Assessment of Financial Situation before Home Buying

Before going to apply for a home loan, it is important to determine how much you can make a down payment and how much you can afford as monthly EMI. An assessment determines how effective your home loan investment would be. This assessment is also used to determine how much and for how long your assets can cover for the EMIs if the regular income suddenly stops for some unforeseen reasons.

There are 4 steps using which you can determine your home budget:

1. Estimating your net worth: This assessment is done by considering all the assets & liabilities of a family. Assets: Cash, savings accounts, FDs etc. Liabilities: Home Loan, Car Loan, Education Loan, Personal Loan, etc.

The Net Worth is defined as the difference between its total assets and total liabilities: Net Worth = Total Assets – Total Liabilities

2. Estimating your home budget: As you prepare for home ownership, it is important to make informed & responsible financial decisions. Although banks perform a detailed assessment of your financial situation before giving you a home loan, they tend to ignore certain expenses that consume your disposable income such as your grocery expenses, medical bills etc. By doing your own affordability check you can be sure that you don’t borrow more than you can actually afford.

3. Home loan eligibility: Your home loan eligibility amount is decided with the help of three important parameters. These are Fixed Obligation to Income Ratio (FOIR), Loan to Value Ratio (LTV) and Installment Income Ratio (IIR). These parameters are indicators of your financial strength and your repayment capabilities. Every bank and lending institution has its own policies and standards for evaluating home loan applications.

4. Cover: If there is a sudden drop in your family income or a sudden rise in the expenses for some unforeseen reasons, you should have enough cover to make all your EMI payments for a few months. For how long you will be able to sustain paying your home loan EMI without a regular income can be calculated as below:

Net Worth-Down Payment/ EMIs