Purchasing a home is no longer a luxury statement. Instead, it has become one of the most important decisions you will ever face. When you decide to buy a home, one of the first things that comes to mind is a home loan.
Once you fix your mind on getting a home loan, youur mind is then bombarded with countless questions. Like “Can I afford a home loan?”, “How will I make the down payment?”, “How much loan will I get?” and so on.
Purchasing a home and obtaining a home loan can be exciting but draining and stressful, particularly if you are a first-time buyer. Choosing the right home loan can save you thousands of dollars in the long run. But how do you know which home loan is right for you? What are the steps in applying for a home loan? What are some common mistakes to avoid when taking out a home loan?
To answer these and other questions, we’ve compiled a list of ten tips for first-time home buyers looking for a home loan.
These tips will not only help you understand the fundamentals of home loans and compare different options but will also help you find the best deal for your specific situation.
5 Benefits for First-Time Home Buyers
- Enjoy government subsidies and incentives
The Pradhan Mantri Awas Yojana (PMAY) offers tax breaks and subsidies on home loans for first-time home buyers, depending on their income and eligibility. You can save up to Rs. 3.5 lakh on interest payments under various sections of the Income Tax Act.
- Financial advantages
Owning a home allows you to build up equity over time, which can be a valuable asset for the future. You can also generate passive income by renting out your property or using it for other purposes. You no longer have to worry about the rent hikes or struggling with landlord tantrums any more.
- Extra Tax Benefits for First-Time Home Buyers
If you are a first-time home buyer, you can claim an extra deduction of Rs. 50,000 on the interest payment under Section 80EE, subject to certain conditions.
- Save Tax on Your Home Loan Interest and Principal Repayments
When you take a home loan, you have to pay back the principal amount and the interest on it. The government allows you to claim deductions on both these components under different sections of the Income Tax Act.
Section 80C allows you to deduct up to Rs. 1.5 lakh from your income, if you repay the principal of your home loan alongside other eligible investments such as PF, PPF, ELSS, etc.
Section 24 allows you to deduct up to Rs. 2 lakh from your income, if you pay the interest on your home loan and the property is either self-occupied or vacant. If the property is rented, the entire interest can be deducted from your income.
- Reduced GST Rate on Affordable Housing
The government has reduced the GST rate on affordable housing from 8% to 1%, to encourage more people to buy their own homes under the Pradhan Mantri Awas Yojana (PMAY) scheme.
It means that you have to pay less tax on the purchase of a property that falls under the affordable category, which is defined as follows:
- For metro cities, the house’s carpet area should be at most 60 sqm, and its value should be no more than Rs. 45 lakh.
- For non-metro cities, the limits are 90 sqm and Rs. 45 lakh respectively.
This can save you a lot of money and make your home-buying process more affordable.
How to Find the Best Home Loan for Your Needs and Budget
Here are some tips on how to find the best home loan for your needs and budget:
Don’t Settle Down For First Offer You Get
Compare different lenders and loan products and choose a home loan that fits your financial goals.
Check Your Credit Score and Eligibility
Your credit score affects both your eligibility and the interest rate offered by banks. A higher credit score can get you a lower interest rate and a larger loan amount.
Before you seek a home loan, make sure to review your credit score. A CIBIL score of 750 or higher can be considered satisfactory. Take corrective actions to improve them. For example, pay your bills on time, keep track of credit card bill dates, pay off any unpaid dues or balances on credit cards, or your credit scores will suffer.
Choose The Right Loan Type And Tenure
Depending on your needs and budget, you can choose from different types of home loans, such as fixed, floating, or hybrid, with different tenures ranging from 10 to 30 years.
Assume you are 30 and want to retire by 50. You must fulfill all of your financial obligations within the next 20 years. So, choose a 20-year home loan tenure. Remember that the longer the term, the lower the EMI, but you will also pay higher interest to the bank.
You should choose the home loan type and tenure that suits your risk appetite and repayment capacity.
Read The Fine Print Carefully
Before signing the home loan agreement, make sure you have read and understood all of the terms and conditions. Inquire with your bank about the pre-payment or foreclosure charges.
Whether the interest charged will be reduced daily or monthly, loan processing fees, stamp duty to be paid, loan insurance to be charged, and so on. Keep a copy of the loan agreement and other relevant documents for future reference.
Get A Pre-approved Home Loan
Pre-approval is when the bank or lender verifies your income, credit history, and other information before granting you conditional approval for a specific loan amount and interest rate.
Getting pre-approved can give you an advantage over other buyers because it allows you to learn firsthand about your home loan eligibility, interest rate, and other terms and conditions before making the purchase. It can also help you negotiate better terms and expedite the loan process.
How to Avoid Common Home Loan Mistakes and Pitfalls
Don’t buy a home based on emotions
Do not let your emotions cloud your judgment. You should buy a home based on your needs, budget, and goals, not on how you feel about the color, decor, or layout of the house. You should always do your due diligence and inspect the home thoroughly before making an offer.
Don’t forget to factor in the hidden costs of homeownership
Buying a home entails more than just paying the home loan EMI; it also includes paying for maintenance, repairs, utilities, taxes, insurance, and other expenses that come with home ownership.
If you fail to account for these costs, you may end up financially mismanaged and overburdened. So, always have an emergency fund set aside to cover any unexpected expenses or emergencies that may arise.
Don’t make major financial changes before closing
Once you’ve applied for a home loan, you should avoid making any significant financial changes or decisions that could have an impact on your credit score, income, or debt-to-income ratio.
For example, you should avoid applying for new credit cards, taking out new loans, making large purchases, changing jobs, or cosigning on someone else’s loan. Any of these changes may jeopardize or cause a delay in your loan approval.
Borrow within your means
Taking the maximum home loan amount offered by the bank can be tempting, especially if you have found your dream house. However, this can cause financial stress and difficulties in repaying the loan.
Obtaining the maximum loan amount may affect your loan eligibility for future contingencies such as funding your children’s education, or purchasing your next car. Borrow only what you can comfortably afford without changing your lifestyle., based on your income, expenses, and financial objectives.
10 Quick-to-go Tips For First-Time Home Buyers
- Start saving early for your down payment, processing, and legal expenses involved in a home loan.
- Decide how much home you can afford based on your income, debt, and financial goals.
- Check and improve your credit score before applying for a mortgage.
- Finding the best home loan for your financial situation requires comparing different loan products and their features.
- Get a pre-approved home loan to have a clear vision of your eligibility and interest rate.
- Choose the right type, size, and location of your home based on your needs and preferences.
- Negotiate the best price and terms for your home, and don’t be afraid to walk away if the deal is not right for you.
- Inspect and appraise your home before financing the deal.
- Read the home loan documents carefully before signing the agreement.
- Take up home loan insurance to protect your loved ones from bearing the burden of loan repayment in the event of an untoward incident.
The Bottom Line
Buying a home is a dream come true for many people, but it also requires careful planning and preparation. As a first-time home buyer, you should be aware of the benefits and challenges of getting a home loan and take advantage of the various schemes and incentives offered by the government and lenders.
You should also do your homework and compare different home loan options to find the best one for your needs and budget. By following these tips, you can avoid common home loan mistakes and pitfalls, and enjoy the satisfaction and security of owning your own home.
Know more about
SIP CALCULATOR | RETIREMENT CALCULATOR | CAGR CALCULATOR | FINANCIAL CALCULATORS
*Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considerea d as recommendation or investment advice by Research & Ranking. We will not be liable for any losses that may occur. Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.
FAQ
What is the maximum amount I can spend on a home loan?
A general rule of thumb is to spend no more than 28% of your gross monthly income on housing costs, including your EMIs, taxes, and insurance.
What are the benefits of getting a pre-approved home loan?
Getting pre-approved for a home loan shows sellers help you narrow down your home search based on your budget and loan terms. Also, gives you an edge over other buyers who may not have financing secured.What are the most important factors to consider when choosing a home?
Location, size, condition, features, and resale value are among the most important considerations when purchasing a home. When making your decision, keep your lifestyle, preferences, and long-term goals in mind.
What are the expenses associated with buying a home?
Buying a house comes with additional costs beyond the purchase price, including processing, inspection, insurance, legal, and valuation fees. These fees vary depending on the type and location of the home, as well as the bank you choose to obtain a home loan from. You should budget 2% to 5% of the home's price for these expenses.
I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.