How to assess your financial situation before buying a property?

Any investment requires you to assess your financial readiness. Purchasing a property is a major investment, and it is crucial to check if you are financially prepared to manage the various costs associated with it. These include home loan EMIs, stamp duty and registration fees, costs associated with moving and interiors and various other hidden expenses. More importantly, as a buyer, you must have adequate funds to make the down payment, which typically ranges from 5% to 20% of your property’s cost. Therefore, during financial planning, a buyer must set a realistic budget and establish a solid financial foundation to ensure a smooth home-buying journey. It is essential to conduct a financial checkup regularly, which will help you make informed financial decisions at the right time. In this guide, we explain how you can assess your financial situation before purchasing a property. 

Assessing income sources

The first step in the property buying journey is to determine if you have the necessary funds to finance the purchase. An assessment of your income sources will help you stay aligned with your goals, enabling you to allocate funds judiciously for the purchase. 

This process requires you to calculate the total annual or monthly income from all sources, such as your salary or earnings from your profession, part-time work or any business, income from investments, rental income from house or other property, etc. 

Evaluating liabilities

Tracking your expenses is a crucial step when assessing your net income. These include spending on utilities, groceries, transportation, maintenance, and miscellaneous expenses. Assessing your liabilities is not complete without considering all your outstanding debts, such as credit card bills, car loans, education loans, and insurance premiums. Note all these expenses and calculate your debt-to-income ratio. The formula is:

Debt-to-income ratio = (Total monthly debt payment/ gross monthly income) X 100

According to experts, keeping a debt-to-income ratio of less than 20% indicates a financially strong position for the investor. 

Consider paying off high-interest debts quickly, which will lower your debt-to-income ratio and maintain your financial strength. 

Reviewing savings 

Many financial experts discuss the importance of emergency funds. In scenarios such as sudden unemployment, having adequate savings will help you survive this phase without any stress. Experts also suggest saving enough money to cover expenses for at least three to six months. For example, if your monthly expense is Rs 25,000, consider around Rs 75,000 to Rs 1.5 lakh amount as your savings. 

Assessing your savings also involves preparing for down payments during home buying. Down payments also help lower the amount paid to the bank or lender. Typically, people source money for down payments from their savings or other investments. Therefore, it is advisable to start saving early to avoid any financial burden during the home-buying process.  

Click to read: How much down payment can you make for your property?

Calculating homeownership costs

Apart from the down payment and home loan EMIs, there are several costs a buyer would incur during the property purchase. Some of these are one-time costs, such as repair and renovation costs, property valuation and brokerage charges, GST, stamp duty and registration charges, location preference charges, interior costs, packing and moving costs. On the other hand, buyers should consider the recurring costs they will incur. These include parking and property maintenance, property taxes, home loan EMIs and home insurance. Understanding the estimated home ownership costs will help the buyer set the budget for the house purchase. 

Consider ways to finance your house purchase

Applying for a home loan is the best way to finance a property purchase as it comes with many benefits, including tax deductions. However, lenders typically provide loans to cover 80% to 90% of the property cost while the remaining 20% is upfront expense paid by the buyer. Estimating your home loan payments and the down payment costs is crucial when planning to buy a house. 

Monetising some of your assets, liquidating fixed deposits (FDs), applying for a home loan against PPF, etc., are some popular ways to cover the initial property purchase costs. Experts do not recommend approaching family members or applying for personal loans as an ideal way to fund property buying costs, as these might increase one’s financial burden. It is better to weigh the pros and cons before making a choice. The best approach would be to begin saving at least three to four years in advance and build a corpus. 

Checking credit score

Your credit score determines your eligibility for a home loan and the interest rate you will pay. Make sure to get a copy of your credit score from the lender and review it. A credit score of 750 or above is regarded as a good score, which keeps the borrower in a better position to seek loans at favourable terms, including higher amounts and lower interest rates. 

Considering home loan pre-approval 

Going for a home loan pre-approval makes the home purchase journey easier for a buyer. It makes the individual understand their home loan eligibility and help them decide the best property investment based on their budget. More importantly, it equips the buyer with greater negotiation power with the seller as they can state that they have the financial support to close the deal. Pre-approvals speed up the loan disbursal process as the lender has already given an in-principle approval. 

Risks of not evaluating finances before buying property

Ignoring the need to assess one’s financial position before a property purchase can have several repercussions:

• Setting the wrong budget: The buyer may not get a clear picture of their estimated home ownership costs. In such a case, they might overestimate and overspend, resulting in financial strain. 
• Increased hidden costs: The buyer may likely miss the hidden costs, which might lead to unexpected expenses. 
• Issues when applying for loans: Lack of planning on the part of a borrower may cause rejection of loan applications due to low credit score or high debt-to-income ratio. 

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Financial planning, including assessment of one’s current situation, is a crucial stage during the home-buying journey. It enables individuals to afford a property of their choice and plan their EMIs and other expenses without any pressure. This ensures their long-term financial stability and a worry-free home ownership experience. 

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