Most people struggle with knowing how much ‘house’ to buy or ‘how much housing loan to take’. Not an easy decision to make. If your parents are extremely well off you can afford to commit to a bigger home. In case of you losing your job maybe your parents can step in and pay the EMI for a few months. Maybe you can wait for 7 years to get the principal value of the flat in case there is a recession. However if you are middle class, earning modestly, you will have to be far more conservative in the size of the house that you are planning to buy.

What does the lending institution look at while lending to you?

  • do you earn enough to be able to repay the loan?
  • do you have any other borrowing which you are repaying – like a car loan?
  • your financial past (Credit rating)
  • Do you have any other collateral – just in case the value of the property falls

Fairly obvious, is it not?

Your lender will want to know how much money you have, how much you make on a monthly basis, and also how much you will make over the next 30 years. He might even design an EMI which can be increased automatically to keep in line with the increase in salary. Also, do you have other borrowings? Do you have personal loans, educational loan, credit card payments due?

Do you have any other assets? Things like shares, mutual funds, personal property, etc. All this is also considered while arriving at the amount of loan that you are eligible.

Ideally, your lender will want you to pay at least 20% of the value of your new home as a down payment. But you probably qualify for plenty of financing arrangements that will get you into a new home for a much smaller contribution. The lender will also check your income numbers into a couple of formulas: to check how much mortgage you can afford and seeing how much loan to give you relative to the price of the house that you are trying to buy.

For instance, let’s say your gross income is Rs. 40,000 a month, and you have NOTHING in other debt. A common rule is that they’ll allow you to pay around 30% of your income toward your mortgage payment every month. This is known as the front-end ratio. In this case, 30% of Rs. 40,000 is Rs. 12,000 a month — so, they’ll reason, you can afford to pay Rs. 12,000 per month as EMI.

Have you been trustworthy in the past?
Potential fathers in law (and mates!) aren’t the only ones wanting to know about your past. Your lender wants to know your credit history, before deciding whether or not to commit. Your credit report (wrongly called the Cibil report) — a compilation of your personal financial history — will reveal whether you have a track record of paying your dues on time. The first thing to do if you are going to borrow money is to clean up your credit report, if you find something unpalatable in that.

Now, let’s discuss your needs
How much you earn, how much your co-borrower (wife, parent, brother..)make, your creditworthiness, and whether you can add some more collateral are all questions from the Lender’s point of view. Now, let’s look at a few things from your point of view.

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  1. The maximum home loan tenure offered by all major lenders is 30 years. The longer the tenure, the lower is the EMI, which makes it very tempting to go for a 25-30 year loan. However, it is best to take a loan for the shortest tenure you can afford. In a long-term loan, the interest outgo is too high.

  2. Hello Sir,

    I am planning to Buy a 2bhk Flat in Pune. However am in confuse what amount i need to go for.

    Hence I need your help regarding the this.

    Regards,
    sachin

  3. Hi Subra,

    Great article. Very informative. I am planning to buy a 2BHK house in Mumbai. The minimum 20% contribution that you have to make from your side – the home down payment – Can’t any help be found for that? I came across a site – https://homecapital.in/ – which offers assistance for the home down payment to the tune of 50% of the total down payment amount. What is your opinion about it? Should I go for it?

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