Understanding the Minimum Down Payment for a Home Loan: What You Need to Know
It is essential that you avail yourself of a home loan from a reputed lender like IIFL Home Loans.
In India, buying a new home is not just a financial or an investment decision. It also involves a lot of sentiment. Buying the brick and mortar, having a home signifies that you have a safe haven where you and your family live safely.
If you, too, are planning to buy a new home, it is paramount that you understand each and every aspect of home-buying process, including the concept of the minimum downpayment for availing a home loan. A lot of first-time home loan borrowers get confused about this aspect of home loan.
If you are unsure about the minimum home loan down payment, this guide is for you.
What is the down payment on a home loan?
As per the Reserve Bank of India (RBI) mandate, financial organisations in India are allowed to finance only a certain percentage of the property's value that you want to buy. Although the percentage varies from one lender to another, generally, most lenders finance up to 80% of the property's value.
This means that as a borrower, you must pay the balance amount from your pocket. This is called a down payment. You must pay the amount up front while applying for the loan; it is an integral part of the home loan approval process.
Let us understand the down payment on a home loan with an example.
Miss. Archana Patil purchase a home for Rs. 70 Lakh. When she approaches home lending companies to get the desired funds for buying her dream home, the lenders ask her to pay at least 20% of the property’s cost, i.e., 20% of Rs. 70 Lakh as a down payment for a house.
This means Miss. Patil would have to pay about Rs. 14 Lakh upfront, while the lender will pay the balance amount, i.e., Rs. 56 Lakh.
When you make the down payment for a home loan, it acts as a kind of assurance for the financial institutions that you are serious about the property purchase, and it reduces their risk exposure. From a home loan borrower's point of view, when you make the down payment, you claim your stake in the property from the outset.
Needless to say, the down payment you make has a direct impact on the home loan amount you borrow as well as the loan terms and conditions.
How much should the minimum down payment be for a home?
If you are unsure about how much down payment is required to buy a house, the bare minimum is 10% of the property's value. However, this can vary from one lender to another and depends on several factors.
Some lenders may even require you to pay a minimum downpayment of 20% of the property's value before they sanction your loan application. If you are applying for any home loan schemes offered by the central government of India or the state government, you may get some relaxation in this matter.
For example, if you want to apply for a home loan under the PMAY (Pradhan Mantri Awas Yojana) scheme, you can get it by making a down payment as low as 5% of the property’s value. Furthermore, using a house loan calculator can also help you estimate your potential EMIs and make informed decisions about your home loan.
Factors that affect home loan down payment
Now that you know about how much down payment for a homeloan is required, let us look at some of the critical factors that affect the mortgage down payment.
- Government schemes
Some of the home loan schemes offered by central or state government, like the PMAY can enable you to get the desired loan amount by paying a down payment as low as 5-10% of the property’s value.
- Lender’s policies
Financial institutions in India have their own guidelines and internal policies with regards to minimum downpayment required. However, as mentioned earlier, the average minimum down payment ranges between 10 to 20% of the property’s value.
- Age
Your age at the time of applying for the home loan is another critical factor that may affect the down payment you make. For example, if you are in your 20s with a stable income and a promising career ahead, the lender may let you make a minimum down payment of 5 to 10% of the property’s value.
In contrast, if you are in your 50s at the time of applying of home loan and approaching your retirement, then the lender may require you to pay a higher down payment of 20% or even higher of the property’s cost to minimise their risk of lending you.
- Credit score
Your CIBIL or credit score is a reflection of your creditworthiness. If your credit score is high, i.e., more than 750 and close to 900, the lender may be willing to offer you home loan with more favourable terms and conditions, including reduced down payment.
- Income stability
The stability of your occupation and income also determines your ability to repay the home loan on time and consistently throughout the loan tenure. If you have a strong income record and excellent credit history can help you get a discount on the down payment from the lender.
Benefits of paying the minimum down payment
- If you pay only the minimum down payment, you can keep your hard-earned savings intact. This, in turn, can give you the financial flexibility to manage any unforeseen expenses that may occur at any time.
- The amount you save from paying a higher down payment than the minimum amount required can be invested in some income-generating avenues and earn valuable returns in the long run.
Final Word
Having a fair idea about the minimum down payment required for getting a home loan can help you make arrangement for the funds beforehand, and make an informed borrowing decision. You can either opt to pay the minimum down payment or pay a little higher amount and reduce the amount you borrow, consequently the EMI burden.
Irrespective of the choice you make about paying a higher down payment or only the minimum amount, it is essential that you avail yourself of a home loan from a reputed lender like IIFL Home Loans. They offer the loan at affordable interest rates and get the loan for an extended tenure of up to 30 years.