus.
Therefore, first estimate the required down payment amount after factoring in the property’s value, your existing income and debt repayments, and LTV ratio. And then, according to your risk appetite and investment horizon, choose the right investment avenue whose expected returns would assist in the timely accumulation of the down payment corpus.
Try to pay a higher down payment.
As per RBI’s (Reserve Bank of India) guidelines, banks or financial institutions can finance up to 75 – 90 % of the house property’s cost as a home loan, implying that home buyers have to contribute at least 10 – 25% down payment, depending upon the property’s cost and LTV ratio offered by a lender. But instead of accumulating this minimum down payment requirement of 10 – 25 %, home buyers must try and contribute a higher down payment instead of accumulating just the minimum requirement of 10 – 25%. This is because the higher the down payment, the lesser you would need to borrow and repay in the form of a home loan’s principal as well as applicable interest. And a lower loan amount requirement would imply a lower LTV (loan to value) ratio requirement as well, which can boost both your loan eligibility as well as chances of loan approval.
However, while making efforts to arrange a higher contribution from your own pocket in the form of a down payment, make sure you don’t overstretch your finances or compromise on other important financial goals such as a child’s higher education and your retirement corpus accumulation.
Don’ts
Don’t dip into earmarked investments.
While making efforts to accumulate a home loan’s down payment, homebuyers often commit the mistake of disturbing their emergency fund or earmarked investments set aside for other important financial goals such as retirement corpus and a child’s higher education. While doing so, they often fail to realize that this would have not one but two consequences. Firstly, the chances of failing to achieve the set financial goal due to redemption of earmarked investments, which may even involve the possibility of booking losses while redeeming the market-linked investments during bearish market conditions. Secondly, as the primary purpose of your emergency fund is to tackle financial exigencies such as sudden job loss or severe illness, disturbing it for your down payment can force you to take high-cost loans in case of unforeseen emergencies.
Avoid borrowing to fund your home loan’s down payment.
Failure to accumulate the required down payment often leads home buyers towards the option of borrowing funds for the same. Although borrowing options such as personal loans or gold loans may seem to be a convenient and quick way of procuring the down payment money, doing so can have its own set of consequences as well.
To begin with, as lenders generally prefer lending to borrowers whose fixed obligation to income ratio (FOIR) does not breach the 40 – 50 % mark, your home loan application may get rejected if the combined EMIs of your personal loan or gold loan are taken for funding your down payment, along with the expected EMI of the applied home loan, pushes your FOIR past this mark. Even if the home loan gets approved, a higher FOIR due to the presence of multiple loans can pose difficulty in availing of another loan in future, whenever the need arises.
Additionally, whenever you submit a loan application directly to any lender, the lender fetches your credit report from the concerned credit bureau, which is termed a hard enquiry. Such lender-initiated queries can pull down your credit score by a few points, which may hinder your home loan approval chances since lenders usually either reject or charge higher interest rates from borrowers whose credit score doesn’t meet their eligibility criteria.
Consider visiting online financial marketplaces or online financing lending markets to compare and choose the most suitable lender according to your eligibility and financial requirement. Credit report requests by such online platforms are considered soft enquiries by the credit bureaus, which neither reflect in your report nor do they affect your credit score. This keeps your credit score unhampered, which further allows you to stay eligible for any other loan option in the future.
