In pursuit of owning our dream home, most of our research is often limited to choosing the right property and lender for the home loan. While these two are vital, what many home buyers often fail to lay emphasis on is the pre-loan phase, which involves becoming financially capable of taking the loan.

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I’ll be discussing four checkpoints to find out if you are financially ready for it:

Checkpoint 1: Accumulation of Down payment amount

Borrowers are often over-dependent on home loans to finance major chunk of their house’s cost, and therefore don’t make much efforts to save and pay a bigger chunk from their own pocket. Lenders mostly provide 75-90% of property’s value as loan, implying that you have to finance minimum of 10-25% of the property’s cost on your own.

However, instead of just paying this prerequisite down payment, try to contribute higher proportion from your pocket (around 30-40 percent) by accumulating a corpus well in advance. Remember that the more you contribute, the lesser you would need to borrow and repay along with the interest applicable on the home loan.

What to do: Before applying for home loan, make sure you have accumulated sufficient corpus for down payment. Stretching your finances and digging your pockets a bit deeper during this pre-loan period would make sure you would require lower loan amount, subsequently leading to lower EMIs when taken with a longer tenure. A great way to accumulate such corpus is to begin investing in mutual funds through SIP route, about 4-5 years prior to taking the home loan, depending upon the amount you can contribute per month for this purpose.

Checkpoint 2: Credit score review

Your credit score is one of the most vital parameters on which lenders judge your creditworthiness before approving loan application. Hence, it is imperative for you to check your credit report before applying for home loan. Failure to do so may lead to credit report errors (if any) getting bypassed, thereby hurting both your credit score as well as loan approval chances.

What to do: Keep reviewing your credit score and report periodically, through online financial marketplaces, since these provide such service for free, along with monthly updates. Checking your credit score before applying would help get a fair idea regarding chances of loan approval.

Checkpoint 3: Existing debt to income ratio

Debt to income ratio (DTI) is another important factor that affects loan eligibility. It is the proportion of your income currently being used for debt payments such as credit card bills and loan EMIs. It measures your ability to repay various debts, as a higher ratio would imply that a major chunk of your monthly income is going out as debt payments.

Most home loan lenders, whether banks or HFCs, may hesitate lending to borrowers with a debt to income ratio above 60 percent (including the new loan’s EMI). A higher DTI ratio depicts an imbalance between the individual’s income and debts, and increases the risk of defaulting during future repayments, especially whenever an additional expense or financial emergency comes up.

What to do: Calculate your current debt to income ratio before applying for home loan. In case the ratio computed is over 60%, consider paying off some of these debts, such as foreclosing or prepaying the loan with the highest interest rate, since that loan or credit card would be the costliest of the lot. This would assist in bringing down your DTI ratio and thereby improving chances of loan approval. With a higher debt to income ratio, chances are high that you may either be denied the loan or a higher interest rate would be charged by the lender.

Checkpoint 4: Prepare for long term commitment

Although paying off 30%-40% as down payment is a good move, a major portion of your property’s cost would still have to be financed through home loan.

To repay such high loan amounts, you may require longer loan tenure to comfortably repay EMIs. Although tenures for as long as 30 years are available, taking a home loan for such long period would certainly require a long term commitment towards regular repayment of EMIs.

What to do: Firstly, opt for long home loan tenure, such as 20-30 years to comfortably repay the EMIs while serving the loan, even if you can afford to pay higher EMI. Start investing about 15-20 percent of your monthly EMI’s amount into mutual fund SIP, from the first month of EMI payment itself. This would enable accumulation of a corpus to close the home loan sooner, may be in 10-15 years, through prepayment/foreclosure.

Naveen Kukreja is CEO and co-founder of Paisabazaar.com.

First Published:Aug 27, 2018 8:37 AM IST