In our parents’ generation, many had to wait almost till retirement to own a house. Now, with rising salaries and easy availability of home loans, you do not need to wait till your late 40s and 50s to purchase a house. Many want to take it to the other extreme and want to purchase a house very early into their professional careers. If you are into your 20s, have just started working and plan to purchase a house on a home loan, these are a few things that you should keep in mind.
You need to see if you can actually afford an EMI. Banks do a bit of this work for you. You will only get loan to the extent that the EMI (for all the loans combined) does not exceed a certain percentage (say 40%) of your salary. However, you can’t let everything to the banks. You need to do some homework too. The bank will make a fair assessment of your loan EMIs. However, you know the best about your regular expenses. You need to see if you want to go for Pre-EMI or Full EMI. If you have purchased an under-construction property, you will have to manage both home rent and loan EMI. If you took an education loan for your studies, those EMIs also need to be repaid. All these can jointly create a lot of cash flow pressure. If a major portion of your income goes towards your home loan EMI, you may not be left with much to invest for your other goals. Moreover, a home loan is long term commitment which can run up to 15-20 years.
#2 Job Stability
If you are in a stable job, you may find it easier to get a home loan. And it is not just about getting home loan. It is about servicing it too. You wouldn’t want to be in a position where you lose your job and have a huge loan liability on your head. For instance, you are in a well paying job with a startup and may take a loan based on your current income. However, in case of a job loss, it is quite possible you may not be able to find another job that pays as much. Moreover, if you are still exploring your career choices, you need to see if other options give you similar stability. I am not suggesting that you should be very conservative with your career choices. However, if you are picking up a liability, this is an aspect worth considering.
#3 Down Payment
Even though you plan to take a home loan to purchase your first house, you will still need to make some payment from your bank account. Bank will finance only up to 75-80% of the purchase cost of the house. Therefore, if you plan to purchase a house quite early into your career, it is better to start saving early for down-payment.
#4 Credit Score
Your Credit score plays an important role in your loan sanction process. A poor credit may spoil your chances of getting a home loan. Recently, a PSU bank linked interest rate for your home loan to your CIBIL score. Higher the CIBIL Credit Score, lower the interest rate and EMI. You can expect other banks to follow suit. Therefore, you need a good credit history. So, if you have been planning to take a home loan, it wouldn’t be a bad idea to apply for a credit card, if you already don’t have one. Use the credit card judiciously and pay all your bills on time. This will help you build a good credit history. Many youngsters may go overboard with excessive purchases on their credit card and find it difficult to pay credit card bills on time. This will compromise your chances of getting a home loan.
By the way, I do not mean you should not care about your credit score if you do not plan to take a loan in the near future. Your credit score is assuming greater importance even in areas not remotely related to loans. For instance, I had to furnish my credit report to SEBI while applying for RIA license. Who knows your next prospective employer may ask for it too?
Sometimes, depending upon assessment of your loan repayment ability, you may be asked to get someone to stand guarantor to your home loan. For instance, if you have a low credit score, banks may doubt your repayment ability. In such cases, you may have to find a family member or a trusted friend to provide guarantee. This is no easy job. If you cannot repay the loan on time, bank can ask the guarantor to make payments. Moreover, the credit score of the guarantor will be affected if you default on your loans. Therefore, the guarantor has a bigger headache. Personally, I would not take a loan where somebody else has to provide guarantee. I wouldn’t want to put someone else’s financial life at risk if I cannot make the payment. I would rather try with another lender or wait for some time.
#6 Reduces Your Options
It is not uncommon to see young professionals go for higher education after working for a few years. You rush to purchase a house under family compulsions and seeing your office colleagues booking a house in a new project. You take a home loan and start paying EMIs. What if you subsequently decide or want to pursue higher studies? What will you do then? Who will pay your EMIs while you take a break from work for studies? You do not get moratorium for home loan repayment. This is not just limited to higher studies. A loan can take away other career flexibility too. For instance, you may have to think many times if you want to switch from a stable job to a startup if you have a big loan outstanding.
This post is not about whether you should purchase a house early in your professional career. And there is nothing wrong in purchasing a house early in your career. If nothing else, it forces some budgeting and saving discipline in you. And this discipline is missing in many youngsters. If yours is a dual income household, you and your spouse may jointly take a loan and even if one of you has to take break from work for any reason, the other person can continue paying the EMI provided it is affordable on a single salary. However, there are certain practical issues that you must be aware of. And you better be aware.