Token Money - Learn Meaning, Features and Significance

When you look forward to achieve your dream of home ownership, there are several aspects that encounter in your journey. One such significant part is the payment of token money. It is a simple and an easy concept but plays a vital role when it comes to purchase of property, symbolizing a sign of moving ahead towards the final agreement.

In this comprehensive blog, you can get an in-depth understanding of what is token money, its role in the home loan process, its significance and key dos and don’ts while make payment of the token money. 

What is token money?

Also known by the names of booking amount or earnest money, token money can  be understand as a percentage of the sale price of the property that is paid to the seller by the buyer in order to show an honest interest in buying the property. The amount paid as the token money is intended as a financial gesture of buyer’s seriousness towards the transaction.

Features of Token Money

1. Non-Refundable: Once the payment of token money has been paid, it is generally non-refundable. If in any case, the buyer revokes its decision to purchase the property, the amount is forfeited. However, if the agreement or the deal is broken because of the seller’s fault, the token money is subject to refund.

2. Negotiable in Nature: Usually, the nature of token money is negotiable i.e. it depends and varies as per the agreement formed between the seller and the buyer. Generally, the percentage of token money ranges from 1 to 5 of the property’s total value.

3. Part of Total Purchase Value: The amount od token money is not any additional cost rather it is a part of the purchase price only. When the final payable amount is calculated, the amount of token money is deducted from the same.

4. Good Faith Money/Payment: Token money is considered as a good faith payment that shows the commitment of the buyer towards the deal and supports in keeping the property secure from other potential buyers. 

Significance of Token Money

Token money holds significant importance in the home buying process. Here’s why it is crucial:

1. Securing the Property: By paying token money, the buyer can secure the property and prevent the seller from entertaining other offers. This step is particularly important in a competitive real estate market.

2. Demonstrating Serious Intent: It shows the seller that the buyer is serious about the purchase, thereby building trust between both parties.

3. Initiating Legal Procedures: The payment of token money often triggers the initiation of legal procedures, such as drafting the sale agreement and conducting property due diligence.

4. Facilitating Home Loan Processing: For buyers planning to finance the purchase through a home loan, paying token money can be an essential step. It shows the lender that the buyer is committed to the purchase, which can expedite the loan approval process.

Token Money and Home Loans

When planning to buy a home with the help of a home loan, understanding the role of token money becomes even more critical. Here’s how token money interacts with the home loan process:

Initial Payment Proof

When you apply for a home loan, lenders require proof of your initial investment in the property. The receipt of token money serves as evidence that you have commenced the purchase process and have made a financial commitment.

Strengthening Loan Approval

Lenders assess various factors before approving a home loan, including the buyer’s financial stability and seriousness about the purchase. Paying token money and securing the property can strengthen your home loan application, as it demonstrates a genuine intent to proceed with the transaction.

Incorporating Token Money in Loan Disbursement

During the final stages of home loan disbursement, the lender will consider the token money you have already paid. This amount will be factored into the overall loan disbursement schedule, ensuring that you do not end up overpaying for the property.

Dos and Don’ts for Paying Token Money

Paying token money is a crucial step, and it is essential to approach it with caution. Here are some dos and don’ts to keep in mind:

Dos

1. Get a Written Agreement: Always ensure that the payment of token money is documented in writing. This agreement should outline the terms and conditions, including the amount paid, the property details, and the conditions for forfeiture or refund.

2. Verify Property Documents: Before paying token money, thoroughly verify the property documents. Ensure that the seller has clear ownership and the property is free from legal disputes.

3. Include Essential Clauses: The agreement should include clauses that protect your interests. For instance, it should specify that the token money will be refunded if the deal falls through due to reasons beyond your control, such as the seller’s inability to provide clear title.

4. Consult a Legal Expert: It is advisable to consult a legal expert or real estate advisor before paying token money. They can help you understand the implications and ensure that the agreement is legally sound.

5. Check Seller’s Credibility: Ensure that the seller is credible and has a good track record. Research the seller’s background and read reviews or seek recommendations if possible.

Don’ts

1. Avoid Cash Transactions: Do not pay token money in cash. Always use traceable methods such as bank transfers, cheques, or demand drafts. This ensures that there is a clear record of the transaction.

2. Don’t Skip Due Diligence: Skipping due diligence can be risky. Ensure that all property-related documents are in place, and there are no outstanding dues or legal issues.

3. Avoid Verbal Agreements: Verbal agreements are not legally binding and can lead to disputes. Always insist on a written agreement.

Clauses to Include in the Agreement to Sell

When drafting the agreement to sell, it is crucial to include specific clauses that safeguard your interests. Here are some essential clauses to consider:

1. Refund Clause: Clearly state the conditions under which the token money will be refunded. This includes situations where the deal falls through due to the seller’s inability to provide a clear title or any legal issues with the property.

2. Forfeiture Clause: Outline the circumstances under which the token money will be forfeited. This typically includes the buyer backing out of the deal without a valid reason.

3. Property Description: Provide a detailed description of the property, including its location, size, and any other relevant details. This helps avoid any ambiguities.

4. Payment Schedule: Include a payment schedule that outlines the subsequent payments to be made after the token money. This provides a clear roadmap for both parties.

5. Possession Date: Specify the expected possession date of the property. This helps in managing expectations and timelines.

Conclusion

Token money is a crucial component of the home buying process. It not only secures the property for the buyer but also demonstrates serious intent, thereby facilitating smoother transactions. When dealing with token money, it is essential to be meticulous, ensuring that all terms are clearly documented and agreed upon by both parties. By following the dos and don’ts and including essential clauses in the agreement to sell, buyers can safeguard their interests and make informed decisions.

In the context of home loans, token money plays an integral role in demonstrating commitment and strengthening the loan approval process. Therefore, understanding its importance and handling it with due diligence is vital for a successful and stress-free property purchase.

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