The decision to buy your dream home should be backed by sound financial planning and not an emotional move. Since most homebuyers have to rely on housing finance it is all the more critical to have a realistic and prudent approach so as not to end up in a tight spot eventually. The following points should be religiously followed if you wish to live the dream of owning a house:
- Monthly household expenses- for any middle-class family in India, buying a house is quite a financial blow, though you may not realize it upfront. Ironically, considering the high property prices in today’s times, one cannot afford a house without some degree of financial stretch, no matter how competitive home loan rates are these days. Various case studies have shown that buying a house through home loan will need you to curtail your monthly household expenses by around 25-40%. Once you are know of satisfying home loan eligibility criteria of your lender, it is crucial to keep aside at least 6 months’ household expenses as a reserve to meet any future financial deficit.
- Loan amount- currently banks offer a housing loan amount which is equal to 80% of the property value. If you are availing loan, then you should be in a position to contribute 20% of the property value. Ideally, you should make a down payment of at least 40% from your own savings to reduce the burden of debt. Also, do not forget to take into account other costs like Stamp Duty and Registration Cost, which constitute 5-10% of the total cost.
- Next 6 months’ liabilities- make a list of next 6 months’ liabilities like kids’ tuition fees or insurance premiums. This amount should be kept as reserve to fulfil these liabilities in a timely manner.
- Existing loans/debts- be it a car loan or a personal loan, all existing debts and loans should be cleared. It is not a feasible idea to serve 2 loans simultaneously, given that home loan is itself is a huge liability. Besides, by clearing these unsecured loans, you will improve your CIBIL score before availing the home loan.
- Three months EMI as reserve- though it might be a small amount as compared to the cost of the property you are buying, but this too makes a difference. This reserve will come handy in the event of any unforeseen circumstances or financial crisis. After all, always keep in mind that any default on your EMI will tarnish your creditworthiness in the long run. Check out home loan EMI calculator to have your finances in check.
- Budget for interiors/furnishing- most people tend to splurge on home furnishing/interior after property purchase. It is critical to ascertain a budget for these expenses and stick to that to avoid overspending, which might lead to financial shocks in the future.
- Regular income source- in the absence of a regular source of income, your entire financial planning can go for a toss. If you are working in a sector that might be impacted by recession, it is advisable to keep your home purchase decision on hold till you are sure of your job stability.
- Emergency fund- it hardly needs to be mentioned that life is highly unpredictable, and one can never foresee unpexepdted expenditures such as medical emergencies, educational expenses, job loss, etc. your financial planning will be incomplete if you do not have 6 moths’ household expenditure in your emergency fund. This amount can be invested in short term financial instruments which can be easily liquidated like bank FDs, mutual funds, etc.