Summary of this article
Buying a home is a major financial milestone that often requires a loan. To ensure smooth approval and manageable EMIs, monitor your credit score, assess affordability, build a down-payment corpus, maintain career stability, and strengthen your emergency fund. Proper planning today can save costs and stress tomorrow.
Buying a residential property is probably the biggest lifetime expenditure for most people. Being a big-ticket expense, very few can purchase their dream home from their own savings. For the majority, availing a home loan remains the only option to realise their dream home. However, the processing of home loan applications is stringent, and even small shortcomings can prevent loan approval. Lenders also require you to pay 10-25 per cent of the property value from your own sources. These and other factors mean you must start planning and consolidating your finances before applying for a home loan.
Here are some major financial planning steps that will ease your journey toward home ownership:
1. Monitor Your Credit Health Consistently
Generally, those with credit scores of 750 and above are considered more creditworthy and have a higher probability of loan approval at lower interest rates. So, it is essential to improve your credit score before applying for a home loan. The only way to do it is to fetch your credit report at regular intervals.
This will give you sufficient time to improve your credit score and detect errors or wrong information in your credit report, which otherwise might be pulling down your credit score. Fetching your credit report, especially from online financial marketplaces, may also get you pre-approved home loan offers based on your credit score and other eligibility criteria.
2. Figure Out EMI Affordability
Lenders usually prefer to lend to loan applicants with a fixed obligation to income ratio (FOIR) of up to 50 per cent. This ratio denotes the proportion of your monthly income used for servicing your fixed monthly obligations, such as your existing EMIs, insurance premiums, and the EMI for your new home loan. If your FOIR exceeds 50 per cent, then either make a higher down payment for your home loan or opt for a longer tenure to reduce your EMI and contain your FOIR within 50 per cent.
3. Prepare Your Home Loan Corpus Early
The RBI has placed regulatory caps on the Loan-to-Value (LTV) ratios for home loans. This ratio denotes the value of your property that will be financed by the lender. Currently, the RBI has capped this ratio at 90 per cent for home loans of up to Rs 30 lakh, 80 per cent for home loans of above Rs 30 lakh to Rs 75 lakh, and 75 per cent for home loans above Rs 75 lakh.
Aim at creating a bigger corpus for your home loan downpayment as that will reduce your interest cost. Once you arrive at a ballpark amount required for buying or constructing your house, inflate it by around 10 per cent per annum to factor in the housing inflation. Then, use online SIP calculators to find out the monthly investment required to create your home loan down payment corpus.
4. Maintain A Steady Job Profile
Home loans require long-term commitment extending to more than 20 years in many cases and up to 30 years. Hence, lenders consider career stability and employer’s profile while approving home loan applications. For example, public sector employees or those employed with big corporates and MNCs have higher chances of loan approval whereas self-employed or those with hazardous job profiles are less preferred.
Frequent job hoppers also have lower chances of loan approval as they are considered a sign of an unstable career. While housing finance companies follow less stringent parameters than banks, their interest rates, fees and charges are on the higher side. Hence, abstain from frequent job changes if you wish to avail yourself of a home loan in the near future.
5. Plan Your Emergency Fund Around Loan Obligations
This fund should ideally be equal to at least six times your monthly mandatory expenses, such as daily household expenditures, insurance premiums, existing EMIs, children’s tuition fees, etc. Hence, once you start looking for a home loan, increase the size of your emergency fund by at least six times your expected home loan EMI. This will save you from defaulting on your home loan EMIs due to financial exigencies.
