How to financially prepare yourself to buy a house?

Buying a home is one of the most significant financial commitments you’ll make in your lifetime. In India, where real estate prices can be substantial, it’s crucial to plan ahead and prepare your finances to ensure a smooth and successful purchase. Financial readiness is not just about having enough money saved; it involves evaluating your current financial health, understanding your borrowing capacity, and accounting for additional costs like stamp duty, registration, and maintenance. By taking a structured approach to your finances, you can make informed decisions that will not only help you buy your dream home but also protect your long-term financial stability.

Top 10 tips to financially prepare for buying a house

Here are some useful tips to help you prepare your finances for investing in a property.

Evaluate your financial situation

Before taking the plunge into homeownership, it’s essential to assess your current financial health. This step ensures that you have a clear understanding of your income, expenses, assets, and liabilities, and helps you assess your capacity to afford a home.

• Review your income: Start by calculating your monthly and annual income from all sources, including your salary, business profits, rental income, or any side jobs. This will give you an accurate picture of how much you can comfortably allocate toward housing expenses, loan EMIs, and savings without straining your budget.

 

• Track your expenses: Break down your monthly expenses, including both fixed costs (such as rent, utility bills, and groceries) and discretionary spending (such as dining out, travel, and entertainment). Identifying where your money goes will allow you to make adjustments and free up more savings for your future home.

 

• List your assets and liabilities: Prepare a detailed list of all your assets (cash, savings, investments, properties, etc.) and liabilities (loans, credit card debt, etc.). Understanding your net worth will give you a clearer picture of where you stand financially and whether you have enough liquidity to support a home purchase.

 

• Assess your current debt: Evaluate your existing debt obligations, such as personal loans, car loans, or credit card balances. High levels of existing debt could affect your ability to secure a home loan or manage additional EMIs.

 

• Examine your savings: Take a close look at your savings to determine how much you have available for a down payment, closing costs, and post-purchase expenses. A strong savings cushion will give you peace of mind and greater flexibility in your home-buying journey.

 

Determine your budget

Once you’ve assessed your financial health, the next crucial step is setting a realistic budget for your home purchase. Defining a clear budget ensures that you won’t overextend yourself financially and helps narrow down your property search to homes within your affordability range.

• Consider your monthly income and expenses: Calculate how much of your monthly income can be allocated towards home loan EMIs without compromising your lifestyle. Most financial experts suggest that your home loan EMI should not exceed 30-40% of your monthly income, ensuring that you still have room to cover other essential expenses and savings.

 

• Account for loan eligibility: Banks and financial institutions determine your loan eligibility based on factors such as your income, age, employment stability, credit history, and existing debts. Use online home loan eligibility calculators to get an estimate of how much you may be able to borrow, based on your current financial situation.

 

• Plan for a comfortable EMI: Once you know how much loan you may qualify for, assess how comfortable you will be with the estimated EMI. If the monthly payments seem too high, consider adjusting your property budget or increasing your down payment to reduce the loan amount.

 

• Factor in additional costs: In addition to the cost of the property, consider other expenses such as registration fees, stamp duty, legal charges, and maintenance costs. These can add up to a significant amount and should be included in your budget planning.

 

• Prioritise location and property type: Your budget should also account for the location and type of property you’re interested in. Properties in major cities like Mumbai, Delhi, or Bangalore are generally more expensive than those in smaller towns or the outskirts. Similarly, the cost of a villa, independent house, or luxury apartment will be higher than that of a standard flat.

 

• Set a realistic budget: Based on all the factors above, set a budget that reflects not only what you can afford in terms of the down payment and monthly EMI, but also accounts for future expenses such as furnishing, repairs, or potential upgrades. Being realistic and disciplined about your budget will prevent financial strain after the purchase.

 

Save for a down payment

The down payment for a home generally ranges from 10-20% of the property’s value, as most banks and financial institutions offer up to 80-90% financing through home loans. This makes saving for a down payment one of the most crucial steps in your home-buying journey. The more you save for the down payment, the lower your home loan amount will be, reducing your monthly EMIs and total interest paid over time. Here’s how to effectively save for a down payment:

• Set a savings goal: Start by determining the amount you’ll need for your down payment based on the price of the home you plan to buy. Knowing your target will help you strategise and stay focused.

 

• Create a dedicated savings plan: Allocate a specific amount of your monthly income towards your down payment fund. Automating your savings by setting up a recurring transfer to a dedicated account ensures consistency and discipline.

 

• Cut back on unnecessary expenses: Review your monthly expenditures and identify areas where you can cut costs. Reducing discretionary spending on entertainment, dining out, and luxury purchases can help you redirect more funds toward your down payment goal.

 

• Increase your income: Look for opportunities to increase your income. This could include taking on freelance work, part-time jobs, or starting a side business. Any additional income can go straight into your down payment savings.

 

• Invest wisely: Instead of letting your savings sit idle, consider investing them in low-risk, high-return options like fixed deposits, recurring deposits, or systematic investment plans (SIPs) in mutual funds. These instruments can help you grow your money over time while offering relative safety for your savings.

 

• Use windfalls: Any unexpected bonuses, tax refunds, or gifts should be set aside for your down payment fund rather than spent. This will help accelerate your savings process.

 

Factor in additional costs

When buying a home, the total cost goes beyond just the price of the property. There are several additional expenses that must be factored into your budget to avoid financial surprises later. Understanding these extra costs ensures you are financially prepared to cover all the necessary fees that come with homeownership in India.

• Stamp duty: Stamp duty is a government tax levied on property transactions, and the rate varies by state. Stamp duty ranges between 2% and 8% of the property’s value across different states. In some states, women buyers enjoy reduced stamp duty rates. It’s crucial to check the applicable rate in your state and factor this into your overall budget.

 

• Registration fees: In addition to stamp duty, you’ll also need to pay registration fees to legally register the property in your name. Registration fees in India are generally around 1% of the property’s market value. This fee is essential for completing the ownership transfer process and is mandatory for all property purchases.

 

• Legal charges: Hiring a lawyer to verify the property’s legal documents and title deed is a prudent step. Legal charges may vary depending on the complexity of the transaction and the lawyer’s fees, but they typically range from Rs 10,000 to Rs 50,000.

 

• Loan processing fees: If you’re applying for a home loan, be prepared for loan processing fees charged by the bank or financial institution. These fees can range from 0.25% to 1% of the loan amount and cover administrative and processing costs.

 

• Realtor or brokerage fees: If you’re using the services of a real estate agent or broker, they typically charge a fee of 1% to 2% of the property’s sale price. While a realtor can provide valuable expertise and assistance in finding the right property, this cost should be added to your budget for buying a home.

 

• Goods and Services Tax (GST) on under-construction properties: If you’re purchasing an under-construction property, you’ll need to pay GST, which is currently set at 12% for residential properties. GST does not apply to completed or ready-to-move-in properties, so you can avoid this cost by opting for a property that has received an occupancy certificate.

 

• Interior and furnishing costs: While this is not a mandatory cost, furnishing your new home and making interior improvements, such as painting, lighting, or adding modular kitchen units, can quickly add to your expenses. It’s important to allocate a portion of your budget for these post-purchase enhancements.

 

• Maintenance deposits and society fees: Many housing societies require a one-time maintenance deposit, especially in gated communities or apartment complexes. Additionally, there could be recurring monthly society maintenance fees. These costs cover common area upkeep, security, and other amenities. Be sure to inquire about these charges when purchasing in a society or residential complex.

 

Boost your CIBIL score

Your CIBIL score plays a crucial role in determining your eligibility for a home loan and the interest rates offered by lenders. A higher score not only increases your chances of loan approval but also helps you secure better terms on your loan. Typically, lenders in India prefer a CIBIL score of 750 or above for approving home loans at competitive interest rates. If your score is lower, it’s important to take steps to improve it before applying for a loan. Here are some effective strategies to boost your CIBIL score:

• Pay your bills on time: Timely payment of your credit card bills, loan EMIs, and other dues is one of the most critical factors influencing your CIBIL score. Even a single missed or delayed payment can negatively affect your score. Setting up automatic payments or reminders can help ensure that you never miss a due date.

 

• Reduce existing debt: A high outstanding balance on your credit cards or loans can negatively impact your credit score. It’s essential to reduce your existing debt before applying for a home loan. Aim to keep your credit utilisation ratio (the percentage of your total credit limit you’re using) below 30% to improve your score.

 

• Avoid applying for multiple loans or credit cards: Multiple loan or credit card applications within a short period can make you appear credit-hungry and lower your score. Each application generates a hard inquiry on your credit report, which can negatively affect your score. Instead, plan your credit needs carefully and avoid applying for multiple loans simultaneously.

 

• Clear outstanding credit card dues: If you have high outstanding dues on your credit cards, prioritise paying them off. Carrying forward large balances or paying only the minimum due can increase your interest burden and hurt your credit score. Clearing your dues in full each month will help improve your credit history.

 

• Check your credit report for errors: Sometimes, errors in your credit report, such as incorrect personal information, outdated loan details, or wrongly reported defaults, can harm your score. It’s essential to review your credit report regularly and dispute any inaccuracies with the credit bureau to have them corrected promptly.

 

• Avoid closing old credit cards: The length of your credit history also affects your CIBIL score. If you have old credit cards with a good repayment history, it’s better to keep them active rather than closing them. Closing old accounts can reduce your average credit age, which may lower your score.

 

• Diversify your credit mix: Lenders prefer borrowers with a balanced mix of secured loans (like home loans) and unsecured loans (like personal loans or credit cards). Having only unsecured credit can impact your score negatively. A diversified credit mix indicates responsible credit behaviour and can boost your score.

 

• Limit the use of credit cards: Try to keep your credit card usage to a minimum. High credit card usage signals dependency on credit, which can lower your score. Using credit cards wisely and paying the full balance each month will help in maintaining a good credit score.

 

Review your debt-to-income ratio

Before applying for a home loan, it’s important to review your debt-to-income (DTI) ratio, as it plays a key role in determining your financial readiness to take on more debt. The debt-to-income ratio is a measure of how much of your monthly income goes towards paying existing debts, including credit card payments, loan EMIs, and any other fixed financial obligations. The DTI ratio is calculated by dividing your total monthly debt payments by your gross monthly income (before taxes). It’s expressed as a percentage and indicates your capacity to manage additional debt, such as a home loan.

For example, if you earn Rs 1 lakh per month and have monthly debt payments totaling Rs 30,000, your DTI ratio would be:

 

DTI = (30,000 / 1,00,000) × 100 = 30%

 

Lenders in India generally prefer a DTI ratio of 40% or lower when considering home loan applications. A lower DTI ratio suggests that you have sufficient income to manage additional debt, making you a more favourable candidate for loan approval. On the other hand, a high DTI ratio indicates that a significant portion of your income is already committed to existing debt, which could lead to difficulty in managing new loan EMIs.

 

 

If your DTI ratio is high, it’s a good idea to improve it before applying for a home loan. Here are some steps to take:

 

• Pay off existing debts: One of the most effective ways to lower your DTI ratio is to pay off or reduce your existing debts. Clearing high-interest debts like credit card balances, personal loans, or car loans can free up a significant portion of your monthly income and improve your DTI ratio.

 

• Increase your income: Another way to lower your DTI ratio is by boosting your income. This could include taking on a second job, freelancing, or exploring investment opportunities. Higher monthly income will automatically lower the percentage of income spent on debt.

 

• Avoid taking on new debt: While preparing to buy a house, it’s essential to avoid taking on new debt, such as personal loans or car loans, as this will increase your monthly obligations and negatively affect your DTI ratio.

 

• Consolidate high-interest debts: If you have multiple high-interest loans, consolidating them into a single loan with a lower interest rate can reduce your overall monthly debt payments, helping to improve your DTI ratio.

 

• Postpone major purchases: Delaying any major purchases, such as cars or vacations, until after you have secured your home loan can help keep your DTI ratio in check. Large financial commitments can increase your monthly debt load and decrease your loan eligibility.

 

• Negotiate loan terms: If possible, negotiate with lenders to extend the tenure of your existing loans. This could lower your monthly EMIs, resulting in a lower DTI ratio.

 

Explore home loan options

Selecting the right home loan is key to managing your finances effectively when buying a property. Different lenders in India offer varying interest rates, loan tenures, and repayment options, so it’s essential to explore all available choices before committing. Most home loans come with either fixed or floating interest rates, each with its pros and cons. While fixed rates offer stability, floating rates can provide savings if interest rates fall. Here are some tips to help you choose the right home loan:

• Compare interest rates: Shop around and compare the interest rates offered by different lenders. Even a small difference in interest rates can significantly impact your total loan cost over time. Use online tools and loan comparison websites to find the best deals.

 

• Check loan eligibility: Lenders evaluate various factors, such as your income, credit score, and employment history, to determine your eligibility. Ensure that you meet the basic criteria before applying, and take steps to improve your eligibility if needed by maintaining a good credit score and reducing existing debt.

 

• Consider the loan tenure: The length of your loan tenure affects both your EMI and the overall interest paid. While longer tenures lower your monthly payments, they also increase the total interest you’ll pay. Consider your financial goals and choose a tenure that balances affordability with long-term cost savings.

 

• Understand the processing fees and charges: Lenders often charge processing fees, legal fees, and other administrative costs that can add up. Be sure to understand all the associated costs and factor them into your decision when comparing loan options.

 

• Look for prepayment options: Some lenders allow borrowers to make extra payments towards their home loan without penalties, which can help you save on interest and repay the loan faster. Check if your lender offers flexible prepayment options and take advantage of them to reduce your loan burden.

 

• Choose between fixed and floating rates: Fixed-rate loans provide consistency in your EMI payments, while floating rates may vary depending on market conditions. If you expect interest rates to drop, a floating rate loan could be a more cost-effective choice. However, if you prefer stability, a fixed-rate loan is a safer option.

 

Prepare for home loan application process

Getting your documents and finances in order is essential for a smooth home loan application process. Lenders require a thorough evaluation of your financial background, so being prepared can help speed up the approval. Ensuring you have all the necessary documents, maintaining a good financial profile, and understanding the steps involved can greatly increase your chances of a successful application. Here are some steps to guide you through the process:

• Organise necessary documents: Lenders typically ask for documents such as proof of identity, address, income, and employment. Be sure to have your salary slips, bank statements, tax returns, and property papers ready before applying to avoid delays.

 

• Assess your budget and loan eligibility: Before applying, calculate how much you can afford to borrow based on your income and current financial obligations. Lenders usually approve loans where the EMI is within 40% to 50% of your monthly income. Use online calculators to estimate your EMI and ensure it fits your budget.

 

• Have a down payment ready: Most home loans in India require a down payment of 10% to 20% of the property’s value. Plan your finances accordingly and ensure you have this amount saved up. Avoid last-minute borrowing for the down payment, as it may impact your credit score and eligibility.

 

• Understand lender policies: Different lenders have varying terms and conditions, including processing fees, interest rates, and prepayment penalties. Research and compare these policies thoroughly before choosing a lender. It’s important to select a lender who offers flexibility and transparent terms that match your financial goals.

 

Build an emergency fund

Establishing an emergency fund is a crucial step in securing your financial future, especially after purchasing a home. An emergency fund acts as a safety net, providing you with peace of mind and financial security in times of unexpected expenses or emergencies. Ideally, your emergency fund should cover three to six months’ worth of living expenses, including mortgage payments, utility bills, groceries, and other essential costs. Here are some tips for building and maintaining an effective emergency fund:

• Start with a realistic goal: Determine how much you need to set aside based on your monthly expenses. Setting a specific target for your emergency fund will help you stay motivated and focused on your savings journey.

 

• Open a separate savings account: To avoid the temptation of spending your emergency savings, consider opening a dedicated savings account. Look for an account with a competitive interest rate and no withdrawal limits to maximise your savings.

 

• Automate your savings: Setting up automatic transfers from your checking account to your emergency fund can help you save consistently without having to think about it. Treat your emergency fund contribution like a monthly bill to ensure regular savings.

 

• Prioritise your fund: Make building your emergency fund a priority, especially in the first few months after buying a home. Redirect any extra income, such as bonuses, tax refunds, or gifts, into your emergency fund to help reach your goal faster.

 

• Review and adjust regularly: Periodically assess your emergency fund to ensure it still meets your needs, especially if your expenses change. Adjust your savings goal as necessary to account for life changes, such as a new job, increased living expenses, or family growth.

 

• Use your fund wisely: An emergency fund should only be used for genuine emergencies, such as medical expenses, urgent home repairs, or job loss. Avoid dipping into your savings for non-essential purchases to ensure it remains intact for true emergencies.

 

• Stay disciplined: Building an emergency fund takes time and discipline, but the security it provides is invaluable. Stay committed to your savings plan, and remember that having a financial buffer will give you peace of mind as a homeowner.

 

Consider future financial goals

When preparing to buy a house, it’s vital to align your home purchase with your broader financial goals. Homeownership can significantly impact your financial landscape, so understanding your future aspirations and how they fit into your overall budget is crucial. Here are some key considerations:

• Long-term financial planning: Reflect on your long-term financial objectives, such as retirement savings, children’s education, or starting a business. Ensure that purchasing a home won’t derail your ability to meet these goals. For example, while investing in a property can be beneficial, it’s important to maintain a balanced approach to saving for retirement or other significant expenses.

 

• Future income changes: Consider any potential changes in your income over the coming years. Are you planning to switch jobs, start a family, or retire soon? These factors can influence your financial situation and ability to handle mortgage payments. It’s essential to ensure your home purchase aligns with your expected income trajectory.

 

• Impact on lifestyle: Understand how homeownership will affect your lifestyle and spending habits. Owning a home often comes with additional expenses, including maintenance, property taxes and insurance. Factor these into your future budget and consider how they might impact your discretionary spending on things like travel, dining out, or hobbies.

 

• Property appreciation: Research the real estate market in your desired location to gauge potential property appreciation. Investing in a home that is likely to appreciate in value can be a smart financial move, contributing positively to your overall wealth and allowing you to achieve other financial goals more quickly.

Housing.com POV

Preparing financially to buy a house is a multifaceted process that requires careful planning and strategic decision-making. As highlighted throughout this article, evaluating your current financial health, determining a realistic budget, saving for a down payment, and considering additional costs are essential steps to ensure a successful home purchase. Furthermore, maintaining a good credit score and understanding your debt-to-income ratio can significantly influence your borrowing capacity and loan terms.

 

By approaching the home-buying journey with a comprehensive financial plan, you not only position yourself to secure your dream home but also set the foundation for long-term financial stability. The process may seem daunting, but with disciplined saving, informed budgeting, and a clear understanding of your financial goals, you can navigate the complexities of homeownership with confidence.

FAQs

What are the key financial documents I should prepare before buying a house?

Key documents include your credit report, income statements, tax returns, bank statements, and a list of monthly expenses. These help lenders assess your financial situation and eligibility for a mortgage.

How can I improve my credit score before applying for a mortgage?

To improve your credit score, pay down existing debts, make timely payments, avoid new credit inquiries, and correct any inaccuracies in your credit report. This can help secure better mortgage terms.

What is the significance of a pre-approval letter in the home-buying process?

A pre-approval letter indicates that a lender has evaluated your financial situation and is willing to lend you a specific amount. It strengthens your position when making offers on homes and shows sellers you are a serious buyer.

Should I factor in closing costs when budgeting for a home purchase?

Yes, closing costs typically range from 2% to 5% of the home’s purchase price and should be included in your budget. These costs cover fees like appraisal, inspection, and legal services, and are essential for comprehensive financial planning.

What strategies can I use to save for a down payment on a house?

To save for a down payment, create a dedicated savings account, set a monthly savings goal, reduce unnecessary expenses, consider side jobs for extra income, and explore government assistance programs that support first-time homebuyers.

Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com