With rising incomes and easy availability of home loans, gone are the days when a family would build their house in their 40s. Nowadays, young investors prefer to buy their first home at the earliest opportunity. Buying a house is a significant investment and requires careful planning and due diligence. Home buying also has an aspirational angle to it. Hence, there is always a risk of going overboard and messing up. This article takes you through some financial tips to help your first home buying experience be smooth and hassle-free.
#1: Decide on the right time for buying a home:
Hefty starter pay packages on offer and the aspirational value of a home can get you into buying a flat too early in your life or too big for your needs or budget. Hence, it is essential to segregate needs from wants. People make the mistake of buying a flat in one city and then shifting to another city for job purposes. As a result, they earn a low rent from the owned property and bear the double brunt of high EMI and rental expenses. Hence, prefer buying a flat when you are a bit settled in your career. Also, be clear on the objective for your home purchase – do you want to live in that flat, or are you purchasing only for investment. Your search criteria for the flat will be totally different in each objective. Also, if you presently live on rent, do not forget to do a proper rent vs buy analysis before deciding to buy the flat.
#2: Check your loan eligibility:
It is essential to get some idea of your home loan eligibility before searching for properties in the market. This is because the home loan eligibility will tell you the broad range of property values that fit your budget. Suppose the eligible value of the home loan is less than your expectation. In that case, you can consider step-up loans or consider adding a spouse as a beneficiary. It is also advisable to get a sanction letter from the home loan provider. This helps you in the property negotiation process and gives you a clear idea of your budget for the flat.
#3: Save for the down payment:
Banks are allowed to fund anywhere between 75-90% of the property value. This means that you have to shell out a minimum of 10-25% as a down payment. You can start saving some amount dedicatedly towards this goal right from your first job. Tagging your savings to the goal will ensure that you don’t splurge this money for impulsive purchases. Since the time horizon of this goal is not more than 4-5 years away, you should stay away from investing any portion of this saving in equity. You can consider investing in fixed deposits and SIP in good liquid mutual fund schemes. As the goal approaches, you can consolidate your finances and see if other avenues are available to bridge the shortfall. You can also explore soft loans from friends and family or, as a last resort, withdraw from your provident fund if eligible. Stay away from personal loans or credit cards at all costs.
#4: Check your monthly budget:
Having a clear idea of what comes in and what goes out monthly is the first and the most fundamental step in getting a grip on your finances. Banks consider the EMI to income ratio while considering home loan eligibility. So, you need to make sure that you can plan your monthly budget so that you can reserve 40% of your income towards home loan EMI. Suppose the EMI of your desired quantum of loan is going above 40%. In that case, you should think about increasing your income or reducing the expenses. Don’t forget that expenses will increase significantly if you plan to start a family around buying a loan. So do think through that as well before going for that loan.
#5: Aim for a healthy credit score:
The credit score is now an essential criterion for banks while sanctioning a loan. So, in the runup to getting a home loan, you need to keep a watch on your credit score and ensure it is above 800 at all times. For this, you need to take steps like not making many inquiries for loans and credit cards in quick succession, keeping the credit utilisation ratio on your credit cards low and paying credit card and existing loan EMI balances on time. You should also periodically check your credit report and resolve the discrepancy, if any.
#6: Revisit insurance and emergency fund:
You can revisit your insurance and emergency fund preparedness, apart from going for a house that does not stretch your budgets unnecessarily. Consider ramping up your life insurance coverage to also cover the amount of your home loan. Review your medical and personal accident coverage for sufficiency. As regards emergency funds, when you add home loan EMI as part of your monthly expenses, the amount of required emergency cover goes up substantially. You need to devote some extra funds to provide for that. Ensure that you buy proper property insurance to cover the structure and contents of the property once you buy it.
Buying a home is a dream for every young earner. Some preparatory steps like checking home loan eligibility and maintaining a healthy credit score can help increase your chances of making that dream come true. Basic financial hygiene like buying a home within your budget and reviewing insurance cover can protect your family from financial shocks and help you get peace of mind.
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