Homeward Bound: Steps To Own Your First Home

Gurgaon-based Ashish Arora, 41, a software engineer working for a fintech start-up lives with his wife and child. After working for 15 years he realised that he had not built his own home, so he decided that it was time to invest in his own house.

Like Arora, it is the dream of most people to own their own home. Not only is it one of the bare necessities of life, apart from food and clothes, your own home brings with it security and peace of mind.

In India, people are buying homes in large numbers, with sales growth slightly surpassing the supply. In the first quarter of 2024, home sales went up by nine per cent across the top eight cities in India, with 86,345 units sold, according to a report by Knight Frank, a real estate consultancy.

Buying a home is in fact, the biggest purchase in a person’s life, and since most people require a loan to purchase a home, it means getting into a financial commitment for 15 years or more. And it is not just the monetary aspect of it. Buying a home is also as much an emotional decision. If you are looking to buy your first home, read on.

Rent Or Buy?

There are arguments for and against either option, but the debate has attained newer heights in the post-Covid-19 landscape.

“As before, pro-renting advocates emphasise the arguments of flexibility, freedom of choice and reduced financial commitment. In the current time, they also add that renting is seen as the only choice for those who have lost their jobs or are in danger of doing so,” says Prashant Thakur, Regional Director and Head, Research, ANAROCK Group, a real estate services company.

Curiously, there is almost no discussion about people whose jobs are secure, who have always wanted to own a home, and whose previous equivalence has now been eliminated – paradoxically because of the pandemic. “If they were ambivalent about buying a home before, their minds are now made up,” says Thakur.

Ultimately, the choice between renting and buying hinges on individual circumstances like financial status, lifestyle, and future aspirations.

Deciding What To Buy

Once you have decided to buy, next comes the job of selecting the property. This is a step where the money and the heart both play an important role.

What Can I Afford?

Another way to answer this question is to find out how much loan you are eligible for.

Loan Amount: “Start by assessing your monthly income and existing financial obligations. A common guideline is that your monthly home loan payments should not exceed 25-30 per cent of your gross monthly income,” says Atul Monga, CEO and Co-founder, Basic Home loan.

Additionally, your total debt-to-income ratio (including the home loan) should ideally be below 40 per cent. Consider factors like job stability, future income prospects, and potential expenses. Consider the down payment, which is typically 20 per cent. Use home loan calculators to estimate monthly payments and interest rates.

The bank can also help you in the process, as before sanctioning a loan, they would check your repayment capacity.  “Banks will assess your income, employment history, and stability to determine repayment capability. They will consider your existing debts to ensure you are not over-leveraged,” says Raoul Kapoor, Co-CEO, Andromeda Sales and Distribution, a loan distributor.

Remember that you will be eligible for a maximum of 90 per cent of the property value for a loan of Rs 35 lakh or less. The loan to value (LTV) ratio will reduce with the increase in the size of the loan. “So, even if your salary makes you eligible for a loan of Rupees 1 crore, if the property is valued at Rupees 1crore, the maximum loan you may be eligible for may be 75 per cent or Rs 75 lakh,” says Adhil Shetty, CEO, BankBazaar.com, a fintech portal.

Buyers usually learn their loan eligibility early in the home-buying process, often through a pre-approval stage. “Pre-approval involves a preliminary assessment by the bank based on financial documentation provided by the buyer. Knowing the loan amount they qualify for, allows buyers to set a realistic budget and start selecting properties within their price range confidently,” says Monga.

Type of Property: Once the budget is set, it's time to narrow down the property search. “Consider key factors like the type of property required, the number of rooms, preferred location, and access to essential amenities like markets, schools, or public transportation,” says Priyatham Kumar, Founder of Homes247, a real estate website.

Once these are figured out, a buyer can reach out to real estate agents or explore online listings and visit the properties in person.

Wait vs. Move-In Now: Ready-to-move-in homes are indeed attractive, but they come with a higher price tag compared to properties under construction. “There is typically a 10-20 per cent difference in price between a new launch and ready-to -move-in properties of the similar category,” says Ravi Shankar Singh, Managing Director, Residential Transaction Services, Colliers India, a real estate company.

Entrepreneur Shipra Jena, 35, decided to purchase a property in Sohna, greater Gurgaon, because properties in Gurgaon have become very expensive. She purchased a property under construction built by Godrej Nature Plus, in February 2018. But the pandemic played a spoilsport.

“It is 2024, and Godrej Nature's Plus is massively behind the schedule for delivery. The expected project completion we were informed by the email is post April 2025. I have emailed and have tried to raise complaints many times, the compensation is not clear to us, as well as there is no clarity on the compensation matrix,” says Jena.

The implementation of RERA in 2017 ushered in an era of transparency, compliance, and accountability in the real estate sector and buyer confidence has seen a significant boost.  However, Jena’s example goes to show that while there are laws in place, the problem of delayed delivery of projects is still a reality.

“In case of project delays, buyers have the right to (i) seek withdrawal of booking (developer is liable to refund entire amount along with interest). (ii) go ahead with the project (with the condition that developer will pay the interest for every month delay until it is ready for possession). Maximum time for refunding the buyer is within 45 days of it becoming due,” says Thakur.

Location, Location, Location: Always plan the location with a long-term outlook. “Choose a place where you think you would like to settle down and continue to stay on rent till you eventually reach that milestone. Doing this one can claim house rent allowance (HRA) deductions as well as loss from house property for income tax purposes,” says Singh.

The Home Loan Question

Once you have zeroed down on a property, the next thing to figure out is the loan.

Check Your Credit Score: Credit scores have a direct impact on home loans, and today this impact is clearly measurable. “Most banks clearly state the benchmark-linked rate and the additional credit risk premium on it. If your credit score is high, your credit risk premium, and therefore, your overall interest rate will be lower,” says Shetty.

“If your credit score is low, work on improving it by paying bills on time, reducing outstanding debt, avoiding new credit inquiries, and checking for and correcting any errors in your credit report,” says Kapoor.

Figure Out The Down Payment: Higher down payments can have an impact on your interest rate. If you are borrowing less than the allowed loan-to-value (LTV) ratio, then you have better chances of getting the best rate.

Let us say you have to make a 20 per cent down payment. “If you are buying a house worth Rs 50 lakh, you will be eligible for a loan of Rs 40 lakh (assuming you are eligible for it based on your income). The lender may offer you a slightly lower rate of interest if you borrow, say, Rs 35 lakh. This is because the lender considers you less credit hungry and more prepared to shoulder the loan burden,” says Shetty.

Shop Around: Compare rates from multiple lenders to find the most competitive offers. Negotiate with lenders, leveraging any competing offers you've received. Ensure you understand the total cost of the loan, including closing costs and any prepayment penalties.

You typically receive the keys to your home at the closing meeting, where you sign final documents and pay closing costs. This happens after the lender has disbursed the loan funds and the title is officially transferred to your name.

Your path to homeownership might have a few twists and turns, but with a little determination and planning, you'll be sipping tea on your porch swing in no time.