Personal finance -http://www.fintotal.com Title : Buying a Home
Tags: financial tips for buying house, home purchase for singles, all about home loans
Meta description: Financial guidelines on buying a home
Snippet: You've decided to buy a house. But the million dollar question is can you afford to buy a home now? This can be determined by considering two factors of which one depends on your finance and the other on the economy. 1. How much down payment and EMIs you can afford If you’ve decided to be a homeowner, the next thing for you to do is to examine if you can afford to buy a house now. Before you set out to the real estate agent or the builders’ offices you must have an idea of how big a house you can afford to buy with your current financial position. First of all go through your budget sheets of the past four to six months so you know how much money you have to start with. Next get an estimate of how much money the bank is likely to lend to you. This exercise will enable you to save time and energy spent in checking out houses you cannot afford and avoid disappointment and frustration. To estimate how much you can expect to borrow, use the two basic guidelines that banks and mortgage companies follow. The first guideline is that principal, interest, taxes, and insurance (PITI) shouldn’t exceed 40%percent of your gross income (your pay before taxes). The second guideline is that PITI plus all your other long-term debt shouldn't exceed 65% percent of your gross income. Your long-term debt (car loans, credit cards you won't have paid off within the next ten months, student loans) shouldn't exceed 25% of your income (65% – 40% for PITI = 25% for other debt). As a young professional in your 20s or 30s perhaps you can buy a small house that fits your need and in some years as the house value appreciates you can sell it off to buy a bigger one to accommodate the family. 2. Stage of price boom Another important factor to look at before deciding to buy is if the general level of prices of residential property is at a peak, moderate or floor. You can say property prices in a region are peaking if the rate of growth of property price is more than the rate of growth of income in the place. Basically this means when houses are becoming more and more unaffordable for people across all segments of income it must be a peak. Another way to find if property at some place is overpriced is to calculate whether it is cheaper to buy there or rent there. Suppose you have to shell out Rs X as EMIs every month for 20 years to purchase a flat in an area. So the total amount you’d spend is X*12*20. If the rent you’d pay there for 20 years works out to be more than that, it makes more sense to buy the house because this
indicates lower price. If house prices are at a boom, wait for up to 2-3 years before prices correct. If you are not sure what stage prices are in wait for a year and watch the direction of prices and the economy. Do some research on current property rates in different neighbourhoods. Look at past prices of residential property in various neighbourhoods you’d like to live in and you will have a rough idea of what it could be in the future, unless significant changes occur. Your neighborhood choice will, of course, depend on the lifestyle you wish to have and your budget. How to prepare for home purchase? Everybody would like to have a house of their own. On an average in India house prices are10-12 times more than the annual income of an individual. A house is the most expensive purchase made by most people in their lifetime and a huge chunk of a person’s lifetime earnings are spent on it. There are two ways a person can fund a home purchase: Fund in possession Some people who own ample assets as ancestral inheritance in the form of land and property or had bought prime property really cheap can sell off in one place to purchase where they want to buy. Other fortunate people marry wealthy people (or their sons marry wealthy girls) to inherit property or more liquid assets. Unless you were born wealthy or married into a wealthy household you’ll have to take the long route, that is wait and save your hard-earned money, to buy your dream-house. Building up the fund or part of it To build up your home fund entirely by way of saving and investing could take decades but it is advisable to take home loan on the minimum amount possible. The reason is obvious, the interest paid is wasted; it is never recovered. For a home loan one needs to bring up at least 20% of the house cost as down payment. So for a house costing Rs 30, 00,000 you’d need to pay Rs 6, 00,000 as down payment. If you have identified the type of house you want and the locality, start working towards it. Allocate at least half the amount you would’ve paid as EMI, assuming you have you bought it on rent, in a separate fund. If you intend to make the purchase in 3-5 years or longer, invest the money in mutual funds by way of SIP, every month. If you must buy the house in a shorter duration, build up a ladder of fixed deposit maturing in 2 years, 1.5 years, 1 year and so on depending on when you’re depositing. If you adopt a disciplined manner of saving and investing, you wouldn’t have to dig into funds meant for other purposes such as contingency or disrupt other regular allocations like pension fund, vehicle loan etc. Home loans More and more young people are buying their first homes these days on borrowed loan. With easy financing options home ownership is within the reach of more young people than was possible traditionally. A home loan will be the biggest item on your expenses list and it may run for up to two decades so better make sure you get it done right. In order to find the best possible deal, you need to get quotes from many different banks and mortgage brokers. Don’t assume that broker is trying to find you the best possible deal, because they are often swayed by the commission lenders offer them, and so are not necessarily acting in your best interests. Your best bet is therefore to shop around and compare interest rates, fees, and other expenses between the different deals you are offered. Floating or fixed? While going for a home loan you will have the option of choosing a fixed rate or floating rate loan. A fixed rate loan as the name indicates has a fixed rate of interest that doesn’t fluctuate with market situation and allows you to make repayments in fixed EMIs throughout the loan term. A floating rate loan’s interest can move up or down depending on market conditions. This rate is linked to the bank’s prime lending rate or the base rate and a spread of around 2% is charged. A floating rate implies that your payments can be increased or decreased and this might reflect in the form of repayment for an extended period. Although banks should ideally pass on increase and decrease in rates to customers equally, most of the times they are more enthusiastic about and quick in passing on an increase in interest rate. The decision of settling for a floating rate or fixed rate must depend on the stage of interest rates. If interest rates are peaking and have been fluctuating in the past 6 months to 1 year, it will be wise to go for a floating rate because you expect the rates to go down sooner or later. If interest rates have been stable in the past 6 months to 1 year and are at the lower side compared to previous years one should take a fixed rate and lock in that interest for the entire loan period. In a growing economy like India’s interest rates should hover around the growth rate when inflation is tamed.
Choosing lender Every bank worth its salt offers home loans. A borrower can choose from scores of banks offering loans at competitive interest rates. The most important criteria that anyone must check is interest rate offered. If you have a few banks in mind that offer similar interest rates you can use the following considerations to make a decision: 1. Amount being sanctioned Different lenders will offer you a loan of varying amount depending on their valuation of the property. Banks lend up to a certain percentage of the cost of the house which typically varies from 75 – 80%. The remaining amount called as margin will have to be funded by you. How much amount is sanctioned also depends on your income and repayment capacity. Different lenders will offer different loan amounts based on your income. Verify if the bank is willing to lend the amount you need to borrow. 2. Speed of approval and disbursements Sometimes the price a builder offers on a house is valid for a limited period. Enquire how much time the bank takes to sanction a loan after you have applied and how much time is required to disburse the amount. Ask friends, colleagues and relatives who have experience, for opinion and check if a lender has the reputation of sticking to its commitments. 3. Repayment terms Choose a lender who offers repayment options that you can comfortably manage. Verify conditions laid down by the bank regarding foreclosure penalty, fee for switching lender, prepayment charges, etc. Ensure you understand this criterion before choosing a lender. 4. Convenience At the end of the day you don’t want the bank to give you headaches even if it has offered a low interest rate. You want a bank that offers good customer service, is responsive, treats you warmly and helps you with queries and in understanding relevant formalities and conditions. Documents needed Some of the documents generally required by various lenders are as mentioned below. Documents required differ from bank to bank. 1. Passport size photographs 2. Proof of Identity: PAN Card/ Voters ID/ Passport/ Driving License etc. 3. Proof of Residence: Recent Telephone Bill/ Electricity Bill/ Property tax receipt/ Passport/ Voters ID etc. 4. Statements of Bank Account/ Pass Book for last 6 months to 1 year 5. Statements of any investments showing financial background of borrower (fixed deposits, shares, fixed assets such as land etc.) 6. Sale Deed 7. Agreement for Sale 8. Copy of the approved plan for the proposed construction / extension / addition 9. Allotment letter of Co-operative Housing Society / Apartment Owners' Association / Housing Board / NOC from the Society / Association / Builders / Housing Board 10. Legal Scrutiny Report, EC for the past 13 years, Property Tax paid receipt, Khata and permission for mortgage, wherever necessary If it is a pre-approved loan, documents from 6 to 10 are not asked for. Additional Documents for Salaried Persons
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Salary Certificate & Form No. 16
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Recent Salary Slips with all deductions
Additional Documents for Non-Salaried Persons
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IT Returns filed for last several (2 or 3 typically) years
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Proof of business existence and business address
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Document describing nature of business, year of establishment, type of organization etc.
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Balance Sheet and Profit & Loss Statements for the past several (typically 2 or 3) years
Fees Besides the interest rate, a borrower pays other charges to the lender for services provided. The various fees you can expect are mentioned below:
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Processing Fees: Typically related to the loan application process and is charged when a loan is processed. Note that processing fees maybe refundable and maybe charged even if the loan itself is not approved. Please check with the lender before filing a loan application. It can typically be between 0.5%-1% of the loan amount and could have certain minimum and maximum amount restrictions. For example, a lender could have a processing fee of 0.5 of loan amount with a minimum of Rs. 1000 and a maximum of Rs. 10000. Processing fees could also vary based on the actual loan amount.
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Administrative Fees: Some lenders have fees to maintain the loan which are charged periodically (such as quarterly or per annum).
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Documentation Fees: Some lenders may charge fees for preparing documents etc.
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Commitment Fees: Some lenders may charge a fee in case the approved loan is not availed by you within a certain stipulated time period.
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Prepayment Fees or Penalty: Some lenders charge some penalty or fees when you prepay part of the loan amount. This can sometimes depend on the percentage of outstanding loan amount prepaid. Typically this prepayment fees can be up to 2% of the prepayment amount. Some lenders may not have any prepayment penalty at all. This is an important consideration if you plan to prepay part of the loan before the agreed loan period.
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Delayed Payment Fees: If your monthly payment gets delayed for any reason, some lenders may charge this fee.
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