Are you making your way towards homeownership? This is probably the most significant financial decision you’ll ever make! The first hurdle to cross is securing a home loan, and this requires careful planning and responsible borrowing. Credit Dharma can help ease the home-buying process by giving you access to top home loan advisors and allowing you to compare the different home loan providers. However, when it comes to applying for a home loan, it is not just credit scores and the best interest rates that you are considering. Your lifestyle choices also play a critical role in determining your home loan eligibility.
Here’s how your lifestyle choices and every day habits can influence your chances of getting approved for a home loan.
Financial Habits
- Financial discipline and credit score
Credit score plays an integral role in home loan approval. It is a reflection of your financial history and your ability to manage credit responsibly. This is how your lifestyle choices come into play:
- Credit card usage – Responsible and regular use of your credit cards demonstrates your ability to handle credit wisely, especially if you aim for a utilization rate of 30%. On the other hand, maxing out your credit cards or missing payments can lower your credit score and diminish your loan eligibility, reflecting your inability to handle your credit wisely.
- Debt management – How well you manage your existing debts, including personal loans, car loans, or students, is critical, and it directly impacts your eligibility for a home loan. High debt-to-income (DTI) ratios raise red flags for lenders. Studies indicate most lenders see DTI ratios of 36% as ideal. Getting approved with a ratio above 50% is tough.
- Employment stability
Financial stability is demonstrated if you have a consistent employment record. This is how your career path influences your home loan eligibility:
- Job hopping – Are you a frequent job hopper? Lenders may view your frequent job changes as a sign of financial instability. Ideally, lenders prefer applications with a stable employment history where the applicant has worked with a single employer for at least two years. However, if you are in a dynamic industry or you have freshly graduated, you may need to showcase relevant skills or consistent income growth and experience to secure a home loan.
- Self-employment – Self-employment offers flexibility but it may complicate loan approval because there’s the absence of a regular paycheck. Typically, lenders require self-employed borrowers to provide more documentation to prove they have the ability to pay back the loan within the predetermined tenure.
Financial Prudence
Are you saving for your dream home? What is your spending habit?
Before approving you for a home loan, lenders will want to make sure you have the financial capacity to not just manage your mortgage payment but also your everyday expenses.
So, this is how your daily spending choices can influence your loan:
- Discretionary spending – Are you spending more than you should on non-essential items? This can affect your savings and your ability to make a down payment. Lenders may probe into your spending habits, especially recurring expenses like dining out or entertainment, to analyze your financial prudence.
- Investments and savings – Do you have a healthy investment portfolio and a habit of saving money? If you are consistent with your savings and have a positive investment portfolio, it will demonstrate to the lenders your financial responsibility. This lowers the risk for lenders because it showcases your ability to manage mortgage payments, along with your personal financial obligations. You may get approved for a home loan without much fuss.
Living Expenses
Determining your monthly expenses is critical because it plays a significant role in deciding how much you can borrow for a mortgage. Before approving you for a home loan, lenders will analyze your overall financial picture and come up with a comfortable repayment plan.
- Living expenses – The amount you can allocate towards paying your mortgage can be limited if you have high monthly expenses for utilities, rent, and other lifestyle costs, such as subscriptions or gym memberships. Usually, lenders consider applicants ideal if they have maintained a healthy balance between their income and expenses, ensuring they will have enough funds for loan repayments and living costs.
- Dependents – Do you have dependents? Whether you have elderly family members or children, having dependents increases your financial obligations. This is also factored in by lenders when approving the home loan. However, don’t be disheartened if you have dependents. There are banks and government programs offering loan options that are tailored to borrowers with dependents.
Health and Insurance
Health and insurance are not directly related to traditional home loan requirements but they may play a significant role in impacting your eligibility.
- Health problems – If you are suffering from chronic health conditions or have significant medical expenses, it may raise concerns about your long-term financial stability. In that case, having adequate health insurance may help mitigate the risks for lenders. Since health insurance protects you against unexpected medical bills, it potentially affects your ability to repay the loan.
- Life insurance – If you have a life insurance policy, it demonstrates your financial responsibility to the lenders. Also, your policy adds an extra layer of security for the lenders. In the event of unforeseen circumstances, the proceeds from your life insurance policy can help cover the outstanding loan balance.
Tips to Build A Strong Financial Profile For Home Loan Eligibility
- Create a budget and track expenses
When it comes to financial planning, it is crucial to understand your income and expenses. Craft a realistic budget by allocating your income towards essential needs, debt repayment, and savings goals.
Monitor your expenses to identify where you can cut back and free up some money for savings.
- Increase savings
The more you save for a down payment, the smaller the loan amount you’ll need to borrow to purchase your dream home. This will translate to lower monthly payments and potentially qualify you for securing better home loan terms.
Boost your savings over time by exploring options like recurring, fixed, SIPs, etc.
- Build an emergency fund
Having an emergency safety net is critical so you can avoid depending on credit cards to cover unexpected costs. Try to save at least three to six months of living expenses in your emergency fund.
- Minimize unnecessary spending
Assess your spending habits and pin down areas where you can cut back. Reduce impulse purchases, consider cost-effective alternatives, and prioritize needs over wants.
- Improve your CIBIL score
You can boost your credit score by keeping your credit utilization ratio under 30% and not missing a due payment. Consider enabling automatic payments to make timely payments to all your debts, including utilities, credit cards, and any previous loans.
Conclusion
Your lifestyle choices have a profound impact on your home loan eligibility. It is essential to present yourself as a low-risk borrower to potential lenders to secure the best terms for your loan. So, make smarter lifestyle choices when it comes to using your credit card or planning your career. You must also take actionable steps to balance your income and expenses. If you still don’t have health insurance and life insurance policies, get that sorted out first before applying for a home loan.
By making small changes and adjusting your lifestyle, you can free up funds that can be used to make mortgage payments and showcasing to lenders your financial responsibility.