Investing in a new house in 2022? Check these 4 points to see if you are ready for a home loan
New Delhi: With interest rates on home loans falling to all-time lows many new investors are looking to buy a house. While buying a house, many individuals keep their future requirements in view and stretch their finances to buy a bigger house factoring in their possible salary hike in the near future. However, this calculation may severely go wrong and become a noose around your neck if your income/salary does not go up as expected.
When the Covid pandemic broke out early last year many individuals who had stretched themselves by taking a bigger home loan went through a severe financial crisis as their income actually fell amid the Covid induced lockdown and forced them to either restructure the loan or sell their house to get rid of EMI servicing. In order to ensure that these types of situations do not arise in the future go through the following checklist before taking on the financial burden.
Is your emergency corpus in place?
Before you start planning for the big financial outlay, ensure that your emergency corpus is in place. The emergency corpus should be large enough to cover your expenses including the home loan EMI for the next 12 months. Having such an emergency corpus will provide an immediate financial cushion in case of loss of income owing to job loss, accident or prolonged illness. Over the last 18 months, people have realised the importance of having such as emergency corpus.
Do you have the money for down payment and registration charges?
Banks typically require the home loan borrower to bring in at least 20% of the cost of the house as down payment before they sanction a loan for the remaining amount. For example, if you are buying a house worth Rs 50 lakh, you need to pay at least Rs 10 lakhs as down payment for the loan. On top of it, you also have to pay the cost of registration and GST (in case of under-construction properties), which could be around 7-10% of the cost of the house depending on the state in which you are buying the property. Also, you need to factor in expenses relating to any renovations or furnishings for your new home. All these expenses could be around 30-35% of the total cost of the house which you need to arrange before buying a house on loan.
Worth mentioning here is that it will be better if you can give a bigger down payment as your loan amount will be less and you can get a better deal on interest rate from your bank. Also, a smaller loan component reduces your overall interest outgo and allows for faster repayment.
It may be noted you should have the above corpus on top of the emergency corpus mentioned above and you should not touch the savings set aside for other long term goals such as retirement and children’s education for paying the down payment.
How much home loan EMI can you service?
The EMI that you can serve with your present income will decide the amount and tenure of the loan. Banks typically assume that 50% of your monthly take-home salary can be used to service your home and other existing loans. For example, if your take-home salary is Rs 1 lakh, then banks assume that you can pay maximum Rs 50,000 as loan EMIs. But if you already have some existing loans, then your home loan servicing capacity reduces further.
Also, if your fixed monthly expenses are more than 50% of your income, then even a Rs 50,000 home loan EMI will be unaffordable for you. Further, if you are buying an under-construction property, you will likely be paying rent along with your EMI. Make sure you can afford this even if the bank is willing to give you a large loan. Stretching your budget beyond a point is not advisable. Always have some buffer to factor in any possible reduction in your income due to factors which are not within your control.
Review credit score at regular intervals
Lenders consider the credit score of loan applicants while evaluating their loan applications. Those having higher credit scores, i.e., 750 and above, usually have better chances of loan approval. Many lenders have also started offering lower interest rate to applicants with good credit scores.
Hence, those planning to avail a home loan must check their credit score at regular intervals before applying for a loan. One can access free credit reports from credit bureaus or visit online financial marketplaces to do so, along with monthly updates. Following this practice would enable borrowers to take corrective steps in case they detect any clerical errors in their credit report, and have them rectified. If these errors are not rectified, they can adversely impact the chances of home loan approval.