In India, owning a home holds significance beyond its monetary value. A home represents stability and permanence, which is especially important in a rapidly changing country like India. According to a recent global survey by real estate experts CBRE, 44 percent of young Indians express a strong desire to purchase a house in the next two years, a significantly higher percentage compared to the rest of the world.
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Despite the cultural and emotional importance of homeownership in India, the reality is that most potential buyers rely on financing to fulfil their dreams. This highlights the need to carefully assess the financial readiness of homebuyers in the country. While having enough funds for repayment is crucial, it is just one aspect to consider when evaluating eligibility for a home loan. There are other equally significant factors to take into account when determining affordability and preparedness for a home loan. Let’s take a closer look at these aspects:
Managing the down payment
The majority of lenders require a down payment as an initial investment for a home loan. In India, down payments typically range from 10-20% of the property’s value. Each lender may have slightly different requirements based on their internal policies and risk assessment criteria. In some cases, government schemes and affordable housing loans offer down payment options as low as 5-10%.
Opting for a larger down payment will result in a lower loan amount, reducing the interest payments throughout the loan. It will also improve your creditworthiness and strengthen your application, potentially making you eligible for more favourable interest rates and loan terms. However, choosing a higher down payment requires a larger upfront investment. Make sure you can comfortably manage both the down payment and the ongoing EMIs.
Your ability to save
Are you aware of how important it is to save when applying for a home loan? While having a higher income may make you eligible for larger loans, lenders primarily assess affordability based on the debt-to-income ratio (DTI), which takes into account both your income and existing debts. Developing a strong savings habit demonstrates financial discipline and the ability to handle future financial obligations. Setting a goal to save one-third of your income is ambitious and commendable, but even smaller consistent savings can have a significant impact.
Be aware that lenders consistently seek a steady income stream, prudent spending habits, and a surplus substantial enough to meet both loan repayments and living expenses. Typically, the last six months offer a representative snapshot of your financial behaviour. While aiming to save a third of your income is optimal, even smaller savings contribute to building a safety net and showcasing responsible financial management.
Paying EMIs on time
Paying off a home loan is a significant financial commitment, but with careful planning and wise decisions, it can be manageable and even rewarding. Before applying for a loan, whether it’s for buying property or any other purpose, evaluate if you can comfortably afford the monthly instalments for the next 3-5 years without compromising your essential expenses or straining your finances. Only proceed with the loan application if you have enough funds to handle both your regular expenses and EMI payments comfortably.
Moreover, life is full of unexpected challenges. Make sure to have a safety net in place for emergencies to avoid putting unnecessary pressure on your finances. Additionally, when creating your budget, consider the possibility of future increases in expenses like inflation, property taxes, or maintenance costs. Taking this proactive approach will help you maintain a sufficient buffer that remains relevant over time.
Signing joint loan applications
Opting to apply for a joint home loan with your spouse who is currently employed can offer numerous advantages. By combining both of your incomes, you increase your chances of qualifying for a larger loan amount, which in turn allows you to purchase a more spacious or suitable property. Additionally, having two stable sources of income strengthens your loan application, potentially leading to more favourable interest rates and terms.
This is because both spouses have the opportunity to claim individual tax deductions under Section 80C (for principal repayment) and Section 24 (for interest payment), which could result in substantial tax savings. The extra tax savings can then be utilised for expediting loan prepayment, thereby decreasing the overall interest paid and shortening the loan tenure.
Your current credit score
The credit score plays a crucial role when it comes to securing a home loan and determining its conditions. Having a good credit score, usually above 700, demonstrates responsible borrowing behaviour and makes you appear less risky to lenders. A high credit score can qualify you for better interest rates, lower processing fees, and potentially more flexible loan terms. On the other hand, a lower credit score, below 600, may lead to loan denial or less favourable terms, such as higher interest rates and stricter requirements.
The credit score is pivotal in obtaining a home loan and shaping its terms. A favourable credit score, typically exceeding 700, signifies responsible credit conduct, portraying you as a less risky borrower in the eyes of lenders.
A superior score can make you eligible for improved interest rates, reduced processing fees, and potentially more flexible loan terms. Conversely, a lower credit score, falling below 600, may result in loan rejection or less favourable terms, characterised by higher interest rates and stricter conditions.
The Final Word
Embarking on a home loan is a substantial financial decision that requires careful consideration and preparation. Simply diving into the opportunity to take advantage of stable mortgage rates will not yield any positive outcomes. Instead, take a step back and assess the value of your choice to purchase a home, understanding that it entails committing to a long-term loan payment rather than succumbing to impulsive desires.
-The author is co-founder and CEO, Basic Home Loan. Views expressed are personal.
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