You have found a beautiful flat that perfectly fits the bill of your dream house. If you successfully own it, you would have clinched one of your life’s greatest achievements. You can see your future. But there is an obstacle you have to overcome first. You do not have the money to make a down payment. Before the lender steps in to help, you need to contribute in the form of a down payment. With down payment comprising an important part of a home loan, where you finance around 5% to 30% of the property value.

This value of down payment depends on the Loan to Value ratio (LTV) and the amount of loan you avail. The RBI has permitted the loan to cover 90% of the property value if you avail a loan of Rs 30 lakhs. The LTV decreases to 80% if the loan amount is between Rs 30 lakhs and Rs 75 lakhs. It further drops to 75% if you avail of a home loan over Rs 75 lakhs.

The remainder is then taken up by the lender. With the quantum of the property value appearing very high, arranging the money for the down payment may seem an uphill task. Other than that there are other costs like stamp duty, registration fees, loan processing costs, broker fees, the list could make your head spin. However, there are ways to ease the stress on your finances and help you arrange for the funds to make a down payment on your dream house. There are options that can be utilized to raise or free up funds and this article attempts to explain some of these options and address doubts regarding them.

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Can I take an approved loan from one bank and buy a real estate property from another bank?

If you lack the funds to make a home loan down payment, availing of an approved loan from a bank is a good option for you. There are no restrictions on taking a loan from one bank to purchase real estate property from another bank if you manage to establish your creditworthiness.

  1. If you have a good credit rating, you meet the lender’s eligibility criteria and possess solid documentation, you can avail of an unsecured loan from a lender on low-interest terms which can be repaid in installments.
  2. If possible, try to obtain a pre-sanctioned or pre-approved home loan before finalizing the residential property you want to purchase. This gives you an idea of how much the bank is willing to lend. Once you get an idea, go for an unsecured loan like a personal loan to make the down payment. However, you have to ensure your credit history is clean and spotless.

Is it a good option to withdraw a partial PF amount to buy real estate property rather than taking a loan?

An employee’s Employee Provident Fund is an accumulation of the equal contributions made by the employee and employer towards a corpus that will help an employee when s/he retires into the golden years of his or her life.

  • This accumulation is to prevent financial hardships for a retired individual when they have no steady source of income post-retirement.
  • When you dream of buying a house, you may find yourself short on funds to meet the requirement. At this time, you may consider taking a loan.
  1. However, banks due to RBI regulations on the Loan to Value (LTV) ratio do not disburse loans that cover 100% of the property value of a residential property. As such, the sanctioned loan amount may cover 75% to 90% of the property with the remainder to be covered by you in the form of a down-payment. Some choose to invest money over the years to raise funds.
  2. Others choose to take a personal or business loan to put up money for the down-payment.

However, there is the third option where if you are a salaried individual, you can withdraw a portion of their PF to solve the problem. Unlike the options of investment and taking a loan, this option gives you advantages of its own.

  1. When it comes to investments, the time it takes for an investment to yield fruitful returns may delay your plans to purchase a house by years. Also, investments are subject to market risks and the rate of its growth is also uncertain.
  2. And when it comes to personal loans, you may find yourself encumbered in the future with two loans to repay and may struggle to repay them in the future.
  3. But with a PF withdrawal, you manage to overcome the uncertainty and liability constraints. The accumulation of you and your employer’s contribution to the PF will yield funds and become withdrawable after a few years.

However, this option should be used as the final alternative. As a salaried individual, you have a steady source of income to support your present lifestyle and expenditure. But the future is prone to contingencies. Hence, if you are unable to arrange the funds for your down-payment, it is best to wait for a few years before you have accumulated and saved enough money for the down-payment. Unless it is an absolute requirement, money should not be withdrawn from your PF for funding the purchase of your house, for that money has been saved for your retirement years.

Is there any option for buying a housing loan using Provident Fund?

The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, is a central legislation that regulates matters regarding the Employees’ Provident Fund (EPF) Scheme. Under this Act, partial withdrawal from Provident Fund is permitted for circumstances like funding activities like house renovation, house construction or land purchase and repayment of home loan.

For instance, if you want a flat or wanted to build a house and you want to withdraw funds from your PF to finance this goal, under Section 68-B of the above-mentioned legislation, you can withdraw certain portions of the PF money to fund this goal. However, this is subject to certain restrictions that are underlined in the Act. Section 68-BB permits a person to withdraw a portion of the PF money to repay loans in special cases, which includes repayment of home loans, which is once again subject to restrictions under the Act.

What if I don’t have money for a down payment for a house?

 If you do not have money for the down payment for a house, there are ways to ease the stress on your finances and help you arrange for the funds to make a down payment on your dream house.

  1. The Indian Government schemes like the Pradhan Mantri Awas Yojana (PMAY) launched in 2015 provides for interest subsidies on your home loan, thus lowering your future EMI outflows. This frees much of the funds you have reserved for future payment, which you can now utilize for your down payment.
  2. If your credit score is great and you have a squeaky clean credit profile, you can avail of a personal or business loan to cover the quantum of down payment. Banks are very co-operative if they are assured of your ability to repay a loan.
  3. If you are a salaried individual, you can withdraw a portion of your PF money to make a payment towards the down payment. However, this is an option that requires the individual to have a minimum balance in the fund account and a minimum number of years before the amount can be withdrawn. Also, this option should be utilized as a last resort.
  4. You can invest in SIPs and Mutual Funds to raise funds for covering the down payment. However, this requires some patience and smart decisions to be made.

However, there are many Indians who still cannot avail of these options. In that case, gold is solid security against which a loan can be availed. Several lenders lend money against gold at reasonable rates of interest. With gold, an asset found in a majority of Indian households, this option can always be used as a last resort.

One needs to note that while residents are charged a particular rate of interest for availing of home loans, lenders charge a higher rate of interest with the loan tenure restricted for an NRI. This is because they deal with a higher rate of risk when they deal with NRIs who are not residents of India.

Conclusion

With the property values of residential properties on the higher side and many a time beyond the budget of the middle-class individual or family, the requirement of meeting the liability of down payment may seem an uphill task. However, there are avenues to be explored which can ease the strain on finances to a great extent. With home loans covering a major extent of the property value, you need to make some smart decisions to cover this financial obligation.

However, while considering the benefits of the avenues that may yield short term gains, do not lose sight of your long-term needs. Prioritize your goals, provide for them and the day you step into your own house is not a dream anymore.