5 things to keep in mind while arranging for a down payment

While banks fund a large part of the property value, customers need to shell out the down payment off their pockets Raising funds to do buying your dream home is a long-term plan Here are a few dos and don'ts

From spotting the right location to funding it, buying a house is a big financial decision. While finding a suitable location and good apartment might not take prior preparation, raising funds to do so is a long-term plan.

With property prices going up, most houses are purchased through home loan. Banks typically fund 80% of the property value, while the rest of the amount is arranged by the customer on his own. Banks start disbursing Home Loan after buyers have taken care of the down payment. For the first-time home buyers, arranging for a down payment may seem like a challenging task. Let’s look at five important things that need to be kept in mind while raising fund for down payment.

Planning And Budgeting

Buying a house needs planning well in advance. Arranging for down payment is a long-term project and it needs a good deal of discipline and planning. You can save for it through investment instruments such as Mutual Funds fixed deposits etc. You must pick an instrument based on the amount of time you have in hand. Say, you want to buy a house after three years and the down payment you would need at that time is Rs 10 lakh. You can start by investing Rs 25,000 per month in an equity mutual fund SIP. With return of 12% p.a., you would have a fund of more than Rs 10 lakh within three years.

Borrow From Family And Friends

If you are not ready with the fund for down payment at the time of buying a house, you can borrow from a friend or relative for a short-term period. However, go for it only when you are falling short by some amount. Make sure you have a repayment plan in place before you take the loan.

Check LTV offered by the bank

Normally banks offer Loan to Value (LTV) up to 80% of the value of a property to customers. However, if the loan amount is below Rs 30 Lakh, banks offer up to 90% of the property value.

Banks also consider the repayment capacity of a borrower, so make sure your credit score is healthy.

Do not over leverage

Do not over leverage on your financial capacity while taking a loan. Even though banks offer a loan of up to 80% of the property value, you must check if the EMI is comfortable for you. If you have sufficient fund available with you, try to pay from your pocket or take soft loan from family and friends. Make sure your aggregate EMI doesn’t become a reason for financial distress.

Don’t forget to add the stamp duty and registration charges

Customers often miss out on the associated costs of buying a house. Stamp duty and registration charges are two such costs that need to be taken care of by the customer from his own pocket. While registration costs around Rs 30,000, stamp duty costs about 5% of the circle rate/ready reckoner rate (charges vary from state to state) or the actual property value, whichever is more in value.

While you raise fund for down payment, make sure you have a contingency fund to make your expenses meet in case there is an unforeseen emergency.You should always have a backup fund handy to take care of your EMIs.

(The writer is CEO, BankBazaar.com)