Navigating Home Loans for Low Income Earners: A Comprehensive Guide

Many individuals find themselves in a situation where their income is below the commonly recommended threshold for obtaining a home loan. This article will explore the feasibility of securing a home loan with a salary of ?20,000 and assess whether it is a prudent decision to do so. We will also delve into key factors that should be considered before making such a financial commitment.

Is It Possible to Get a Home Loan with a Low Income?

For a loan amount of ?15,00,000, the monthly EMI would be ?12,180 at an 8.6% interest rate over a 25-year repayment period. This amount is significant, given that for an income of ?20,000, the EMI roughly exceeds 60% of the net salary. This makes the monthly EMI potentially unmanageable given the stringent criteria set by most lending institutions.

In rare and extreme cases, where the take-home pay is approximately 40%, a home loan might be considered. However, this should not be seen as a right decision, as very few lending institutions retain the discretion to approve such loans. Moreover, due to the challenging real estate market, purchasing a home for this amount may yield suboptimal results, possibly in a less desirable locality.

Important Factors to Consider Before Taking a Home Loan

When considering a home loan, it is essential to bear several critical factors in mind:

Long-Term Commitment and Benefits

A home loan is a long-term financial commitment. It is crucial to evaluate whether the benefits outweigh the costs. This consideration is particularly important for individuals in the private sector, where job instability is a common concern. Adequate planning and insulations against potential financial setbacks are paramount.

Margins and Cushion Funds

Besides the margin money that needs to be paid upfront, a cushion fund covering around 10 months of EMIs should be maintained. This fund must not be touched unless absolutely necessary. Overconfidence in meeting the liability, where the margin money is funded by short-term loans or collateral without interest, can lead to debt traps. Similarly, raising the margin money at interest cost exacerbates the financial burden and can result in a Non-Performing Asset (NPA). Therefore, it is strongly advised not to resort to such practices.

Emergency Fund

Another essential cushion for unforeseen circumstances is an emergency fund of approximately ?30,000. Previously, a minimum of 6 months' EMIs was recommended, but with the financial impact of the pandemic, a more conservative buffer of 30,000 is advisable to avoid any complications post loan availing.

Rent vs. Home Loan

The decision to take a home loan should also consider the rent paid monthly compared to the EMI. If the rent covers about 50% to 60% of the EMI, obtaining a home loan might be financially viable, conditioned on capital appreciation.

If the rent is less, it would be advisable to opt for a rented residence until the economic situation improves. The interest rate on a home loan, though currently low, is still around 8%, which is slightly higher than the potential capital appreciation of 3% in a good locality. If the interest rate is estimated at 6%, the capital appreciation might be around 1.5%-2%, which is significantly lower than the rent savings.

Financial Deductions and Monthly Deductions

To ensure financial stability, it is recommended to keep monthly deductions, including premium payments for Life Insurance (LIC), Provident Fund (PF), and similar expenses, not exceeding 50% of the gross salary. This leaves the other 50% for family expenses and other necessary expenditures.

Choosing a Bank

Choosing a bank for your home loan is a personal decision, but opting for a bank with strict adherence to procedures is advisable, as they adhere more closely to banking ethics. Some people prefer banks with the lowest interest rates, while others prefer banks that are more flexible. Ideally, the borrower should choose a bank they already have a relationship with, such as their salary or business account bank.

By thoroughly considering all these factors, individuals can make an informed and pragmatic decision about whether or not to take a home loan, even with a low income.