In order to qualify for a home loan, you will need to make what is known as a "own contribution," also abbreviated as "OC." This is the amount of money that will come directly out of your pocket and be paid to the property reseller or builder.
You are not the only one if, while looking to buy property, you are uncertain as to how much of the purchase price you should pay out of your own pocket. The majority of people looking for home loans will have to contend with the challenge of making their own monetary contribution toward the purchase of a property.
Even if you satisfy all of the loan eligibility criteria of a lending bank or NBFC, they will not provide you with a loan that is equal to the full value of the property even if you meet all of those criteria.
You will be required to make a personal contribution toward the purchase of the property equal to a predetermined percentage of its total price. This is done primarily to share the risk associated with the investment and to demonstrate your financial commitment to the property you intend to buy.
This article will provide you with all the information you require regarding a borrower's own contribution while applying for a home loan.
What exactly does "Own Contribution" mean?
In order to qualify for a home loan, you will need to make what is known as a "own contribution," also abbreviated as "OC." This is the amount of money that will come directly out of your pocket and be paid to the property reseller or builder. Money receipts, also known as Margin Money Receipts (MMR) or Own Contribution Receipts, will be provided to you by the builder or reseller once they have received payment from you (OCR).
Paying for the property out of your own funds not only mitigates the risk to the financial institution providing the loan but also demonstrates the level of financial commitment you have to the property. This enables the lender to compensate for the risks that he is taking by providing you with a home loan for the remaining amount.
The Optimal Ratio of Other Credit to Home Loan
The Reserve Bank of India (RBI) and the National Housing Bank (NHB) have both listed guidelines for own contribution for a variety of borrowing amounts, but not many people are aware of this fact.
The total cost of your property will determine how much of a contribution you are expected to make toward its purchase. When determining the ultimate amount of their own contribution, financial institutions typically take into account a number of additional factors in addition to the overall loan tenure and the opportunity cost of investing in other types of assets.
The minimum amount of own-contribution margin money required for home loans with a value between Rs. 25 and Rs. 75 lakh can be as little as 10 percent of the overall cost of the property. The minimum amount of collateral required rises to 25 percent for loans that are greater than Rs. 75 lakh. The Loan-to-Value Ratio is the metric that financial institutions use to determine the maximum loan amount they are willing to extend to borrowers (LTV). The loan-to-value ratio, or LTV, for home loans is typically somewhere in the range of 90 percent, 80 percent, and 75 percent for properties priced at less than 20 lakh rupees, between 20 and 75 lakh rupees, and more than 75 lakh rupees, respectively.
Therefore, the most you could get for a loan based on the value of your property, which is Rs. 50 lakh, is Rs. You will be responsible for obtaining the balance through your own personal resources, making the payment directly to the vendor, and requesting margin money receipts in exchange.
Options When You Cannot Meet OC Requirements
Because of the high costs associated with real estate, it is frequently difficult to accumulate sufficient resources to make a personal contribution. In this kind of situation, you have three viable options to pick from.
The first choice you have is to sit tight and work on reestablishing your financial foundation until you have amassed sufficient funds to satisfy your margin money requirements.
To meet the requirements for your margin money, the second alternative is to apply for an unsecured loan of any kind, such as a personal loan. Taking out two loans at once and making the monthly payments on both of them could put a strain on your finances, cause you to default on one of the loans, and hurt your credit history. This step may look like an easy way out, but it actually puts a strain on your financial situation.
If you are buying a property that is still in the process of being built, your third choice is to apply for a home loan based on the construction of the building.
OC Home Loans and Construction-Linked Mortgages
If you choose a home loan plan that is linked to the construction of your property, then the payments that you make will be determined by the stage of construction that your home is in. You are provided with advance notice of the plan. Let's say that your construction-linked plan is broken up into five stages for a home purchase that costs Rs. 50 lakh, and that each stage requires a separate outlay of Rs. 10 lakh.
Now, let's say you got a loan with an LTV of 80 percent, which comes to 40 thousand rupees, and you have to pay the margin money for the first stage, which is twenty percent of the loan amount. In other words, you have to pay two thousand rupees up front. Following this calculation, the remaining amount of your personal contribution would be Rs. 8 lakh. Since the bank is required to pay a total of Rs. 40 lakh, you may now assume that the remaining balance of your own contribution will be required at the very end of the loan tenure. This is a reasonable assumption to make. The truth of the matter is, however, that the bank will pay out eighty percent of the disbursement for each stage, while you will be responsible for paying the remaining twenty percent of each stage's disbursement.
Obtaining a home loan in today's market is relatively simple thanks to streamlined processes for loan documentation and funding, provided that the borrower has made adequate preparations for his or her share of the required down payment and monthly payments. Make complete use of this facility, carefully plan your finances, and you will have no trouble acquiring the home of your dreams.
