Financial Steps To Buy A House In India

Having a place to call your own is a dream for a great many in our country. In the old days, people used to wait till marriage and having kids before planning to buy a home, but times have changed. More and more individuals are looking to become homeowners at a young age, and why not? There are more options at one’s disposal and more facilities in the form of easy loans and accessible guidance from a financial planner for the home-buying process. 

So if you’re seeking financial advice for buying a house, or considering another as an investment, you’ve found just the guide! In this blog, we’ll take a close look at the steps involved in home-buying financial planning so you can turn your dreams into reality. 

How to do Financial planning for buying a house? Step-by-Step Guide

Buying a house is a complex process, and naturally, it is one of the biggest, most important investments one makes. How successful and how pleasant your experience is will depend on how well-prepared you are. Here are seven steps you can take to get started on your financial planning:

Step 1: Assessing Your Financial Health

Understanding your current financial situation is the first step of the process. Evaluate your current income and include all sources such as primary, secondary, and passive streams. Note down all your expenses and your liabilities such as credit card debts and education loans. Evaluate the state of your savings and find out what your credit score is. By doing so you will get the full picture of your finances, and you’ll know exactly what you can and can’t afford. This will also give you an idea of the down payment you can comfortably make, and help you set achievable goals for the rest of the home-buying process

Step 2: Setting a Realistic Budget

Getting a clear understanding of your financial health will help you with the next step, which is setting a realistic budget. Classify all your expenses into three categories – essential expenses, non-essential expenses, and savings. The necessary expenses of living such as rent and groceries come under essential expenses. Non-essential expenses include the money you spend on your wants, like ordering food, streaming subscriptions, and hobbies. This category will help you identify areas where you’re spending too much and can make cutbacks. Of course, you will have to make sacrifices, but that doesn’t mean changing your entire lifestyle, so save as much money as possible without lowering your standard of living too much.

There are different costs associated with homeownership such as the down payment, monthly mortgage payments, and closing costs. Closing costs include the expenses when you receive the ownership of your home, such as brokerage fees, property tax, insurance, and stamp duty. It’s important to consider these costs before you set your savings goals. 

Also Read: What is Budgeting? All You Need to Know

Step 3: Saving for a Down Payment

With your budget, you’ll be able to determine a savings amount. For example, if the down payment you want to make is Rs. 10,00,000 and you are saving Rs. 20,000 per month, starting today it will take you over 4 years to save that amount. Another important thing to consider is the amount of down payment you want to make. Standard practice is to pay 20% of the property’s purchase price, but some loans offer a lower percentage. If you’re planning on a small down payment, know that you will have to pay more interest and for longer, which means you will end up paying a lot more.

Now where do you save your money? Many people tend to open separate savings accounts to accumulate funds and often overlook investing. Look to invest your savings according to your risk appetite and your time horizon. If you are risk averse you can consider investing in a monthly recurring deposit and net a return of 7-8% per annum. If you want higher returns, however, there are many short to mid-term mutual funds you can invest in such as Equity Linked Savings Schemes. ELSS has a lock-in period of 3 years and can provide some big returns in the mid-term. 

Step 4: Pre-approval for a Mortgage

Pre-approval is the process during which the lender reviews your financial information to determine how much they are willing to lend you and at what interest rate. 

• First, check with your current bank if you’re pre-approved for a home loan or not. Usually, salaried individuals who have been with a bank for a long time are already pre-approved. 
• Pick the lender of your choice. Different banks offer different interest rates on loans so it’s a good idea to weigh different options. 
• Provide your financial details such as your proof of income, employment history, credit score, and debts to the lender. 
• The lender will then assess your creditworthiness and offer a preliminary loan amount. 
• This amount will give you a good idea of the price range within which you can comfortably shop for your new home, and you can readjust your savings goals accordingly.

Step 5: Choosing the Right Mortgage

You’ll find many lenders offering various types of loans with different interest rates and terms. Check the lender’s reputation and read the customer reviews. Is their customer service good? How transparent is the entire loan process? Are there any hidden fees? How long does approval take? You have to conduct due diligence on your part. Once you find the appropriate lenders, compare them. Compare their fees, interest rates, and terms and conditions. Now pick the most suitable mortgage. What down payment are you prepared to offer? More payment upfront generally means lower mortgages. What is the length of the loan? Shorter periods often mean lower interest rates. 

An important factor that the lender analyses in the home-buying process is your credit score. It is suggested that before going through this process you should take steps to improve your score. You can do this by paying your credit card bills on time, maintaining a low credit utilisation ratio, not having multiple debts, and checking your credit reports regularly for any errors. If you have a good CIBIL score of say, above 750, you might get a lower interest rate of about 8.5% per annum. For a lower score like 500, the interest rate might be 9.3%. The difference may not seem like much but in the long run of 20 or 30 years? It will make a massive difference.

Step 6: Emergency Fund and Future Planning

Another important thing to do is build and maintain an Emergency Fund. An emergency fund acts as your financial safety net that makes sure you can effectively tackle any unexpected financial challenges such as a job loss or heavy home repairs, that life may throw your way. Build this fund in a separate savings account till you can accumulate three to six months’ worth of your living expenses. 

While the home-buying process is lengthy and demands a lot of attention, it is likely not the only financial goal you are working towards. Don’t forget about other important aspects like retirement planning and investing for your child’s future. 

Step 7: Seek Professional Help

Since buying a house is one of the most important decisions in your life, consulting with a financial advisor for a home purchase would be a very wise step. A financial advisor can –

• Give you personalised financial advice for buying a home, that takes into account aspects like your time horizon, savings amount, goals, credit history, and debt.
• Help you in setting attainable financial goals and outlining a realistic budget.
• Suggest ways to improve your credit score.
• Provide insights on the tax implications of owning a home.
• Suggest different options to finance your home.
• Assist you in picking the most suitable mortgage option.
• Suggest the best home insurance options.

Also Read: What are Financial Goals and How to Achieve Them?

Conclusion:

The home-buying process is quite extensive and time-consuming. You have to dedicate a lot of time, effort, and resources towards it, but the results are well worth it. The key to success lies in understanding your current financial health, setting realistic budgets, and seeking professional guidance from a financial planner when needed. With these Financial planning tips to buy a home, you’re well on your way to realising your dreams.