Can you tell me, at least, one common aspiration that every Indian has or one common dream every Indian is dreaming about? Owning or buying a home. Yes, you are right. But what are the things to be taken care in terms of financial perspective when you are buying your first home or in short, what you have to do for buying your first home? Though it is a big debate that you should buy or rent a home, I think buying a home is more of an emotional decision. When you decide to buy a home, it is to be properly planned so that it would not hamper other financials goals.
Determine the property you can afford
At first, you have to access your requirement. Whether you have a requirement of 1BHK, 2 BHK or rather 3 BHK home, the location of the home- you want your home beside your office or a posh locality of a city where you want to live. But above all, you have to fix your budget because the main constraint which most of us have, is our financial budget. Maybe you want to live in a posh locality, but your budget does not suit your desire. Then you have to compromise your desire towards your other financial liabilities.
Most important thing is to keep in mind that the decision of buying a home should not hamper the other financial goals. The temptation of buying a home over your ability may jeopardize all other necessary financial goals. Generally, a person should not spend more than the 40% of net home income towards the EMI though banks normally give the loan considering that any individual can pay 60% of net income as an EMI.
Save for Down Payment for buying your first home
To buy a home, you have to pay a down payment of 20% of property value. Some banks even allow 10%-20 % contribution from the buyer on a case to case basis, but it is wiser to save and pay the down payment at least 20% of property value. Pick a period to achieve the goal. According to the availability of time, allocate the investible amount into the different asset class to reach the desired down payment amount.
If you are 25 years old and you are planning to buy a flat at the age of 30 years. It means you have 5 years to save for the down payment. Suppose you want to buy a flat of 30 lakh rupees and 20% of the value i.e. 6 lakh rupees you have to pay as down payment. So your goal is to achieve 6 lakh rupees after 5 years down the line. If you invest in a diversified equity mutual fund you have to invest Rs 7398 per month.
Though, it is always advisable to plan early if you want to buy a home, as huge money is required at the start of buying a home to make the down payment. But some persons are facing problem to plan properly at the early stage and enter into a costly debt of personal loan to finance the initial amount. In this case, they may opt for an interest-free loan from their friends and relatives and may sometimes opt for really low-cost cooperative loans from office or from another source. Those who are not enough disciplined in investing and thinking of buying a home, go to a financial planner to help you.
Choosing a Property
This is the most difficult task which you probably face in the entire home buying process. I know some of my colleagues who are fed up with the home selection according to their requirement and financial ability or budget. To handle that, first you list the requirements which are must have and which are nice to have. Prepare a list of preferred locations in the city as the price of flat is very much dependent on the location of the flat. If your budget is not matching with the first preferred location, don’t hesitate to search the flat in the other locations which actually give you a significant advantage over the price of the flat.
Sometimes, developers sell the furnished flat with a high price to attract the customers. Don’t fall into the trap. Do a ballpark estimation of the furnishings and arrive at the actual cost and price advantage, if any. Try to book a flat at a very early stage of the project which can be available at a discount rate. It is always a requirement to do the homework about the builder’s reputation, timely delivery etc. before finalizing the property.
Selecting a financial institution for Home Loan
After paying a down payment of 20% of property value, for rest of the 80%, you have to take a home loan. For taking a home loan, the financial institutions check two aspects. One is your financial capability towards paying the EMI over the 15 -10 years. And the other is the property is worth the amount you are taking the loan so that in the case of a defaulter, the bank can sell the flat and recover the debt.
To take care of the first part financial institutions need the documents like your salary slip, Income tax acknowledgment or Form-16 issued by your employer, last six months transaction details in bank account etc. In the same way, the property documents like building plan, builder details, last deeds and prior deeds, 20 years history of property etc. Most of the financial institutions have partnered with various verification agencies to verify the documents given by you. After checking the first type of papers, they can approve the loan. They also check the credit score and report from CIBIL or any other credit bureau. So, before applying for a home loan, know your credit score from CIBIL for free.
At present, the banks and NBFCs (Non-Banking Financial Companies) are coming with the pre-approved loan after verifying your financial ability. These pre-approved loans are having a validity of certain period e.g. 3-4 months. After that, you can search the flat and according to the property, the loan will be further processed and disbursed to the builder. Banks and NBFCs are helping the prospective home buyers with pre-approved projects which do not need further documentation of the property.
Another thing you have to take care during applying a home loan is the processing fee. Normally bank and NBFCs charge a sum of 0.5% of the loan value as the processing fee. But some institutions also give a processing fee waiver to attract the more customers in the highly competitive market. So do a comparison not only on the interest rate of the home loan but also keep a view on the processing fee.
A big advantage of taking a home loan is tax benefit against the payment of EMI. You can claim the tax benefit on the payment of interest part of the EMI up to Rs 2.5 lakh. The principal part of EMI can claim the tax benefit of up to Rs 1.5 lakh under section 80C.
Registration and Stamp Duty and Other charges
Government charges in the form of registration of the flat and stamp duty put your job into a further difficult situation. The stamp duty and registration charges both vary widely according to the states. Stamp duty varies from as low as 3% to close to 12% across the states and registration charges varies from 0.5% to3% of the property valuation. Please keep in mind that this percentage is not calculated based on the sale value. This is calculated based on the government valuation.
For more, please read stamp duty and registration fee in states
Other than government charges, there are professional charges for lawyer etc. which you can consider close to 1% of property value. Some banks and NBFCs from where you are taking the home loan, you can approach for the top up loan to finance these expenses. You can claim the tax deduction against these expenses on which financial year you have spent.
Hope this will help you to one step forward towards you much dream goal i.e. buying your first home. If you have already bought your first home, share the experience.