Availing a home loan is a huge financial commitment. You must be disciplined with your repayment to avoid getting into hasssles of any kind. The best way to ensure that you don’t default on your repayment is to be smart with your financial planning. Read on to know a few financial planning tips for taking a loan.
If you have decided to buy a home and are ready to take a loan, the first thing you must do is to sort your finances. If you rush into taking a home loan without meticulous financial planning, you may feel overwhelmed with the expenses that you didn’t expect during the loan tenure. To avoid this situation, here are a few smart financial planning tips that you can consider before applying for a loan.
- Focus on reducing the debts
When you apply for a loan, the financial organisations will review your debt to income ratio before determining the loan amount. If your monthly debts are high, the lender may question your repayment capacity and reject the loan application. So, before you start your search for the best home loan lender, you must focus on repaying all your previous dues. Try to pay off your credit card bills in full, and if possible, consolidate your debts to reduce the monthly payments.
- Maintain a good credit score
All lenders in India consider the credit score as one of the critical checks before approving the loan. Generally, the lenders consider a credit score of 750 or above to be a good score. So, if you have any outstanding car loan, or long-standing credit card bills, you must clear the dues before applying for a home loan. The outstanding bills will reflect poorly on your credit report, and the lender may consider you a risky borrower. A good credit score, on the other hand, will help you get several benefits, including a discount in the interest rate, quicker approval, and longer repayment period.
- Make Higher Down payment
Currently, most lenders in India sanction home loan up to 80% of the property value. You must pay the remaining 20% out of your pocket. So, make sure that you arrange the funds before approaching the lender to avoid delay in the approval process. The best way to accomplish this is to set aside a fixed sum from your monthly income and invest in a recurring deposit. This will not only help you develop the habit of regular savings but also accumulate a larger amount for the down payment.
- Set a budget for home interiors and furnishing
Most home buyers, especially the first-time buyers, tend to go overboard with their home furnishings and interiors and tend to overspend on it. It is paramount that you set a budget for it and strictly stick to it. Make sure that you include the budget for interiors while planning the finances for a home loan.
- Have a reserve fund for emergency
An emergency can occur at any time. It is impossible to predict situations like illness or loss of a job. But, you must always have financial provision for such unexpected events. Your financial planning is incomplete if you don’t set aside an emergency fund, which should cover your household expenses for at least six months. You can invest the funds in various financial instruments like mutual funds or bank fixed deposit that can give you easy liquidity.
Planning your finances well in advance will go a long way in making the loan repayment easy. Assess your current and future financial condition and make arrangements to meet all the expenses that may arise during the loan tenure while managing the EMIs.