Owning a home is an aspiration for many. It is also among the most expensive purchases one makes during their lifetime. According to the BankBazaar Aspiration Index, home ownership remains among the top goals cherished by Indians year after year. However, most prospective home buyers find it challenging to buy a home with just their savings and often borrow to fund their purchase.
Although affordable and convenient, home loans are a long-term financial commitment. Having sufficient funds to repay the loan is not the only factor to consider when taking a home loan. There are several others which are equally important. Here are the top six factors you must consider to assess whether or not you are financially prepared to take a home loan.
How much do you save?
Your monthly income plays a vital role in your borrowings. But what’s more important is how much you save from your monthly income. Lenders tend to assess your repayment capability based on your bank statement for the last six months. Ideally, you should save a third of your income each month. If this isn’t the case, you may want to postpone borrowing until you have built a modest corpus of savings.
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Do you have enough funds for the down payment?
Many lenders require borrowers to pay a down payment towards their home loan. The down payment amount usually ranges between 10-20% of the property’s value but may vary from lender to lender. For instance, you want to purchase a property worth Rs.30 lakh, for which you decide to take a home loan. The lender insists on a 20% down payment for the loan, which translates to approximately Rs 6 lakh. Remember, the higher your down payment, the lower your equated monthly installations (EMIs).
Also, account for initial charges like registration, stamp duty and other transaction-related fees, which will hike your immediate fund requirement to Rs 7-8 lakh. These costs can vary based on your loan amount and the down payment requirement of your lender. If you don’t have the funds to cover these initial costs, it would be advisable to delay your application.
Can you pay the EMIs sustainably?
Currently, home loan interest rates range from 8.5% to 8.75%. Thus, after making the down payment, the minimum EMI for a Rs.25 lakh home loan would approximately be Rs.22,000 for a term of 20 years. So, before applying for a loan, take stock of your monthly income and expenses. Assess whether or not you can afford to make EMI payments for the next 3-5 years without cutting necessary costs or burdening your finances. Apply for the loan if you have sufficient funds to manage your routine expenses and EMI payments comfortably.
Is your income likely to grow in the future?
Before applying for a loan, determine if your income may likely grow soon. Since a home loan is a long-term financial commitment, salary increments or a better-paying job opportunity can boost your repayment capacity. You can also consider making regular prepayments on your loan to reduce its tenure.
Can you apply for the loan with a working joint-holder?
Applying for a loan with an employed joint owner like a spouse can be advantageous. The combined income of both borrowers can be used to cover living and EMI costs. Moreover, in the case of a joint home loan, both borrowers can avail of tax benefits under Section 80C and 24 of the Income-tax Act. The savings thus gained may also be used towards making loan advances.
Do you have a high credit score?
Your credit score has a direct bearing on your loan application. A score of 700 and above is favored by lenders and may fetch you lower rates and better loan terms. If you have a low credit score, the chances of your loan getting rejected are higher. Take steps to improve your credit score, if it is low, before applying for a loan.
The factors mentioned above are a good starting point for assessing your readiness and preparedness to take a home loan. However, financial ability is not always sufficient to handle a long-term commitment such as a home loan. Lack of discipline and financial mismanagement can quickly derail loan repayment plans and dent your finances. To prevent that, you need to exercise caution regarding expenses. Review your finances regularly, catch unnecessary expenses, and focus on reducing your debt by making repayments on your loan, if possible.
(The author is CEO, BankBazaar.com)