Buying Your Dream Home: Financial Checklist Before You Begin

The “HOME, DREAM HOME” is a sentimental objective of every individual those started their career in the recent past. It gives the immense pleasure of significant achievement in their lifetime. Hence everyone is diverting their sizeable savings towards availing a dream home. The objective of a dream home is not only to live and lead their comfortable life and also an asset creation to their next generation. We are spending the majority of our lifetime savings towards buying a home to lead our life happy and comfortable.

The question is, are we really living comfortably after the purchase of our dream house? I am sure; we will have some comfort level while living in own house rather than the rental house. However, there will be some sort of struggle after buying an own house due to lack of proper financial planning.

Understanding your cash flow is the foundation of financial health.

• Stable Income: Ensure that your income is steady and reliable. This includes salary, business profits, rental income, or other sources of revenue.
• Track Expenses: Analyze where your money goes each month—rent, groceries, utilities, entertainment, and other discretionary spending.
• Monthly Surplus: Aim for a positive balance between income and expenses to ensure you have sufficient funds to save or invest in a home.

Buying a home requires a significant amount of savings, not just for the down payment but also for additional costs like furnishings and maintenance.

• Down Payment Savings: Ideally, you should have at least 20% of the home’s value saved.
• Emergency Fund: Set aside 3–6 months’ worth of living expenses for unexpected situations like medical emergencies or job loss.

Excessive debt can hinder your ability to secure a favorable mortgage.

• Current Debt Levels: Review any outstanding loans, credit card balances, or personal debts.
• Debt-to-Income Ratio (DTI): This ratio measures your monthly debt payments relative to your income. Most lenders prefer a DTI below 36%.
• Pay Down Debt: Prioritize paying off high-interest debt, such as credit cards, to free up more disposable income and improve your creditworthiness.

Your credit score is one of the most critical factors lenders assess when you apply for a mortgage.

• Check Your Credit Score: Aim for a score of 750 or higher for the best mortgage rates.
• Review Credit Reports: Check for errors or inaccuracies in your credit report and dispute them if needed.
• Build Credit: If your score is low, work on improving it by paying bills on time, reducing credit card usage, and avoiding new debt.

Think about how buying a home aligns with your broader financial goals.

• Short-Term Goals: Are you financially prepared to cover immediate home-buying costs, such as a down payment and closing fees?
• Long-Term Goals: Will purchasing this home impact other financial plans, such as saving for retirement, education, or vacations?
• Career Stability: Consider how secure your job or business is and whether your income will likely grow or remain steady.

Consider additional financial resources that may help in your home-buying journey.

• Family Contributions: Are family members willing to contribute to your down payment?
• Joint Purchases: If buying with a partner, review combined income and savings.
• Government Assistance: Check for homebuyer assistance programs, tax benefits, or grants that can reduce your financial burden.

A credit score is a numerical representation of your creditworthiness, typically ranging from 300 to 900 in India (or 300 to 850 in other regions).

• Higher Scores = Lower Risk: A higher credit score signals to lenders that you are financially responsible and less likely to default on your loan.
• Key Credit Score Ranges:
  • 750 and above: Excellent
  • 700–749: Good
  • 650–699: Average
  • Below 650: Poor

1. Pay Your Bills on Time:

   • Consistently paying credit card bills, EMIs, and utilities before the due date positively impacts your score.
   • Even a single missed payment can significantly hurt your credit score.

2. Reduce Credit Card Utilization:

   • Keep your credit card utilization ratio below 30% of your credit limit.
   • For example, if your credit limit is ₹1,00,000, aim to use less than ₹30,000 at any given time.

3. Avoid Excessive Credit Applications:

   • Each loan or credit card application triggers a hard inquiry, which can temporarily lower your credit score.
   • Space out your applications and only apply for credit when necessary.

4. Clear Outstanding Debts:

   • Prioritize paying off high-interest debt, such as credit cards or personal loans.
   • Set up payment plans or use the debt snowball/avalanche methods to reduce your debt effectively.

5. Keep Old Credit Accounts Open:

   • The length of your credit history affects your score. If you have an old credit card with a good payment record, keep it active.

6. Monitor Your Credit Report for Errors:

   • Errors, such as unrecorded payments or incorrect personal information, can hurt your score.
   • Dispute inaccuracies immediately with the credit bureau to have them corrected.

7. Diversify Your Credit Mix:

   • A mix of secured (e.g., home loans) and unsecured (e.g., credit cards) credit types demonstrates good credit behavior.

The down payment amount typically depends on the lender and the property value. Here are some common benchmarks:

• 20% of the Purchase Price: This is the standard recommendation as it avoids PMI and ensures better loan terms.
• 10%–15% for Moderate Loans: Some lenders accept a 10%–15% down payment, but this may come with higher interest rates or added fees.
• 5% for First-Time Buyers: Government-backed schemes may allow first-time homebuyers to secure a home with a lower down payment.

Example: For a home worth ₹50,00,000:

• 20% down payment: ₹10,00,000
• 10% down payment: ₹5,00,000
• 5% down payment: ₹2,50,000

Saving for a large financial goal like a down payment requires discipline, strategic planning, and time. Here’s how to get started:

1. Set a Realistic Goal

• Determine the amount you need for your down payment based on the property price and loan terms.
• Factor in additional costs like closing fees, registration charges, and furnishings.

2. Create a Dedicated Savings Account

• Open a separate account exclusively for your down payment savings.
• Opt for a high-interest savings account to maximize returns while keeping your funds liquid.

3. Establish a Budget

• Track your monthly income and expenses to identify areas where you can cut back.
• Allocate a fixed percentage of your income to your down payment fund each month.

4. Automate Your Savings

• Set up automatic transfers to your dedicated savings account to ensure consistent progress without relying on manual effort.

5. Reduce Unnecessary Expenses

• Cut back on discretionary spending like dining out, entertainment, or vacations temporarily to boost your savings.
• Cancel unused subscriptions or memberships and redirect that money into your fund.

6. Supplement Your Income

• Take on freelance work, part-time jobs, or side gigs to accelerate your savings.
• Use bonuses, tax refunds, or unexpected windfalls to make lump-sum contributions.

7. Invest for Growth

• Consider investing a portion of your down payment savings in low-risk instruments like fixed deposits, government bonds, or mutual funds to earn higher returns.
• Ensure the investment horizon aligns with your home-buying timeline to avoid market risks.

8. Take Advantage of Government Schemes

• Many countries offer first-time homebuyer programs or assistance schemes that reduce the required down payment.
• For example, in India, the PMAY (Pradhan Mantri Awas Yojana) provides subsidies for first-time buyers in the affordable housing category.

Rising Property Prices:
Real estate prices may increase while you're saving, making it harder to reach your target.

• Solution: Regularly re-evaluate your savings goal and adjust contributions accordingly.

2. Competing Financial Goals:
You may need to save for other priorities, like education or emergencies.

• Solution: Balance your financial goals by prioritizing savings and using smart budgeting techniques.

3. Insufficient Time:
If you want to buy a home soon, you may not have enough time to save a large sum.

• Solution: Consider government programs, family assistance, or a smaller down payment loan.

Buying a home involves more than just the purchase price. Account for:

• Closing Costs: Legal fees, stamp duty, and registration fees (typically 2%–5% of the home’s value).
• Home Inspection and Appraisal: Costs to ensure the property is worth the investment.
• Furnishing and Repairs: Prepare for any upgrades or maintenance work.

1. Analyze Your Income and Expenses

• Track Your Monthly Income: Include all sources of income, such as your salary, business profits, rental income, or any other earnings.
• Calculate Your Fixed Expenses: List monthly obligations such as rent, utility bills, groceries, transportation, and other essential costs.
• Account for Discretionary Spending: Include non-essential expenses like dining out, shopping, and entertainment.
• Evaluate Your Savings: Determine how much you save each month and what percentage of your income can be set aside for your home purchase.

2. Assess Your Down Payment Capacity

• The down payment is typically 10%–20% of the property’s price.
• Calculate how much you can afford to pay upfront without depleting your emergency savings or compromising your financial stability.
• Example: If you are looking at a home worth ₹50,00,000, a 20% down payment would be ₹10,00,000.

3. Calculate Your Borrowing Capacity

• Use the 40% Rule: Financial experts recommend keeping your debt obligations (including home loan EMIs) within 40% of your monthly income.
• For instance, if your monthly income is ₹1,00,000:
  • 40% = ₹40,000 (maximum EMI you can afford).
• Use online loan calculators to estimate the loan amount you’re eligible for based on this EMI figure.

4. Factor in Additional Costs

Buying a home involves more than just the purchase price. Include these additional expenses in your budget:

1. Stamp Duty and Registration Fees: Usually 5%–10% of the property’s cost.
2. Brokerage Fees: If a broker is involved, they typically charge 1%–2% of the property price.
3. Home Loan Processing Fees: Lenders charge 0.5%–1% of the loan amount as a processing fee.
4. Furnishing and Renovation Costs: Budget for furniture, appliances, and any repairs or remodeling required.
5. Property Taxes and Maintenance Charges: Ongoing costs that homeowners must bear annually or monthly.
6. Insurance: Home insurance is an additional cost to protect your investment from risks like fire, theft, or natural disasters.

5. Establish a Safety Net

• Always set aside an emergency fund equivalent to 6–12 months of your monthly expenses.
• Avoid spending your entire savings on the down payment or property-related expenses. This ensures financial security in case of unexpected circumstances like medical emergencies or job loss.

6. Account for Future Financial Goals

• Buying a home should not come at the expense of other financial goals, such as retirement savings, children’s education, or vacations.
• Balance your budget to accommodate these goals alongside your home purchase.

7. Explore Loan Options

• Research home loan products from different banks and financial institutions.
• Compare interest rates, loan tenure, and processing fees to find a loan that aligns with your budget.

Tips for Staying Within Your Budget

1. Start Small if Necessary: If your dream home is currently out of reach, consider starting with a smaller property or in a less expensive area and upgrading later.
2. Negotiate Smartly: Don’t hesitate to negotiate the property price, especially in a buyer’s market where sellers may be more flexible.
3. Stick to Your Budget: Avoid getting emotionally attached to properties that exceed your financial limit.
4. Avoid Unnecessary Debt: Do not take personal loans or use credit cards for down payments or home-related expenses.

Example Budget Breakdown

Scenario: Monthly Income: ₹1,00,000

• Down Payment Savings: ₹10,00,000 (target for 20% of a ₹50,00,000 property).
• EMI Allocation: ₹40,000 (40% of monthly income).
• Additional Costs:
  • Stamp Duty & Registration: ₹3,00,000 (6% of property price).
  • Furniture & Renovation: ₹2,00,000.
  • Home Insurance: ₹25,000/year.

Why Explore Government Schemes?

1. Reduced Costs: Many schemes offer subsidies or grants that directly lower the cost of homeownership.
2. Lower Interest Rates: Housing programs may provide loans at subsidized interest rates, helping you save significantly over time.
3. Easier Eligibility: These schemes often come with relaxed eligibility criteria, making it easier for first-time buyers or individuals with moderate incomes to qualify.
4. Encourages Homeownership: Such programs aim to boost the real estate market and encourage people to invest in property.

Popular Government Housing Schemes (Examples)

1. Pradhan Mantri Awas Yojana (PMAY) – India

• Overview: A flagship housing scheme launched by the Government of India to provide affordable housing for all by 2022.
• Key Features:
  • Interest subsidy of up to 6.5% on home loans under the Credit Linked Subsidy Scheme (CLSS).
  • Categorized into Economically Weaker Section (EWS), Low Income Group (LIG), and Middle Income Group (MIG) to provide benefits based on income levels.
  • Focuses on both urban and rural housing needs.
• Eligibility:
  • Beneficiary families should not own a pucca house in any part of India.
  • Income criteria: Up to ₹18 lakh per annum (varies by category).
  • Women ownership/co-ownership is mandatory in certain categories.

2. Help to Buy – United Kingdom

• Overview: A government-backed program for first-time buyers and homeowners looking to move.
• Key Features:
  • Equity loans of up to 20% (or 40% in London) on new-build homes.
  • Buyers need to pay only a 5% down payment.
  • No interest on the equity loan for the first five years.
• Eligibility:
  • First-time buyers purchasing a property under a set price cap (varies by region).

3. Federal Housing Administration (FHA) Loans – USA

• Overview: A program by the U.S. government to assist first-time homebuyers or those with lower credit scores.
• Key Features:
  • Low down payment options (as low as 3.5% of the property value).
  • Easier credit requirements compared to traditional loans.
• Eligibility:
  • Stable employment and income.
  • A minimum credit score of 500–580, depending on the lender.

4. First-Time Home Buyer Incentive – Canada

• Overview: A shared equity mortgage program for first-time buyers.
• Key Features:
  • The government contributes 5%–10% of the home purchase price to reduce mortgage costs.
  • Buyers repay the government’s share when selling the property.
• Eligibility:
  • Household income should not exceed $120,000 annually.
  • The total mortgage amount must be within four times the household income.

Steps to Research and Leverage Government Schemes

1. Understand Eligibility Criteria

• Check income brackets, property types, or geographic locations required for eligibility.
• Ensure you fall under the defined categories (e.g., first-time buyer, low-income family).

2. Identify Relevant Programs

• Look for national, state, or local government programs specific to your region or country.
• Use government websites or housing finance institutions as credible sources.

3. Compare Benefits

• Evaluate schemes based on their financial advantages, such as:
  • Interest subsidies.
  • Tax benefits or exemptions.
  • Loan amount limits.
  • Repayment flexibility.

4. Seek Expert Advice

• Consult with financial advisors, real estate agents, or housing loan officers who are familiar with these schemes.
• They can guide you on application processes, documentation, and deadlines.

5. Combine Schemes for Maximum Benefit

• Explore the possibility of combining schemes, such as using both a tax rebate and an interest subsidy for the same home loan.
• Ensure the terms and conditions allow for this.

6. Prepare Proper Documentation

• Commonly required documents include:
  • Proof of income (salary slips, tax returns).
  • Identity proof (Aadhaar card, passport, etc.).
  • Property-related documents (sales agreement, property registration).

7. Stay Updated

• Government schemes often evolve with new budgets and policies. Keep yourself informed about updates or new initiatives.
• Subscribe to newsletters or follow government housing department websites for announcements.

Tips for Success

1. Act Early: Government schemes often have limited funds or quotas, so applying early increases your chances of securing benefits.
2. Verify Authenticity: Ensure the scheme you’re applying for is legitimate and directly linked to the government.
3. Understand the Fine Print: Carefully read the terms and conditions to avoid hidden costs or restrictions.

A professional can help you:

• Understand your financial standing.
• Explore the best financing options.
• Plan a step-by-step strategy to achieve your homeownership goals.

Buying your dream home is a blend of emotional fulfillment and financial prudence. With the right preparation and smart financial planning, you can navigate this process smoothly and turn your dream into reality.

Ready to take the first step? Let us help you make informed decisions and find the perfect home financing solutions tailored to your needs!