Many people dream of owning a home. However, with the steep rise in house prices, many people opt for home loans to buy a house. If you are taking a home loan for the first time or want to upgrade your existing house, it is important to understand certain financial aspects beforehand to avoid getting stuck in debt.
Estimate Income and Debts
A home loan is a long-term commitment with a repayment period of 15-30 years. Therefore, before taking a home loan, you should assess your financial situation, including your income, savings, and debts. Calculating your monthly cash flows, expenses, and financial goals would help. You should then decide on a budget for buying a house based on your financial means.
Low Debt Ratio
Banks and other financial institutions consider your debt-to-income ratio before approving a home loan application. A low ratio indicates a good borrower. Generally, banks are interested in lending when the loan-to-income ratio is less than 35%. Disclosing other incomes can increase your chances of getting a loan.
Down Payment
A down payment, or advance payment, is required to buy a house. Paying up to 20% of the purchase price in advance is advisable. Some lenders may lend against the home’s entire value, but you must decide which option is best for you.
Other Expenses
Buying a new home involves other expenses besides the home loan EMIs, such as property tax, monthly maintenance fees, home repairs, and bills. You should set aside some expenses to avoid future financial difficulties.
Future Plan
When considering a home loan, you should also consider your long-term goals. Once you take a loan, most of your income will go towards paying the instalments, which may compromise your future financial goals. Therefore, you should take adequate precautions beforehand, such as opting for a loan cover term policy to provide financial security to your family in case of unexpected events. You should also take term life insurance up to 10-12 times your annual income.
