Eager to buy a house? Check your readiness first

How do you know when you are ready to buy a house?

Some think that a person may never be fully ready and, hence, it’s better to buy a house as soon as you can. And this is the reason why so many young professionals buy their first house just a few years into the job.

Purchasing a house is a big decision. More so if it’s the first one. But despite the house purchase being an emotional ‘I-have-arrived’ kind of a decision, there is some mathematics when it comes to the decision.

You can’t just wake up one day and buy a house. You need to check your readiness first. And how does that happen?

Two prime factors of house purchase readiness

Unless you are very rich, you will take a home loan to purchase a property. This has two components. The first is the upfront down payment you need to make; and the second is the equated monthly instalment (EMI) you will be servicing later.

There are other aspects to this too, but we shall discuss them later on.

Is 15-20 percent down payment manageable?

When you are purchasing a house, you won’t get the full amount as a loan. The lenders want the borrowers to put up a minimum of 15-20 percent of the cost themselves.

Let’s say you are planning to buy a house of Rs 1.2 crore. Then be ready to shell out Rs 18-24 lakh as down payment from your pocket. Only the remaining 80-85 percent is given as a home loan.

But what if you do not have this Rs 18-24 lakh available? What if you can only manage Rs 10 lakh?

In that case, the bank will only lend you a lower amount. For your ability of Rs 10 lakh down payment, the bank will give a loan of about Rs 40-45 lakh. So your house budget reduces to Rs 50-55 lakh instead of the original plan to buy a Rs 1.2-crore house.

This means simply that your house purchase readiness is there, but for a property that costs less.

But there is another factor at play here.

Also read: Why buying a second house can put your other life goals to risk

Check your EMI affordability

Let’s say you can manage the required down payment. Good for you. But what about monthly loan EMIs?

Generally, lenders only give a loan so that the EMIs are not more than 40 percent of the borrower’s income. And this is for all the loans combined and not just the home loan.

Let’s extend the earlier example (of purchasing a Rs 1.2 crore house). Suppose you were able to somehow manage the down payment of 20 percent, i.e., Rs 24 lakh. Now you will need a home loan of the remaining 80 percent, i.e., Rs 96 lakh.

Assuming a loan tenure of 25 years (at 7.5 percent), the monthly EMI will be Rs 71,000. If your monthly income is Rs 1.2 lakh, then using the 40 percent loan rule, you can’t get a loan where the EMI is more than Rs 48,000. So you will not be given Rs 96 lakh as loan in this case.

You may be asked to bring in more down payment or increase the loan tenure.

Please note that you may be confident of servicing a high EMI and still be willing to take the loan, but lenders might not be comfortable approving a large loan compared to a person’s EMI servicing capability.

These were the two major factors. But there are a few more aspects to consider:

• Are you planning to use all your savings to make a large down payment? Don’t do that. I would suggest you not use up all your savings to make the down payment. Keep some money for emergencies. Always.
• Going for an under-construction house? Can you really manage both rent and EMI? Think carefully. Don’t walk on thin ice and push yourself into a situation where after rent, EMI and other expenses, you have nothing left.
• Consider your job stability before you take a big loan. You don’t want to lose your job when servicing a big loan, do you?
• It’s common for working couples to jointly take home loans. This increases the joint EMI capacity. But one needs to factor in whether both partners can or are willing to work for as long as the loan is fully paid off. If not, servicing a large loan using just one income might be difficult later on.
• We haven’t even discussed other goals. House purchase is a big goal by itself. But you cannot ignore important goals like children’s education and retirement. You may be in a watertight situation initially and not consider these goals. But do not ignore these goals for the entire home loan tenure. Make sure to assess how EMIs impact the investments for other goals.

I know that the house-buying decision can also have a family and peer-pressure angle to it. But don’t be pressured into taking this decision. Buying a house is not a race. Some buy it early. Some buy it later. There is no right or wrong here. Buy a house only if you can manage the above-discussed factors well.