Every Indian dreams of a self-owned home. Most of us want to see ourselves holding the keys one day soon. However, if you are living paycheck to paycheck; buying a home should not be on your to-do-list. If you are looking to buy a home sooner rather than later, you need a better strategy to achieve the same.
For instance, if you have decided on a time frame to buy a home, you have to begin budgeting to save for it. For this, you have to make buying your home the top priority. So how to build a budget plan?
First step: Strong credit
The most important focus for a potential home buyer should be to improve credit scores. Remember, to get the best home loan rate, credit is king. A low score could mean refusal for a loan or you might be forced to take the loan at a higher interest rate. Don’t let a low credit score make you lose out on your perfect home.
Keep an eye on your credit score. Request your credit card company for regular credit reports. Make sure that you are not being penalised for bills already paid. Get your old addresses removed from the report. Check for accuracy in each report and immediately fix any irregularities you notice. There is nothing minute when it comes to ensuring your credit score is current and accurate.
So how can you raise your score? Pay all bills on time, pay off all post-due bills and cut down balance to 30% or less of credit limit on every account. Paying bills late or missing a payment will stay a long on your credit report.
Second step: Reduce debt
One of the priorities in planning for a home purchase within 2 years is to reduce debt along with increasing the savings. Interest payments on your debt should not exceed interest earned on savings. Lenders are not overly concerned about the amount of debt you have; they are more interested in finding out how good you are at managing your debt and keeping low credit card balances. A person with more debt but lower monthly payments is a better home loan applicant than someone with less debt but a higher monthly payment.
Third Step: Personal Savings
Before you begin your search, your first step should be to decide what you want from a home and what you can afford. Make a list of your basic requirements including location, size, neighbourhood, amenities, distance to school and work. To calculate affordability, consider what your monthly payment looks like with EMIs, maintenance, taxes and other bills. Once you are clear about the cost of your home purchase as well as how your monthly expenses will look like; you can start saving. Set up a home purchase savings account and automatically transfer a set amount into it every month. Deposit any bonuses into this account.
It takes time to save enough for a down payment. Usually, home buyers have to be prepared to pay 20% of total costs for the down payment. Avoid pulling out money from any retirement fund to pay for the down payment. However, you can look towards investing to help reach the down payment goals quicker than with just a cash account. The more down payment you put down, the more likely that you can negotiate for a lower interest rate.
Fourth Step: Keep emotions out
You have found your dream house and are ready to put down the down payment. We hope you do not scrape your entire savings to do so. Ensure that you have enough savings to cover 3-6 months of living expenses in an emergency fund as well as enough to contribute to your retirement fund. Ideally, buyers must begin their budget plans at least a year before they make an offer on a house.
Owning a home doesn’t end at buying one. There will be repairs and maintenance required and you will have to spend time and money on those. Home ownership is about emotions as much as finance. However, if you are not ready financially, there is no shame in waiting for a better time to buy a home.
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