Follow these three steps prior to hunting for your first home
Buying a house is an important milestone in everyone’s life; an event that seesaws between excitement and stress. Like a pivotal event in history in many ways buying a first house is a coming together of so many variables that it gives a scare to the most strong hearted.
To minimize the stress during this we would suggest following the following three steps.
Step 1 – Finalize Budget
The first thing to do before starting the process is to be clear as to the reasons for purchasing a house. Ensure you understand that a own home is a liability; don’t make the mistake of considering it as an asset. There would be price-appreciation over time but that shouldn’t be the primary driver for buying a own home – unless you have idle funds available and you cannot think of a better place to “invest” them.
As a base exercise consider the following variables –
- Possible price appreciation
- Tax impact – rental versus benefits WRT home loan (principal and interest component)
- If looking for an investment is there an alternate option that provides better returns with lesser hassles.
Only buy a house that you can afford right now. This involves two components – availability of a lump-sum corpus and bank funding in the form of a home loan.
- Lump-sum corpus – typically banks fund only a portion of the overall property price; requiring a fair portion of the price to be funded by a down payment. In addition there are substantial costs related to booking amount, registration and taxes which are typically not funded by banks. To avoid any stress later in the process ensure that you work towards saving a corpus to be utilized towards these purposes.
- Home loan funding – As a rule of thumb try and keep your home loan EMI to less than 30% of your net take home salary. This would enable you to have enough funds to dedicate towards – emergency funds, investments to meet short and long term goals as well as maintaining a comfortable lifestyle.
Arrive at your likely budget by evaluating the above aspects.
Step 2 – Prepare your finances for the loan process
An important input towards a bank’s loan evaluation process is the credit score. It is thus important that your credit score is good – CIBIL score of at least 750. Also bear in mind that if applying for a joint loan then the banks would check the score of all the members involved in the application.
Ensure that you pull a credit score for all members involved a few months before you start looking for houses to ensure that there are no surprises. This would allow you to take steps towards improving your credit score prior to your application. While improving one’s credit score can take at least six (6) months a few quick hits could be – paying off all outstanding credit card balances, not applying for new credit a few months before applying for the home loan.
Step 3 – Shop for home loans
It is highly unlikely that you would buy your dream home without any funding from a bank. It is best to thus windowshop with a few banks to ensure that you get the best value for your buck. A home loan is typically active for a considerable period and a difference of a few percentage points could result in a substantial money.
Consider all parameters (loan type – fixed or floating), interest rate, late fees, fee applicable in case of early part or full repayment etc. Be promiscuous and seek quotes from a few banks to compare effectively. It is best to secure a pre-approval for your home-loan; at times this also helps in negotiating a better deal from the seller.
Following these steps would have reduce a substantial amount of stress in your home buying experience.
If you are planning to buy your first home a good idea to build the lump some for the down payment would be starting a saving group with like minded and trusted friends on the Finlok App. Do reach out to us at firstname.lastname@example.org for further guidance on the same.