The basic mindset towards many aspects of life is often shaped by prevailing perceptions regarding them. For instance, a person who mentions a decision to turn entrepreneur receives an almost overwhelming stream of advice about the need for having a professional and systematic approach towards financing the venture, since it is considered to be essential.
A home seeker, on the other hand, tends to get guidance on ideal locations, important procedures and key parameters for shortlisting projects. While all these aspects are undoubtedly significant, an equally important element, without which the entire transaction remains a ‘dream’ is usually overlooked — financing the purchase.
In most cases, people assume that any gap between what was anticipated by the home seeker and the final amount payable would be somehow ‘managed.’ Many people actually manage to pull it off, and they do so by epitomising the Indian concept of ‘jugaad,’ which usually entails borrowing desperately from whoever responds to their pleas, be they friends, families, even employers.
However, not all home seekers in situations are so fortunate. Some raise their benchmarks of desperation even higher and make the sometimes ‘fatal’ error of taking personal loans from banks, non-banking financing institutions and even money lenders, or even worse, making payments by maxing out their credit cards.
The exorbitantly high interest rates levied in such situations, coupled with the concept of ‘interest charged upon interest’ create a quagmire that one can almost never escape from, no matter how strong the efforts. As the medical fraternity has so aptly put it, prevention is indeed better than cure and that is one adage home seekers need to keep on reciting.
Sure, that 35th floor apartment may seem like your dream home come to life, but maybe taking a similar one ten floors below would save you a massive amount just in terms of the floor rise charged per square foot. Maybe the view isn’t quite as breathtaking but as long as it’s impressive enough and doesn’t wreck your wallet, it’s definitely better to upgrade homes at a later date.
Most importantly, take expert advice. Maybe it’s the chartered accountant recommending ways to plan for your children’s higher education or a college friend who guides you on filing income tax returns, consult someone who understands finance before entering into financial transactions. There are various guidance websites online as well to get you started off.
For instance, as the Consumer Financial Protection Bureau points out, having a co-signer or co-borrower could help you raise the funds through a home loan with far more reasonable rates of interest and a much longer repayment tenure up to 20-30 years as against taking a personal loan or running up a credit card bill respectively.
Since the co-borrower agrees to take full responsibility to pay back a mortgage loan with you and is therefore, obligated to pay any missed payments and even the full amount of the loan if you don’t pay, their eligibility gets clubbed along with yours making it possible to get a larger amount as compared to being a solo applicant.
Do keep in mind, however, that the co-borrower’s credit record and finances are at risk if you don’t repay the loan. Lenders must generally find out, consider, and document a borrower’s income, assets, employment, credit history and monthly expenses. While approving you for a home loan, they must confirm not only your intent to repay but your capability to do so as well.
For example, if a mortgage has a low interest rate initially, that goes up in later years, the lender has to make a reasonable effort to figure out if the borrower can pay the higher interest rate later on as well. Similarly, ensure that you ask yourself these questions as well and only proceed with the transaction once you are sure of the answers.
While buying a home is definitely cause for celebration and a concrete step towards stability, it is also a huge financial responsibility that you have to undertake for not just years but decades. Just like setting up a business.
Top 3 tips
Buying a home is exciting. It’s also one of the most important financial decisions you’ll make. Choosing a mortgage to pay for your new home is just as important. Don’t rush into it.
Determine how much you want to spend on a home
Decide if it’s the right time to buy a new home
Gather your application paperwork
(Source: Consumer Financial Protection Bureau)
(The writer is Founder & Former Chairman, Saba Group and Founder, Anannke Foundation)