Selecting the house of your choice may take its own time but you need to plan for the finances to fund the purchase, in advance.
Obtain your credit report
It is almost impossible for one to buy a house, without borrowing either from friends and relatives or by taking a home loan or a combination of both. When you apply for a home loan, the lender accesses your credit history, from a credit information bureau like CIBIL. The credit report/score obtained from the credit bureau, is a reflection of your credit behaviours. The credit report contains historical data about applications and transactions pertaining to loans, credit cards, etc., and the score is prepared on the basis of information reported by various financial institutions
The lender takes decisions on whether to lend or not, based on your credit history. It is possible that a default by someone else, may be reflected in your report, thereby, adversely affecting your credit score. This may jeopardise your chances of borrowing temporarily, till the error is rectified. In case any such transactions are included in your report, you need to approach the credit information bureau, as well as the bank, to rectify such mistakes. This process may take some time. Therefore, it is in your own interest to access this report in advance, which is available for free to you, to understand the data in it about you.
Frequent enquiries for personal loans and credit cards, adversely affect your credit score. Hence, one should refrain from applying for too many credit cards or for personal loans, in case you wish to take a home loan in the near future.
See also: Financial checklist for buying a house
In-principle approval for home loan
There is a general perception that you cannot apply for a home loan, unless you have identified the property to be bought, which is not true. Once you have ensured that you have a good credit score, you can apply for a home loan, without having to wait for the finalisation of the property purchase. It is always better to apply for the home loan, even if you haven’t yet identified the property which you wish to buy.
Applying for a home loan before finalising the property, will give you a broad idea on whether you will get a home loan or not and also about the amount you are eligible for, based on your income. Once you know your home loan eligibility and the resources at your disposal, you will be able to arrive at the budget for the property. This will also help you to reduce the time required for disbursement of the home loan, after the property documents are submitted. The presence of a sanction letter, will also reassure the seller, ensuring that the deal is finalised at the earliest and smoothly. The sanction letter issued by the lender for the home loan, is generally valid for a limited period, beyond which you may have to pay nominal commitment charges.
Arrangement of funds to buy the property
Once you have decided on the budget for your house and have ascertained your home loan eligibility, you have to arrange for the balance amount, which is called as the ‘margin money’. As banks are allowed to fund only up to 80% of the cost of the property, excluding the stamp duty and registration charges, you are required to arrange the remaining 20% and the expenses towards stamp duty and registration charges. In all probability, you may have already invested your funds in the past, in different asset classes. In order to ensure that the property purchase goes through smoothly, you need to collect the margin money in one place. If you do not wish to take a home loan, you will have to arrange for the entire fund.
If your savings have been invested in equity shares or equity mutual funds, it is advisable to liquidate these saving well in advance. This is because equity investments are very volatile and it is impossible to predict the market levels, at the time you need to pay the seller. The markets may fall, resulting in a substantial reduction in the value of your investments. So, liquidate your equity investments and put the money in funds such as saving accounts, which earn you as much interest as fixed deposits.
In case your savings have been given as loans, you should liquidate these loans, as well and put the money in a liquid fund. This is because you may not be able to recover your loans in full, when you need the money.
(The author is a tax and investment expert, with 35 years’ experience)