Let’s presume that you have looked around and identified a few properties – one of which you might want to finalize asap. The best course of action is to firm up your budget by applying for a loan. This is because; most sellers would be ready to offer their maximum discount on the pricing, when they are sure that the transaction will go through smoothly. The risk of getting tied down in a delayed transaction is something all sellers would want to avoid. Also, sellers want to get their hands on the money quickly to meet their own financial commitments – possibly the reason to sell, hence they would try and find a compromise pricing. Ability to pay cash down is the ace card for a buyer in negotiation. Even developers will warm up to you once they know that you have lined up the finance.
The first thing to do is to find a mortgage lender. A number of Banks anf NBFCs offer home loans. Take your pick based on terms – pricing, option to choose fixed or floating rates, Pre-payment charges, processing fees etc. Negotiate whatever, you want to – the results might surprise you pleasantly. Though on rates, you may find some to be inflexible. Some lenders offer to send an agent to your house / office for discussions, picking up the form etc.
All Banks and financial cos. require you to fill out a detailed form. You may find it cumbersome, and the friendly bank executive may offer to fill the same for you, but beware! You do not want any discrepancy in the form to be the reason for your application to be turned down. Most of us balk at filling out forms – Just do it!
Home loan applications are fairly simple. Most require you to furnish credit and property related documents.
Credit related documents are - latest payslip of your spouse and yourself (usually last three months, Form 16, (ITR for the last 2 years – for self employed), Bank account statements for last 6 months, copies of ID proofs like driving licence / passport / PAN card etc. Be prepared with the details of credit and debits to your accounts – you should reveal all loans availed by you at this stage (the bank will find out anyway thru credit rating agencies – and then frown at your not revealing the same in the first instance).
Be prepared to reveal all sources of income. Some lenders also consider prospective rent on the property to be financed. Also helpful will be details of assets and liabilities – the lender may ask for proofs. Reveal details of all loans accurately. Failure to do so will in all probability result in your application to be turned down.
Property related documents are copies of previous sale deed, sale agreement, search report non-encumbrance certificate, sanctioned map, occupation certificate etc. Keep a set of the same for your records prior to submission.
Once you are ready, make a note of the application form number and head for your preferred financier.
Cheers - till my next blog
Thursday, April 15, 2010
Friday, April 9, 2010
Can I afford this property?
You see a nice house on the newspaper / net? You like it...it just seems perfect.
Can I afford it? This is a million dollar question...its seems so simple yet has many hues. Affordability requires three things, cash, credit and collateral.
In this blog, let’s take cash.
Firstly, look at what you have managed to save (exclude statutory savings such as PF) for the last six months. Now deduct the abnormal blips in income such as bonus or income from sale of any investments. Divide that by 6 (no. of months). This is what I can safely call your "gross disposable income" for a month. Next, deduct all statutory savings like PF, taxes etc. Let’s define the balance amount as your "Net Disposable Income".
You need money every month to pay for Food, Rent, Clothes, Entertainment, Medicines, EMI’s (Existing loans) etc. The spending (debits in your bank statements) appears to be “inevitable monthly expenditure”. Or is it? Take a close look again and mark out the purely voluntary spending that cannot be considered essential expenses. Make a list of that. You may be tempted to assume, that most of them you can give up since you are making a big purchase (property) and future benefits surely justify small sacrifices. That might be possible, but take my word for it, that over a period of time, this approach will fall by the side.
Pick up the same list again. Make a small note against each on the frequency of such expenditure. Aha....now we are talking...can we can cut down on that regular restaurant dining? What about that (inevitable?) dinner post the movie show? Talking about which, can we rent out more popular movies and watch them on the DVD player - with family and friends - go ahead and buy some instant popcorns to go with it – Great!! Now there’s some more money to add to your disposable income.
Next, depending on whether you are going in for a "ready for occupation" (residential) property for yourself, or for leasing it out; calculate the savings (of existing rent) or income expected from rentals. Add that to your “Net Disposable Income”. This is, roughly, the amount you can afford to pay on a monthly basis. You might want to take 75% of the amount to stay conservative.
• You need to assess your "Net Disposable Income" to calculate the maximum amount you can pay for the loan instalments. Be sure to keep a buffer of 15 – 20% at least for exigencies. This is your “Repayment Capacity”
• Identify and cut down on your impulsive spending. You will be able to increase your repayment capacity.
• Keep at least 6 months savings in liquid and near liquid savings as a buffer for life’s ups and downs. Beware; you may not be ready to compromise a lot on your current life-style. This is really important. Really!
By the way, most lenders will take approximately 35 – 40% of your monthly income as your repayment capacity per month. You will be able to club your spouse’s income (generally financial institutions would insist on both borrower and co-borrower to be assessed for income tax) .
Now to the next step - Margin money.
Every lender would like you to contribute a certain amount known as “margin money” or “down payment”. This is to ensure your equity and therefore your interest in repayment of the loan in the event that the value of property depreciates. This is where most first time buyers get stuck. Don't worry, just dive deeper into your finances.
You would have made investments in many instruments like Mutual Funds, Fixed Deposits, PF, Shares and bonds, Cash in bank, real estate and gold, all of which are liquid (ability to turn into cash) in various degrees.
Let’s assume the following amounts apply in your case:
Savings in Bank: Rs. 100,000
Fixed Deposits : Rs. 200,000
Mutual Funds : Rs. 350,000
PF : Rs. 400,000
Gold (worth) : Rs. 500,000
Shares : Rs. 75,000
• PF: You will be able to withdraw your PF savings to fund your house. Go ahead and take it. It’s one of the few windows provided by PF rules to withdraw. Make a mental note that this is really a withdrawal from your retirement fund. (Assumed w/d: 85%)
• Fixed Deposits: Right time to break the deposits – your FDs earn far less that the borrowing rate on the loan. (Assumed redemption: 90%)
• Gold: Tricky – Lender of the last resort. Family jewels helps maintain a healthy relationship with your spouse. Remember, it would be better to keep it for a rainy day. Unless, of course, you have a door open for more inflow of the same. Just kidding! However, if you really need to, dip into this instrument with caution. (Assumed sale: 25% )
• MFs and Shares: This is near liquid and requires some thought. To sell, identify the ones providing weak returns or low liquidity and keep working through the rest till your requirements are met. (Assumed sale: 90%)
• Family: This source is subject to availablity. However, you may want tread cautiously here. Check whether your family can contribute some capital for down payment. Always assume that this is a personal loan. Most family members including your parents will not be able to forego that money indefinitely – hence clearly state the time-line for repayment. If you can top up the loan by a generous amount when returning, do that. Your family would be too embarrased to point out that they have lost “bank interest" on the principal lent. Insist even if they refuse. (Assumed Loan from family: Rs. 500,000)
Raising the margin money:
Ignoring your savings account balance, which anyway should be applied to the 6 months income rule, you could raise the same from the investments listed earlier:
• FDs : Rs. 180,000 (90%)
• MFs & Shares : Rs. 380,000 (90%)
• PF : Rs. 340,000 (85%)
• Gold (worth) : Rs. 125,000 (25%)
• Family : Rs. 500,000 (Assumed as interest-free loan)
Total money available for down payment: Rs. 15,25,000.
Most financial institutions lend up to 85% of the value of the (to be acquired) property. The actual amount depends on specific guidelines of the lender for income recognition, value of the property and a host of other credit parameters including your past record of repayments.
A quick note: Ensure there is no outstanding EMI on existing loans (Home loans, personal loans, credit card loans etc.). Most lenders do check on your previous track record though a credit rating agency. Also, in case you have gone in for a compromise settlement of outstanding dues in the past – that would work against you.
Cheers, till the next blog on Credit.
Can I afford it? This is a million dollar question...its seems so simple yet has many hues. Affordability requires three things, cash, credit and collateral.
In this blog, let’s take cash.
Firstly, look at what you have managed to save (exclude statutory savings such as PF) for the last six months. Now deduct the abnormal blips in income such as bonus or income from sale of any investments. Divide that by 6 (no. of months). This is what I can safely call your "gross disposable income" for a month. Next, deduct all statutory savings like PF, taxes etc. Let’s define the balance amount as your "Net Disposable Income".
You need money every month to pay for Food, Rent, Clothes, Entertainment, Medicines, EMI’s (Existing loans) etc. The spending (debits in your bank statements) appears to be “inevitable monthly expenditure”. Or is it? Take a close look again and mark out the purely voluntary spending that cannot be considered essential expenses. Make a list of that. You may be tempted to assume, that most of them you can give up since you are making a big purchase (property) and future benefits surely justify small sacrifices. That might be possible, but take my word for it, that over a period of time, this approach will fall by the side.
Pick up the same list again. Make a small note against each on the frequency of such expenditure. Aha....now we are talking...can we can cut down on that regular restaurant dining? What about that (inevitable?) dinner post the movie show? Talking about which, can we rent out more popular movies and watch them on the DVD player - with family and friends - go ahead and buy some instant popcorns to go with it – Great!! Now there’s some more money to add to your disposable income.
Next, depending on whether you are going in for a "ready for occupation" (residential) property for yourself, or for leasing it out; calculate the savings (of existing rent) or income expected from rentals. Add that to your “Net Disposable Income”. This is, roughly, the amount you can afford to pay on a monthly basis. You might want to take 75% of the amount to stay conservative.
• You need to assess your "Net Disposable Income" to calculate the maximum amount you can pay for the loan instalments. Be sure to keep a buffer of 15 – 20% at least for exigencies. This is your “Repayment Capacity”
• Identify and cut down on your impulsive spending. You will be able to increase your repayment capacity.
• Keep at least 6 months savings in liquid and near liquid savings as a buffer for life’s ups and downs. Beware; you may not be ready to compromise a lot on your current life-style. This is really important. Really!
By the way, most lenders will take approximately 35 – 40% of your monthly income as your repayment capacity per month. You will be able to club your spouse’s income (generally financial institutions would insist on both borrower and co-borrower to be assessed for income tax) .
Now to the next step - Margin money.
Every lender would like you to contribute a certain amount known as “margin money” or “down payment”. This is to ensure your equity and therefore your interest in repayment of the loan in the event that the value of property depreciates. This is where most first time buyers get stuck. Don't worry, just dive deeper into your finances.
You would have made investments in many instruments like Mutual Funds, Fixed Deposits, PF, Shares and bonds, Cash in bank, real estate and gold, all of which are liquid (ability to turn into cash) in various degrees.
Let’s assume the following amounts apply in your case:
Savings in Bank: Rs. 100,000
Fixed Deposits : Rs. 200,000
Mutual Funds : Rs. 350,000
PF : Rs. 400,000
Gold (worth) : Rs. 500,000
Shares : Rs. 75,000
• PF: You will be able to withdraw your PF savings to fund your house. Go ahead and take it. It’s one of the few windows provided by PF rules to withdraw. Make a mental note that this is really a withdrawal from your retirement fund. (Assumed w/d: 85%)
• Fixed Deposits: Right time to break the deposits – your FDs earn far less that the borrowing rate on the loan. (Assumed redemption: 90%)
• Gold: Tricky – Lender of the last resort. Family jewels helps maintain a healthy relationship with your spouse. Remember, it would be better to keep it for a rainy day. Unless, of course, you have a door open for more inflow of the same. Just kidding! However, if you really need to, dip into this instrument with caution. (Assumed sale: 25% )
• MFs and Shares: This is near liquid and requires some thought. To sell, identify the ones providing weak returns or low liquidity and keep working through the rest till your requirements are met. (Assumed sale: 90%)
• Family: This source is subject to availablity. However, you may want tread cautiously here. Check whether your family can contribute some capital for down payment. Always assume that this is a personal loan. Most family members including your parents will not be able to forego that money indefinitely – hence clearly state the time-line for repayment. If you can top up the loan by a generous amount when returning, do that. Your family would be too embarrased to point out that they have lost “bank interest" on the principal lent. Insist even if they refuse. (Assumed Loan from family: Rs. 500,000)
Raising the margin money:
Ignoring your savings account balance, which anyway should be applied to the 6 months income rule, you could raise the same from the investments listed earlier:
• FDs : Rs. 180,000 (90%)
• MFs & Shares : Rs. 380,000 (90%)
• PF : Rs. 340,000 (85%)
• Gold (worth) : Rs. 125,000 (25%)
• Family : Rs. 500,000 (Assumed as interest-free loan)
Total money available for down payment: Rs. 15,25,000.
Most financial institutions lend up to 85% of the value of the (to be acquired) property. The actual amount depends on specific guidelines of the lender for income recognition, value of the property and a host of other credit parameters including your past record of repayments.
A quick note: Ensure there is no outstanding EMI on existing loans (Home loans, personal loans, credit card loans etc.). Most lenders do check on your previous track record though a credit rating agency. Also, in case you have gone in for a compromise settlement of outstanding dues in the past – that would work against you.
Cheers, till the next blog on Credit.
Tuesday, April 6, 2010
Different Strokes for Different Folks - Residential properties
Take a break from your usual thoughts.
Why do you need your own house?
Well, some of the ones I have heard over time are:
Buddy, it satiates the need for security.
Everybody has bought one -that tells me something - Its necessary !!
I don't want my money to go in waste (read rent)....
Don't want to listen to my Landlord's nagging - ugh!
Its a great investment - a Systematic Investment Plan.
My spouse says we need one - LoL
Its my retirement plan
How do I identify a suitable house?
Tricky tricky ....
The maximum budget - do your maths with EMI (don't worry if you can't - I shall demystify that in one of these blogs)
Need a 3 Bedroom unit
Need a house in this wonderful project that my colleague told me about.
Liked the advt (placed by developer) -It looks like heaven (Didn't know a spa, gym and jogging track were attributes for my paradise on earth - The ad tells me that.
Its a Steal Deal (The seller is a moron)
Its a great opportunity with all the development coming in.
My friend made money in a similar project.
Is the location of the house suitable for me?
Many buyers I know would prefer to buy a house close to where they live. I call it the "Republic Effect" - One wants to stay in the Republic of _____ (wherever you live". I love to stay in the Republic of Kormangala)
Reasons:
The maid stays nearby -now that's important !!
I love my morning walk in this neighbourhood..hmmm
The kids love the nearby library.
Who wants to change the bus / train route?
I have friends around and they are important.
I know and love the shops around.
Some would love to buy a house close to where they work....
Its smarter - less commuting.
It frees up time for what is important - More work? (Nah - I'm just kidding)
Saves expenses on travel.
All these are important questions - The answers are even more important - think about it. Debate if you want with your spouse - I shall take this on in my next blog...right now my kids await the pasta I promised to make them tonite. So bye for now.
Why do you need your own house?
Well, some of the ones I have heard over time are:
Buddy, it satiates the need for security.
Everybody has bought one -that tells me something - Its necessary !!
I don't want my money to go in waste (read rent)....
Don't want to listen to my Landlord's nagging - ugh!
Its a great investment - a Systematic Investment Plan.
My spouse says we need one - LoL
Its my retirement plan
How do I identify a suitable house?
Tricky tricky ....
The maximum budget - do your maths with EMI (don't worry if you can't - I shall demystify that in one of these blogs)
Need a 3 Bedroom unit
Need a house in this wonderful project that my colleague told me about.
Liked the advt (placed by developer) -It looks like heaven (Didn't know a spa, gym and jogging track were attributes for my paradise on earth - The ad tells me that.
Its a Steal Deal (The seller is a moron)
Its a great opportunity with all the development coming in.
My friend made money in a similar project.
Is the location of the house suitable for me?
Many buyers I know would prefer to buy a house close to where they live. I call it the "Republic Effect" - One wants to stay in the Republic of _____ (wherever you live". I love to stay in the Republic of Kormangala)
Reasons:
The maid stays nearby -now that's important !!
I love my morning walk in this neighbourhood..hmmm
The kids love the nearby library.
Who wants to change the bus / train route?
I have friends around and they are important.
I know and love the shops around.
Some would love to buy a house close to where they work....
Its smarter - less commuting.
It frees up time for what is important - More work? (Nah - I'm just kidding)
Saves expenses on travel.
All these are important questions - The answers are even more important - think about it. Debate if you want with your spouse - I shall take this on in my next blog...right now my kids await the pasta I promised to make them tonite. So bye for now.
Thursday, April 1, 2010
Awakening from dreams.....
I often wonder .....how does one first think of buying a home.....
Is it a genetic disposition, peer pressure, financial imperative or just a casual dream of a warm kitchen, luxurious bedspread or a photograph of the view outside a window ...and you start imagining ....what if ....maybe I can....should I....will I be happier????
The bug has bitten...no respite ....it surfaces unexpectedly ...you realise that the thought of .... the possibility of ..... having a place of your own, keeps flitting - in and out of your mind. Your eyes get the cue to watch out, conversations on real estate suddenly become interesting...gosh how many people know something about RE that I don't !! Keep discovering ......
Congratulations...you have joined the generations of home seekers - from caves to condos..... your ancestors were the carriers of this instinct ... and now, you carry the bug ...
Welcome to the world of real estate ... as I know it......
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Part- 1 It seems to me that we all fall prey to the myth of the " pot of Gold " with respect to property investments. This... -
If you are one of the numerous buyers who are holding up their negotiations for finalizing property, then you may be in for some disappo...
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Take a break from your usual thoughts. Why do you need your own house? Well, some of the ones I have heard over time are: Buddy, it satiates...