Most men and women looking for a first time home loan are bogged down by multiple questions and confusions. Whether it is the right time, whether the property is suitable, which bank to seek loan from, etc… Yet, there are others who are almost cavalier when sealing a home loan deal and purchasing a property, and end up realizing later the mistake they made by not doing their homework well.
One needs to be very careful when you decide to take the home plunge, because buying a house is much more than securing a home loan. When you decide on buying a home, make sure you know the long-term implications of your move and your capacity to make repayments.
Here are a set of beginner’s tips for people looking for a first time home buy:
1. Evaluate your monthly cash flow and assess ways to save more
Before you decide what you can afford and invest in, you need to have your basic calculations right. Make sure you list out your income and expenditure details regularly for at least 3-4 months to assess some basic factors such as what extra expenditure you can cut, how much money you can save, and how large repayment installments you can afford. This is very basic calculation which an individual must be able to do before going for a house loan. It will not only make your accounts clear in your mind but also make it easier to plan your expenses well. Think about ways to save more cash, cut your superfluous expenses. Your rented apartment may be bigger than what you need right now, consider moving into a smaller apartment to save on rent. Move in with your parents for a year or two, if possible. Only when you are convinced that you are saving enough and to the best of your potential should you move ahead with a house and loan search.
2. Select what you can really afford
Now that you have a fair understanding of your buying capability, make an assessment of what you can afford. Do not take impetuous decisions while selecting property. Never select a house that will put more financial burden on you than you can carry in your present circumstances. Do not indulge in wishful thinking and assume promotions and appraisals down the years will help you tide in the payments. Apart from affordability, also take into account factors like safety, location, public transport accessibility, among other conveniences. Also factor in the cost potential of the property, whether it promises to surge in value with time.
3. Save for down payment and seek help if needed
It is advisable to save as much you can to make a down payment for the purchase. The more you can pay without a bank loan help, the better it would be for you. Apart from saving some money, sell some assets if needed; or seek help from parents or other willing family members for making a substantial down payment. You won’t need to pay interest back to your family, just the principal some. The lesser loan you take from the bank, the shorter will be the payment course and the lesser the interest payment. The larger the down payment you make, the better it is for you because it reduces the remaining amount to be paid over the years.
4. Check with multiple banks
Do your homework well. Do not just plunge into a deal with the first bank you speak to. Make sure you go around and check the different deals different banks are offering. Then opt for the best deal available. Sometimes people hurry into a deal with a bank and realize later that another bank could have made a better and more profitable deal.
5. Go for consolidation of loan
Often when many people decide to buy a home, they are already having another running loan or liability. For example an auto loan which would now run parallel to the home loan. In such circumstances, consolidation of loans is a good option. Nobody likes to pay two EMIs simultaneously; a loan consolidation reduces the amount payable per month resulting in a single monthly payment instead of multiple payments. By consolidating two simultaneously running loans, one would not only reduce the installments per month but also reduce the rate of interest as compared to what one would be paying on multiple repayments.
6. Have at least 3 months payments in your account
When you activate a loan, you must not be living from paycheck to paycheck. Make sure you have some cushion money in your account to fall back upon. You should have at last three months of payment equivalent money in your account even after making the down payment.
7. Have contingency funds:
Some people buy a house, and do not immediately realize the liabilities it will bring. They end up forfeiting the buy, and this harms their credit score. Unforeseen events and exigencies can happen to anybody. One needs to be very careful and always have a Plan B. Make sure there is a contingency fund such as an FD that can be encashed on emergency or a PPF fund that can be relied upon in case an unfortunate incident like a pink slip happens. These emergency funds can come in the form of life insurance deposits, FDs, or mutual funds that you have invested in.