So, you have taken that big, life-changing decision of buying a house. This is about the time that you also start thinking about the less exciting details about buying a house such as budget and finances. What kind of house can you afford? The answer to this question would depend on details like current income, expenses, existing loans, and assets followed by the amount of down payment.
While the most essential factor that determines your affordability to buy a property is the ability to pay a certain sum of money as equated monthly instalments, there are several other factors that determine the house you can really afford. To have a realistic estimate of the cost of property you can afford you may need the help of a professional cost calculator.
Here are the important details that would be required as inputs –
- Annual income – The total amount of money that you are receiving as salary along with interest from investments is the base for the amount you can afford to pay every month. The annual income of a homebuyer has to be sufficient enough to pay the loan and also retain sufficient funds to manage monthly expenses and unforeseen emergencies.
- Monthly debt/expenses – It is crucial to make a realistic estimation of expenses that occur every month like groceries, utilities, healthcare, entertainment, insurance, credit cards, fees or loans.
- Funds available for down payment – You have to keep in mind that while buying a house, around 10-20% of the property’s value has to paid upfront as down payment while a bank loan can be taken for the rest. This amount usually has to be paid from your savings or other assets that can be sold to make the payment to the builder.
- Credit score – Every individual that has borrowed money from a bank or other financial institutions for any purpose in the past will have a credit score based on his/her payment record. This will determine the amount of money that a borrower will lend to a first time homebuyer and also the interest rate that will be charged. As a regular practice, lending organizations charge high interest from homebuyers if they have a low credit score or have defaulted in the past.
While the above factors are related to the financial aspect of home buying, governments are also taking an active part in creating affordable housing for everyone. Besides making laws that ensure transparency in the purchase and sale of property, populist schemes have been introduced offering low-cost housing through special townships, making it easier for borrowers to convince lenders to grant loans.
As a first time homebuyer, you should not overburden yourself with a housing loan you can ill-afford, which may eat into your emergency savings.
An ideal move would be to check with your bank about their list of approved builders while getting your credit score checked up to make the search for an affordable home an easy process. It is always advisable to keep an emergency fund to avoid the impact of any economic upheavals that may occur.
This article was originally published on www.thehindu.com dated August 6,2017
