Can You Really Afford The House You Want?

Mar 07, 2017

For most people, major goals of the first half of their active work lives are to get a decent job, get married and buy a house. There is no doubt that buying the first house is one of the most important and exciting financial milestones of everybody's life. And its possible, that in your excitement, you might even be looking at buying a house, which might eventually be too costly for you and might wreak havoc for your personal finances. There are many first-time house buyers that end up buying too much and buying too early.

So before you finalize the house you want to purchase, make sure to have a realistic budget for the same. Be ready to answer some harsh questions in your quest to understand whether you can actually afford the house you want or not?

The major factors to consider while answering your house affordability and home loan eligibility questions are following:

A very important thing to note is that even if the bank tells you an amount that you can borrow, it doesn't mean that you should go ahead and borrow it all. Experts suggest not borrow more than what will make you pay more than 40% of your monthly income as EMI.

So it's clear that buying a house is a very big accomplishment for the buyer. More so if it's the first house. But whether or not one can afford to pay the EMIs for the house is something that should also be given due weightage.

Your Income

Your monthly income / salary will be used to repay the loan. So more the income, more you can afford to give up as EMI each month. To put it simply, the monthly income establishes a baseline for what one can afford to pay as EMI each month. Since home loan interest rates are not cheap, the EMIs can run into several thousand a month.

Down Payment

A home loan requires the borrower to put up a part of the required amount from his/her own sources as down-payment. Generally, banks ask for 15% down-payment. So higher the down-payment amount, more the bank will be willing to give you as loan.

Other Loans

If you have any other outstanding loans, then banks will consider these as part of your fixed monthly obligations. This will effectively reduce the amount of EMI you can service each month. This in turn reduces the loan eligibility.

Repayment (Credit) Record

Loan repayment record or the credit score tells whether the borrower is dependable or not. It tells whether the borrower has repaid all EMIs on time or not. This is one of the most important factors for lenders while assessing loan applications.