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How to plan your finances before applying for a home loan

Buying a home loan without financial planning is like shooting in the dark. You would end up feeling overwhelmed with all the expenses that you didn’t take into account, along with home loan EMI payments.

Proper financial planning will not only help you manage your expenses better, but also help you make your dream of buying a home, come true.

Here are 8 smart tips to help you plan your finances better, before opting for a home loan EMI.

1- Reduce your debt-to-income ratio.

When considering your home loan application, financial institutions often look closely at your debt-to-income ratio. Your monthly debt obligations drawn against your monthly income is a good way to gauge your paying capacity. So get your credit card balance down as low as possible and consolidate your debts into lower monthly payments.

2. Loan Amount:

Currently you get 80% of property value as the loan amount. The down payment of 20% is what you need to arrange. This amount should not be raised through loan or debt. In fact , it is advisable to have at least 40% down payment from savings so that your loan would not be a big burden on you. The best way to do this is by putting aside an amount equal to the EMI in a recurring deposit. This will not only get you into the habit of saving that amount every month but also help you accumulate a bigger down payment.

3- Show your best credit behaviour

The way you've handled debt in your past is the best indicator financial institutions have of how responsible you would be with future debt. Missed payments or accounts in collections are going to give them a pause. Think about how reliable of a borrower you've been.

4. Maintain a good CIBIL Score:

Anything above 750 is considered a good credit score. All financial institution usually looks at the credit score as one of the many checks they do before advancing a loan. So it is advisable to clear all your existing loans or debts like car loan, personal loans etc. before buying a house on Home Loan. You may still be able to get a loan without good credit, but the structures and rates available to you might leave you paying more than you should. A good credit score gives you many benefits, such as low interest rate, higher loan amount, quicker loan approval process and longer repayment period.

5. Contingency fund for future EMI:

At lease have a margin of 3 months EMI as reserve. It might seems like a small amount but this reserve will come handy, in case of any unforeseen circumstance where you are unable to pay EMI on time. Any default on EMI can spoil your credit worthiness for future.

6. After buying furnishing:

Most of the builders give you a house with basic structure. You need to do the interiors on you own. People have a tendency to overspend on House Furnishing/Interiors and it comes out as a major expense. Therefore, it is advisable to fix a budget for the same in advance and strictly adhere that budget to avoid any future financial shocks.

7. Regular monthly Income:

To pay EMI on time you need to have a regular monthly income as in absence of that your entire financial planning can go for a toss. Job stability is must and if you are working in a sector, which is impacted by recession, then it’s a wise decision to postpone house purchase.

8. Research-

Familiarise yourself with the changing trends of the real estate market by reading newspapers, magazines or websites. Many institutes offer assistance programs for first-time home buyers with perks such as tax credits, low down payment loans and interest free loans up to a certain amount. For example the Government of India has launched Pradhan Mantri Awas Yojana (PMAY) where the interest rate of home loan is very less. There are special home loan schemes for the working women too. To avail these kind of benefits, it is advisable to do thorough research to make your home buying experience profitable.

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