Are you ready for a home loan?

Abhijit Mitra, 27, an electronic engineer working with a Pune-based IT firm, took the big step towards buying a home last year.

Still young and single, many cautioned him about committing himself to a home loan. He (and his dad) thought otherwise.

"Though my salary was getting inflated regularly, I could barely see the money thanks to a huge tax burden," he says. "Hence, baba suggested I should buy a house and get tax relief."

He bought the house in Kolkata and his father chipped in with the money for the much-needed deposit that fetched him a bank loan.

Since Abhijit's parents already have a house, he has let his apartment out. "It has a double benefit," he exclaims. "My tax burden is reduced and I earn rent."

Though Abhijit has been putting marriage on the back burner for some time (crying over the lack of a healthy savings account), he claims to feel much more secure and financially stable by having a home in his name.

True. But, the decision to buy a home is not easy. Too many issues have to be taken into account. Here we look at some of them.

Age matters

Are you old enough to afford a home?

You are never too young to buy a stock, are you old enough to be able to afford a home loan?

Let's say you are 23 and just started working. Sure, you will be eligible for a home loan but you may just qualify for a few lakh rupees which will not get you the home you want in the city you want.

But, if you wait for a few years and apply for a loan with a higher salary and show your tax returns over the years, you will get a higher loan.

So, sometimes, it may make sense to wait.

Saikat Hazra, a Mumbai-based pharmacist, agrees.

"When I landed in this city, I had a tough time making both ends meet," he confesses. "But the moment I got myself a respectable job, I started saving substantially so that I could buy myself a house."

Saikat's dreams bore fruit; five years after his first job, he managed to buy a decent two-bedroom apartment in a western suburb of Mumbai.

"While I am still paying the EMI, the loan is fetching me a handsome tax benefit," he says.

Read Got a home loan? Read this to understand the tax benefits on a home loan.

Other loans

Are you servicing too many loans? That could be a problem. Not only will you get a lesser amount, you will also stretch yourself too thin servicing all these loans.

Ruchira Verma, however, does not agree. The 24-year-old journalist from Lucknow is servicing a student loan and a home loan.

"It is hard enough buying now because property is so expensive. But if I waited until my debts were cleared before taking a home loan, it would be even worse because property prices would have risen further," she says.

To be on the safe side, if you are planning on a home loan, avoid a car loan or personal loan. Housing finance companies tend to think that, when a person has too much of debt, a large part of his/ her salary will go towards clearing it. This means he does not have too much money left towards servicing the home loan.

In any case, it is wise to keep Equated Monthly Installments and loan payments of all kinds below 40% of your monthly take home income. Any amount higher than that would cut into your normal spend, as well as emergencies. 

Read Tips to get out of debt to learn how to deal with too many loans.

Other commitments

Do you have a lot of financial commitments or expenses in the near future? A holiday abroad, maybe. Or paying for a sibling's education fees or wedding expenses?

Then, even if you can afford a home loan now, it may make sense to wait. Because a year down the road, you may not have the money for the monthly home loan payments because all your savings would go towards the above.

You must take a peek into the immediate future before you make a home loan commitment now.

For instance, let's say you are planning to get married next year. If you are taking a personal loan to fund the lavish wedding and using up all your savings for a honeymoon abroad, think twice before you take the home loan this year. You may find yourself in financial dire straits next year.

On the other hand, it may also make sense to take the home loan after you get married. Because when you take a joint home loan with your working spouse, both incomes are clubbed together to entitle you to a higher amount.

Take the case of Sagar Chatterjee, who took a home loan only after marriage. Despite their joint income, they did not want to be burdened with a huge loan.

For one, they found the prices unaffordable. "Real estate prices in this city (Mumbai) are prohibitive and after paying a hefty rent for a two-bedroom apartment, I can't even dream of coughing up Rs 35-40 lakh (Rs 3.5 to Rs 4 million)," he says. This was a few years ago when a two-bedroom apartment in nice locality would cost them that much. Now the price has shot up even more.

Secondly, they both decided that they would eventually settle in Kolkata. So that is where there bought their home.

Now he and his wife have worked out a smart plan. She claims the tax benefit on the rent receipts while he claims the tax benefit on the home loan.

"In the current scenario of high paying corporate jobs, unless you have a home loan document, your tax liability is sure to kill you," he says.

Read Joint home loans and tax benefits to see how a couple can share the tax benefits if they want to.

Getting family to chip in

This is a cheap source of funds to tap.

The home loan provider will just give a loan up to 80% or 85% of the cost of the house. The balance has to be paid by the borrower.

While Sagar waited for a spouse to help him out, Saikath had to make do on his own. But Abhijit and Ruchira were fortunate enough to be helped by their parents. In both cases, their parents helped them with the deposit.

If you are running short and your family is willing to help, look into it.

Read Can I take a home loan from my family? to see the tax implications.

Not living in the same city

If you buy a home in the city you are working in, great. You move into your home, save on rent and start paying your EMIs on the loan.

The problem arises if you take a loan to buy a house in one city but work in another. Which is what Abhijit and Sagar have done. While Sagar's parents live in his house, Abhijit has rented out his place. In both cases, they did a smart thing by not leaving the house vacant and unused.

Read Claim home loan benefits, HRA