While starting your quest for the “perfect” home, the first thing you need to keep in mind is your affordability to have one. In most cases, you will be relying on a loan to make one of your biggest dreams come true.
But the question is, “How much can you afford to buy a home?”. As several factors influence this question, let’s look at them, one-by-one.
1. Your Income
Your income will be the most critical factor that affects your affordability. Generally, a salaried individual is more likely to get a home loan without much struggle, as compared to a self-employed individual. But again, if a person has a good amount of savings fund, the form of income doesn’t matter much.
Along with income, financial institutions look into the debt-to-income ratio of an individual before sanctioning a loan. It is the ratio between the debt you have and your salary. The lower the ratio is, the higher is your chance to get a loan. Most financial institutions ensure that your loan EMIs don’t exceed 40%-45% of your net income.
2. Credit Score
Your reliability is assessed from your credit history. As you know, having a credit score is a significant advantage and improves your chances of getting a loan. It is best advised to maintain a credit history by paying your monthly installments on time and never defaulting on loans.
3. Down Payment
While applying for a home loan, your credit score or EMI aren’t the only factors of concern. Unfortunately, a financial institution will not lend you the entire amount to buy a house. You have to chip in as well, depending on the Loan To Value ratio.
Generally, banks or financial institutions grant loans amounting to 75% – 90% of the property’s value. This means that you have to contribute the remaining amount – known as a down payment. In most cases, the higher the down payment, the lesser the interest rates will be for your loan.
Also, if you are planning to make a larger amount of down payment, banks are more likely to grant a loan as the risks involved are lower.
4. Interest Rate
Your income, credit score, and the down payment you make will decide the interest rate of your loan. You can use a home loan calculator to gain insights about your affordability for the specific loan amount and its interest rate.
If you have a decent credit score and you plan to make a substantial amount as down payment, your interest rates will be significantly lower. When assessing your affordability for a home loan, interest rates and EMI must be taken into consideration as you will be paying it every month, till the end of the loan’s tenure.
The tenure is an agreed period, within which the borrower will pay the principal and the interest amount to the lender. As expected, your monthly installments will depend on the interest rate and tenure of the loan. The longer the repayment period, the lower monthly payments will be.
Do note that the longer the tenure of your loan, the more amount you will have to pay as loan interest. Also, while calculating the affordability, tenure is crucial as it would decide the monthly installment amount. You can calculate an estimated interest rate by using a home loan calculator.
Your house will be a long-term financial investment, as well as an immense commitment. Make sure you don’t get carried away by avoidable expenses as it can ruin the entire experience of owning a house. However, if you plan carefully and contact a trusted home loan provider, a house will be the best investment you will make in your lifetime.