Before applying for a home loan, we recommend running the decision through financial, practical, and emotional parameters. ICRA estimates that the average home loan size for Housing Finance Companies (HFC) is Rs. 30 lakhs in India. The generic thumb rule that EMI would be 1% of the loan amount; the average EMI comes upto Rs.30,000. Current home loan interest rates are anywhere between 7% to 8.5%. Whether it is wise to spend Rs 30,000 every month is determined by many factors.
Here we have a 8-pointer checklist that will help you understand if a home loan is a wise decision for you or not-
1. Current financial situation:
It is essential to go over your financial records with a fine-tooth comb and know your liquidity position for various expenditures that the loan will not cover. For the sake of easy calculation, let’s assume that the home cost is Rs. 100. You will incur the following expenses-
Rs. 5 for GST,
Rs. 10 as registration fee
Rs. 7-Rs.10 for brokerage, furnishing, documentation, etc.
Bank will pay you Rs.80, but you’ll need to arrange the additional Rs.20 on your own as a down payment. You’ve to figure out if you’d be able to manage the down payment along with your current expenses and financial commitments. If yes, move on to the next criteria.
Pro Tip: The higher is the down payment, the lower is the borrowing.
2. Income to debt ratio:
Ensure to have a rainy day fund. You should have adequate savings to fall back upon in case of emergencies. Maintain a healthy debt-to-income ratio to avoid any defaults which can affect your credit score. The EMI should not take up more than 40% of your monthly income, or else you will end up in a financial soup.
3. Credit score:
A healthy CIBIL score is of utmost importance for lenders to avail of a home loan on favorable terms. It shows the creditworthiness of a borrower when checking the eligibility for loans. A credit score of 750+ is a perfect score for the best loan offers. A low score can result in a lesser sanctioned amount at a higher interest rate or, worse, rejection. It would be wise to obtain a credit report from CIBIL before applying for the loan and improve the score if needed for a smoother road to the sanction.
4. Steady income:
Ensure stability in your business or job when taking a loan that helps you cover costs associated with homeownership along with everyday living expenses. Every month, EMI will hit your account; so, it is crucial to analyze your cash flows before applying for the loan. Financial institutions consider the history of your full-time employment when approving your loan. In the case of self-employment, additional sources of income might strengthen your case.
5. Current financial goals:
A home loan is a long term commitment. It would essentially mean making long term alterations in the way you manage your finances. Hence, ensure that your long-term and short-term financial goals are not compromised or impacted by your decision to avail of a home loan. It’s not wise to put your entire financial life under stress for a single home loan.
6. Loan recovery:
It would help if you had a clear plan of how you plan to recover the loan amount. A house is purchased to live in or use as an investment. If you do not intend to stay in the place, owning a home on EMI and paying rent elsewhere is a significant burden on finances in the short term. Moreover, suppose the house is merely an investment opportunity. In that case, you need to wait for at least five years to earn significant returns on it. Besides, rental incomes might not always coincide with property costs, and you might miss out on investment options that will fetch better returns.
On the other hand, if you are buying a house for personal use, you will generally have to service the home loan for 20 years. However, it will be easy on finances if you intend to live in your first owned house for the foreseeable future. You might also want to increase the down payment to reduce the burden on the EMIs. Hence, it is crucial to gauge whether your objective is to earn ROI on your home or use it personally.
7. Existing debts:
A home loan will increase your debt obligation. You must be in a comfortable financial position to handle this additional debt. Analyze your existing debt and check if you can meet the current liabilities. Credit cards are also a part of the debt you owe. It is essential to clear the outstanding credit card debt before applying for a home loan. Banks look down upon unpaid credit card dues and judge your creditworthiness.
In financial parlance, lenders will check your debt-to-income ratio to determine the monthly payments to repay the home loan that you plan to borrow. Therefore, if your income doesn’t permit you to take any additional loan, it is recommended to postpone your home loan plan. Clear all existing debt to avoid any debt trap.
8. Market conditions:
Lastly, take a look at the market conditions and progress of the real estate market on a broader scale when purchasing a property. The real estate market is hugely exposed, hence volatile during economic turmoils. You must be aware of and understand the future value of your property, not just as per current market conditions, but how it will withstand the changing times.
Along with the above points, we also urge our customers to ask themselves the following questions during our free home loan counseling sessions-
Does your income suffice the repayment of the loan?
Banks and financial institutions review your monthly income to decide the loan amount eligibility. The income considered is net of taxes and deductibles such as LTA. Ensure your EMI doesn’t exceed 40% of your net monthly income. If you want a larger loan, then applying for a joint mortgage with your spouse is recommended.
Are you able to keep savings for the current and future fixed expenses after considering the EMI?
It is a no brainer that you will have to bear your current expenses as well, along with your EMIs. It is important to remember that your savings shouldn’t be compromised because of your home loan. A loan may last for more than a decade. Suppose you do not save during this period, arguably your prime earning years; you may not have enough money to live well during later years.
Do you have insurance in case of health emergencies?
Health insurance for you and your family is crucial in any medical emergency during the loan repayment period. It will save you from any financial stress during difficult times and help you effectively repay your loan.
Do you have a contingency fund that can also cover home loan EMI commitments?
Keep a contingency fund during the loan repayment period, which should match the EMI’s of three to six months. This fund will act as a shield during unforeseen circumstances.
Will you be able to fulfill EMI and rent commitments if you are yet to get possession of the new house?
If the home you purchased is still under construction and your loan repayment starts, consider EMI’s amount and the rent you are staying in as a total expense. It is advisable to either increase your income source or move into the house at the earliest to save on the rent.
This checklist will help you get a reality check on whether you are home loan ready. Sound financial planning is vital. Availing a home loan is often the most significant financial responsibility, and you must not commit on a whim! A dream house is a romantic idea built upon the practical bricks of realistic planning. Credit Monitor offers free home loan counseling to ensure you lay a strong foundation while applying for a home loan(absolutely free!). Get in touch with us if you’d like some expert guidance on the matter!