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Essential Financial and Banking Literacy for Real Estate Investment for first time home buyer
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Essential Financial and Banking Literacy for First-Time Home Buyers

Last Updated on February 28, 2023 by Admin

Buying a home is one of the most significant financial decisions that a person can make in their lifetime. As a first-time home buyer in India, it is important to have a basic understanding of financial and banking literacy to make informed decisions about real estate investment. In this article, we will discuss the essential financial and banking literacy for first-time home buyers in India and the important things related to real estate before taking a home loan.

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Loan Eligibility

Before applying for a home loan, it’s essential to know your loan eligibility. Lenders consider various factors such as your income, age, credit score, and existing loans to determine your loan eligibility. You can use an online home loan eligibility calculator to check your loan eligibility. If interested you could also check How Does a Construction Loan works?

Loan Tenure

The loan tenure is the duration for which you take the loan. In India, the maximum loan tenure is 30 years. While a longer tenure may result in lower EMIs, it also means paying more interest over the loan’s duration. A shorter tenure means higher EMIs but a lower interest burden.

Interest Rates

Interest rates are the cost of borrowing money from a lender. In India, home loan interest rates vary from lender to lender and can be fixed or floating. A fixed interest rate remains constant throughout the loan tenure, while a floating interest rate changes based on market conditions.

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Loan to Value (LTV) Ratio

The loan to Value (LTV) ratio is the ratio of the loan amount to the value of the property. It’s an important factor that lenders consider while determining loan eligibility and interest rates. The LTV ratio varies from lender to lender and is usually up to 80% of the property value.

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Equated Monthly Installments (EMI)

EMI is the monthly installment that you pay to the lender to repay your home loan. It consists of the principal amount and the interest charged on the loan. It’s important to calculate the EMI and ensure that it fits your budget and repayment capacity.

Fixed vs. Floating Interest Rate

Banks and financial institutions offer home loans with fixed or floating interest rates. Fixed interest rates remain constant throughout the loan tenure while floating interest rates fluctuate based on market conditions. It’s important to understand the pros and cons of both types of interest rates and choose the one that suits your financial goals.

Credit Score

Before applying for a home loan, it is important to check your credit score. A CIBIL credit score is a three-digit number that represents your creditworthiness. A good credit score will help you get a better interest rate and loan terms. In India, a credit score of 750 or above is considered good. You can check your credit score for free on websites like CIBIL, Experian, or Equifax.

Down Payment

A down payment is a portion of the total cost of the home that you pay upfront. In India, lenders typically require a down payment of 10-20% of the property’s value. Saving for a down payment can take time, so it’s important to plan accordingly.

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Margin Money

Margin money is the difference between the loan amount and the LTV ratio. It’s the initial amount that you need to pay upfront while buying a home. Margin money varies from lender to lender and can range from 10% to 20% of the property value.

Co-applicant and Guarantor

Banks and financial institutions may require you to have a co-applicant or a guarantor while applying for a home loan. A co-applicant is a person who shares the responsibility of repaying the loan, while a guarantor is a person who provides a guarantee for loan repayment. It’s important to choose a co-applicant or guarantor who has a good credit score and repayment capacity.

Additional Costs

Apart from the loan amount, there are additional costs associated with buying a home in India. These include stamp duty, registration fees, legal fees, and processing fees. It’s important to factor in these costs while budgeting for a home purchase.

Pre-approved Home Loan

Getting pre-approved for a home loan can give you an idea of your loan eligibility and the loan amount you can expect from the lender. This can help you plan your home purchase better and make an informed decision.

Home Loan Insurance

Home loan insurance, also known as a home loan protection plan, is an insurance policy that covers your home loan in case of unforeseen events such as death, disability, or job loss. While it is not mandatory, it can provide a safety net for your loved ones and protect them from financial difficulties in case of an emergency.

Tax Benefits

In India, home loan borrowers can avail of tax benefits under the Income Tax Act. The principal amount repaid towards the home loan is eligible for tax deductions under Section 80C, while the interest paid on the loan is eligible for tax deductions under Section 24(b). Understanding the tax benefits can help you save money and reduce your tax liability.

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Property Research

Before making a home purchase, it’s essential to do thorough research on the property and its location. This includes checking the property’s legal documents, its market value, and the infrastructure and amenities in the area. This can help you make an informed decision and avoid any legal or financial issues in the future.

Resale Value

While buying a home, it’s important to consider the resale value of the property. Factors such as location, infrastructure, and amenities can affect the resale value of the property in the future. Understanding the resale value can help you make a wise investment and maximize your returns.

Home Loan Refinancing

Home loan refinancing is the process of transferring your existing home loan to another lender to get better interest rates and loan terms. It can help you save money and reduce your loan burden. However, it’s important to understand the costs and risks associated with refinancing before making a decision.

Property Insurance

Property insurance is an insurance policy that covers your home and its contents against damages and losses due to natural disasters, theft, or other unforeseen events. While it is not mandatory, it can provide financial protection and peace of mind in case of an emergency.

Maintenance Costs

Owning a home also comes with maintenance costs such as repairs, renovations, and upkeep. It’s important to factor in these costs while budgeting for a home purchase and plan accordingly to avoid any financial difficulties in the future.

Bank Interest Rates

Interest rates are an important factor to consider when taking a home loan. Different banks and financial institutions offer varying interest rates, and it’s important to compare the rates and choose the one that suits your budget and repayment capacity. Additionally, keeping an eye on the interest rates can help you make informed decisions about loan refinancing or prepayment.

RBI Repo Rate

The RBI (Reserve Bank of India) repo rate is the rate at which the RBI lends money to banks. It’s an important indicator of the prevailing interest rates in the economy and can affect the interest rates offered by banks and financial institutions. Understanding the repo rate and its impact on interest rates can help you make informed decisions about your home loan.

Loan Terms

Loan terms refer to the various aspects of the home loan such as the loan amount, loan tenure, interest rate, EMI, and repayment schedule. It’s important to understand these terms and choose the one that fits your budget and repayment capacity. Additionally, understanding the loan terms can help you avoid any confusion or surprises during the loan repayment period.

Processing Fees and Other Charges

Apart from the interest rate, banks and financial institutions may also charge processing fees and other charges for processing your home loan application. It’s important to understand these charges and factor them into your budget while planning for a home purchase.

Buying a home involves legal documentation such as sale deed, conveyance deed, and possession certificate. It’s important to understand these documents and ensure that they are legally valid and authentic. Seeking professional help from a lawyer or a real estate expert can help you avoid any legal issues in the future.

Prepayment and Foreclosure

Prepayment refers to the repayment of the home loan before the end of the loan tenure, while foreclosure refers to the complete repayment of the loan amount before the due date. It’s important to understand the prepayment and foreclosure charges and penalties and factor them into your loan repayment plan.

Real estates market trends such as property prices, demand-supply dynamics, and infrastructure development can affect your home-buying decision. It’s important to keep an eye on the market trends and conduct thorough research before making a decision.

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Built-up Area

The built-up area is the area of a property that includes the carpet area plus the area occupied by walls, balconies, and other common areas. It’s important to understand the built-up area of the property as it determines the actual usable space in the property.

Carpet Area

The carpet area is the area of a property that can be covered with carpet, excluding the area occupied by walls and common areas. It’s important to understand the carpet area of the property as it determines the actual usable space in the property and affects the property’s value.

Super Built-up Area

The super built-up area is the total area of a property that includes the carpet area, built-up area, and common areas like staircases, corridors, and lift lobbies. It’s important to understand the super built-up area of the property as it determines the total cost of the property, including maintenance charges.

Saleable Area

A saleable area is the area of a property that is available for sale, including the carpet area, built-up area, and super built-up area. It’s important to understand the saleable area of the property as it determines the total cost of the property, including taxes and other charges.

Plinth Area

The plinth area is the area of a property that is covered by the building’s foundation. It’s important to understand the plinth area of the property as it affects the property’s structural stability and value of the property.

Loading Factor

The loading factor is the percentage of the common area that is added to the built-up area to calculate the super built-up area. It’s important to understand the loading factor as it affects the total cost of the property and the maintenance charges.

Floor Space Index (FSI)

FSI is a ratio that measures the amount of construction allowed on a given plot of land. It determines the maximum floor area that can be constructed on a given piece of land. It’s important to understand the FSI of the property as it affects the size and structure of the building.

Setbacks

Setbacks are the minimum distances that need to be maintained between the boundary of a property and the building. It’s important to understand the setbacks of the property as it affects the total land area available for construction and the size of the building.

Occupancy Certificate (OC)

An OC is a certificate issued by the local municipal authority after inspecting the property to ensure that it’s constructed in compliance with the approved plan, safety standards, and other regulations. It’s important to obtain an OC before occupying the property, as it ensures the safety and legal compliance of the property.

Completion Certificate (CC)

A CC is a certificate issued by the local municipal authority after the construction of the property is completed. It’s important to obtain a CC, as it ensures that the property is constructed in compliance with the approved plan, safety standards, and other regulations.

Property Tax

Property tax is a tax levied by the local municipal authority on the property’s owner, based on the property’s market value, type, location, and other factors. It’s important to understand the property tax applicable to the property, as it affects the overall cost of owning and maintaining the property.

Title Deed

A title deed is a legal document that establishes ownership of the property. It’s important to verify the title deed of the property before buying, as it ensures that the property has a clear and marketable title, free from any legal disputes or encumbrances.

Important Factors that affect the home loan EMI in India

There are several financial market factors that can affect the home loan EMI in India. Some of the major factors are:

  • Interest Rates: Interest rates are one of the primary factors that determine the home loan EMI. Higher interest rates result in a higher EMI, while lower interest rates result in a lower EMI. Interest rates are influenced by various factors such as inflation, monetary policy, global economic conditions, and RBI policies.
  • Inflation: Inflation is the rate at which the prices of goods and services increase over time. Higher inflation can result in higher interest rates, which in turn results in higher EMI.
  • Repo Rate: Repo rate is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks. Changes in the repo rate can impact the interest rates on loans, including home loans.
  • External Benchmark Rate (EBR): In October 2019, the RBI mandated that all new floating rate loans, including home loans, should be linked to an external benchmark rate. The EBR is the rate that the bank uses to calculate the interest rate on the home loan. Changes in the EBR can impact the home loan EMI.
  • Marginal Cost of Funds based Lending Rate (MCLR): MCLR is the minimum interest rate that a bank can charge on loans. Changes in the MCLR can impact the interest rate and the home loan EMI.
  • Loan Tenure: The loan tenure is the duration of the home loan. A longer loan tenure results in a lower EMI, while a shorter loan tenure results in a higher EMI.
  • Down Payment: The down payment is the initial amount paid by the borrower while purchasing the property. A higher down payment reduces the loan amount and hence, the EMI.
  • Credit Score: A good credit score is essential to secure a home loan. A higher credit score may result in a lower interest rate, which in turn results in a lower EMI.

Conclusion

Buying a home is a significant financial decision, and it’s essential to have a basic understanding of financial and banking literacy before making the investment. Understanding your credit score, saving for a down payment, checking your loan eligibility, choosing the right loan tenure and interest rate, and factoring in additional costs are essential for first-time home buyers in India.

Also, By understanding these technical terms related to real estate and construction such as FSI, setbacks, OC, CC, property tax, and title deed, first-time home buyers in India can make informed decisions while buying a property and ensure a smooth and hassle-free home buying process. By being financially literate and making informed decisions, first-time home buyers can make the most of their real estate investment.

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FAQs

What is a credit score, and how important is it for getting a home loan?

A credit score is a number that represents your creditworthiness. It’s based on your credit history, including your payment history, credit utilization, length of credit history, types of credit used, and recent credit inquiries. A higher credit score generally means better chances of getting approved for a home loan, and better interest rates and terms.

What is the difference between a fixed-rate mortgage and an adjustable-rate mortgage?

A fixed-rate mortgage has an interest rate that remains the same for the entire term of the loan, typically 15 or 30 years. An adjustable-rate mortgage (ARM) has an interest rate that can change periodically, usually after an initial fixed-rate period of 5 or 7 years. ARMs can be riskier because the interest rate can increase, making your monthly payments higher.

What is a down payment, and how much should I save for it?

A down payment is an upfront payment you make when buying a home, usually expressed as a percentage of the home’s purchase price. The typical down payment is 20% of the purchase price, but some lenders allow lower down payments. However, a lower down payment may require you to pay for mortgage insurance, which can add to your monthly expenses.

What are closing costs, and how much should I expect to pay for them?

Closing costs are the fees and charges you pay when buying or refinancing a home. They can include appraisal fees, title insurance, attorney fees, inspection fees, and more. Closing costs typically range from 2% to 5% of the home’s purchase price, but can vary depending on your location and lender. It’s important to factor in closing costs when budgeting for your home purchase.

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