As a first-time homebuyer, remember that the home you can buy and the home you can afford are two separate things. Even if you secure a significant home loan and buy a costlier home, planning a home budget – big or small house budget – doesnâ€™t end at successful loan approval and disbursal. It involves a complete restructuring of your existing financial plan – realigning certain expenses, charting out EMI payments, considering existing loans, taking into account the after-purchase expenses, etc.
In this article, we will understand the factors that help you with buying or building a house on a budget.
Financial Planning for Buying a House in India
The DTI Rule:
Debt-to-Income ratio is the percentage of monthly income used for loan repayments.Generally, a DTI of lower than 36% is considered manageable as that means you are left with enough money to handle other expenses and financial obligations. If you are going for a higher DTI ratio, realign other expenses accordingly.
Analyse your existing and potential expenditure:
Make sure to reassess your existing financial plan, especially the expenditure groups, to understand your EMI â€˜affordabilityâ€™. As seen above, up to 36% of your income will go into paying the EMIs. No matter the type of home budget you currently have, you will need to modify it to ensure you can afford to pay timely and regular EMIs.
Account for any EMI + rent payments:
Suppose you decide to buy a flat in Mumbai, and it is under construction. That means you will have to bear the rent as well as EMI payments every month, which can be sizeable in a city like Mumbai. Make sure to account for it when planning a home budget for a new house.
Determine the EMIs and down payments:
First-time homebuyers might go for a high down payment to ensure a lower home loan amount and EMI payments. A down payment takes a major chunk out of your savings and needs to be carefully planned without affecting your finances. Similarly, lenders can allow up to a 50% DTI ratio if you have no other liabilities. However, do not go for a higher loan or higher EMI. Consider the affordability rather than the eligibility.
Do not forget the after-purchase expenses for the house:
When you buy a house, you will spend on interior decoration, redesigning, any repairs, etc. Take these expenses into consideration when planning a home budget.
Buying a house, especially the first house, is one of the most important decisions in an average individualâ€™s life. For a first-time homebuyer, the purchase entails a considerable investment of time, effort and, more importantly, money. No matter the type of home budget you have, consider the above-mentioned points to ensure detailed financial planning for buying a house in India.
What is DTI? What is the formula for calculating the DTI ratio?
The Debt-to-Income Ratio is basically the percentage of your gross monthly income that is utilised to service your monthly loan repayments, including the home loan EMIs.
DTI = Total value of loan repayments in a month / Total gross monthly income x 100
How much home loan can you afford?
The amount of home loan you can afford equals the amount of EMI you can pay each month. A Debt-to-Income Ratio between 25% to 36% is considered manageable.
How much down payment does a new home require?
You will have to pay at least 10% of the agreement value of your new home as a down payment. There is no upper limit on the down payment.
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