Buying a home is probably going to be your biggest financial decision. Therefore, its timing needs to be correct and its impact on your regular finances needs to be understood beforehand. Homeownership is considered the highest aspiration by many Indians—it often becomes a high-priority goal the moment one becomes financially independent. So when homeownership is the goal, home financing through loans becomes key. And where loans are required, one’s borrowing eligibility needs to be understood. As such, before you become the proud owner of a house, it is important to assess yourself on the following parameters to achieve your goal.
Assess Your Financial Position
First, check if you have the necessary liquidity for a variety of expenditures the loan won’t cover. Let’s say your home costs Rs. 100. You’ll pay a GST of Rs. 5. Registration may cost you another Rs. 7. Furnishing, moving, brokerage, etc. will cost you another Rs. 5-10. Out of this, a typical bank will fund about 80% of your base price and GST. So while the bank will give you around Rs. 80, you’ll need to raise the additional Rs. 30 to 40 from your pocket. Do you have the funds ready for this? And if you do, would spending this money disturb your other financial commitments and life goals? If there’s no disturbance, let’s move on to the next parameter.
Evaluate Your Loan Eligibility
Next, assuming you have the requisite funds, let’s check your loan eligibility – the amount you can borrow from a regulated lender such as a bank or an NBFC. The higher your down payment, the lower you need to borrow. However, what you can borrow is decided based on all sorts of considerations. For starters, the bank may lend about 80% of the property cost. The EMIs resulting from this loan should not take up more than 40% of your take-home income, else you’re asking for financial trouble. Lastly, if you have existing borrowings such as a car loan or credit card dues, your home loan eligibility would reduce to that extent. Therefore, these things need to be kept in mind before you take a loan.
Do You Have A Healthy Credit Score?
Availing a loan on favourable terms requires a good credit score. A credit score is a three-digit number ranging between 300 and 900. It expresses your creditworthiness and is computed by credit rating agencies. Lenders look at your credit score while checking your eligibility for a loan. The best loan offers are reserved for those with scores of 750 or higher. If your score is poor, you may struggle to get a loan or get one with a high interest rate. Before you apply for a home loan, it would be wise to go online to get your free credit report. If your credit score requires improvement, work on it before applying for a loan.
Your Commitment To Home Loan
A home loan is a long-term commitment. Before you take a loan, it is crucial to assess if you will be able to service it even during emergencies. A job loss, health problems, loss of income, and lack of increments could be some of these. You should also consider future events and how they will impact your ability to keep repaying the loan. For example, your pay will see a rise, but your family responsibilities may also increase to take up more of your income. Therefore, you should be able to stay on the repayment path for the long term when you take a home loan.
Are Your Financial Goals On Track?
Once you have made up your mind to buy a house, you should translate this idea into reality only after ensuring that your other financial goals would not be compromised. Both your short and long term goals should be on track and should not be impacted by your EMI payments. Additions to the family or an urgent financial need may alter your income flow. In many cases, medical emergencies are unforeseen and can affect your ability to repay your loan.
Do You Have Other Debts?
If you are planning to take a home loan while servicing another big debt with the same income, it is better to postpone your home buying plans. If your income doesn’t permit it, you should drop the idea of taking another loan to fulfil your home-owning aspirations. Another debt at this point may strain your finances and push you into a debt trap.
Ask Yourself If You’re Buying for Investing or Self Occupation
Do give a thought to your life and career progression. If you intend not to stay in your current location, owning a home on EMIs there while paying rent elsewhere may inconvenience your finance. You should especially examine the idea of buying your first home for investment purposes. This is because rental incomes are not always in sync with property costs, and there are always other forms of investments that could deliver higher returns at lower costs. Therefore, buy your first home if you intend to live in it for the foreseeable future. This would be easier on your finances.
Besides all the important points mentioned above, you should also check if you have all the required documents that can get you a home loan without much hassle. When in doubt, employ a lawyer to help you vet your property documents.
The writer is CEO, BankBazaar.com, India’s leading online marketplace for loans and credit cards.