Common Mistakes Applicants Make When Sourcing Their Home Loan Down Payment Money

One of the most pivotal factors that decide one’s home loan amount is the LTV ratio set by the lender. LTV ratio is the home’s cost that is financed by the lender. The remaining cost is to be paid by the borrower’s own resources. Given that most lenders offer an LTV ratio of up to 75 to 90% of the home’s price, applicant’s are required to accumulate a minimum of 10% to 25% in the form of a down payment. 

Note that the LTV ratio of up to 75 to 90% of the value of the property is set by the RBI guidelines. However, the final proportion allowed is based on the lender’s assessment of their credit risk concerning a specific home loan applicant.

As a higher contribution from the applicant’s own funds lowers the lender’s credit risk, applicants can increase their eligibility for a home loan, may it be for LIC home loan eligibility or SBI home loan eligibility, by contributing a higher amount as a down payment from their own funds. Doing this would even lower your entire interest cost of a home loan. However, in an attempt to meet the down payment requirement, many often tend to make financial mistakes, which can adversely impact their financial health in the long run. Thus, apart from knowing your LIC Home Loan EligibilitySBI Home Loan Eligibility or home loan eligibility with other lenders, ensure to even consider planning before for the home loan down payment amount if you want to avail home loan in future.

Here I will list some common mistakes home loan applicants make while sourcing home loan down payment amounts:

Liquidating emergency fund

This fund is the portion of an individual’s savings, which is set aside to face unforeseen expenses and meet unavoidable expenses in events of illness, disability or job loss. Ideally, emergency fund should be at least 6 times one’s mandatory monthly expenses, including their existing EMIs, utility bills, daily household expenses, insurance premiums, children’s tuition fees, medical costs etc.

If you redeem your emergency fund for making your home loan’s down payment, you will be propelled to either liquidate your investments earmarked for your crucial financial goals or opt for loans available at high-interest rates on witnessing any financial emergency.

Liquidating long term investments earmarked for crucial financial goals

Home loan applicants often commit the mistake of disturbing their long term investments set aside for their crucial financial goals such as retirement or a child’s higher education to source the down payment money. The availability of a long time horizon to create their corpus again for such goals often make them take this route. However, what they fail to understand is to restart their contribution towards financial goals from scratch or at depleted levels would take a longer time to create an adequate corpus.

For example, to create a retirement corpus, if a 30-year-old investor begins SIP of Rs 3,000 per month in equity mutual funds generating 12% p.a annualized return, he will have a corpus of Rs 1.05 crore on turning 60 years. However, if he withdraws the whole corpus after 5 years of investing to make his home loan down payment, he will redeem Rs 2.45 lakh, assuming the same return rate. If he begins investing in the same fund to rebuild his retirement corpus immediately after his home loan down payment, he will have a retirement corpus of only Rs 56.37 lakh on turning 60 years of age. The new corpus would be nearly half of what he would have actually built had he remained invested.

Availing personal loan

Like other loan options, lenders factor in the repayment capacity of home loan applicants’ when evaluating their loan applications. Lenders generally require home loan applicants’ monthly loan repayment obligations, which includes their new home loan EMI and existing other loans EMIs, to be within 50% of their NMI or Net Monthly Income.

If a home loan applicant avails personal loan to fund his down payment amount, the new EMI of his personal loan may make his monthly loan repayment obligation go beyond 50% of his NMI, which may thereby lower his overall LIC home loan eligibility, SBI home loan eligibility or home loan eligibility with other lenders.

Moreover, submitting an application with multiple lenders for a personal loan to finance down payment can even impact applicant’s home loan approval chances as every lender fetches your credit report from the credit bureaus, and each enquiry gets reflected on your credit report, which in turn lowers your score by a few points. A reduced credit score further brings down your home loan eligibility prospect.

How to build a home loan down payment amount? 

Instead of redeeming your emergency fund, availing personal loan or liquidating investments for crucial financial goals, you should start saving for your home loan down payment by investing regularly in equity funds through SIP. Take the help of an online SIP calculator to know the monthly investments needed to create your home loan down payment corpus. Those wishing to generate substantial corpus within 3 years should opt for short term debt funds or bank fixed deposits.

Moreover, try to create a higher down payment amount as this converts to reduced interest costs. Apart from this, a higher down payment amount may even assist you in availing of better loan deals and a lower rate of interest on a home loan.

Advantages of contributing a huge down payment amount

Lower EMI burden

A lower loan amount means you require paying lower EMI. It means you do not require making any massive changes to your monthly financial planning to stay comfortably after your EMI amount deduction from your bank account.

Your interest component becomes less

While home loans are cheaper as compared to other debt forms, a borrower typically requires paying interest component, which is equivalent to or at times little more as compared to the principal amount. If your principal amount is lower, the interest component would even be less.  

Helps boost LIC home loan eligibility, SBI home loan eligibility or home loan eligibility with other lenders

The fact that borrowers have a sizable amount to pay in the form of a down payment amount reflects their solid financial standing. For such borrowers, lenders would not just be quick at the time of approving home loan applications; they may even provide slightly lower interest rates.

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