Before Buying a Home: Dos and Don’ts

For most middle and upper-middle class families, a house is the most expensive asset owned by them. The asset also has emotional value and therefore families should perform meticulous research before buying the same. The following is a set of must-dos before buying a house.

Due diligence of a property:

To ensure credibility of the builder, two must-have documents for a home buyer are the approved drawings of the project and the Intimation of Disapproval (IOD) which is an instruction set pertaining to construction from an authority to the builder.

Buyers looking to buy space in under-construction buildings should obtain a no-objection certificate (NOC) from the lender, if the property is mortgaged, and a commencement certificate which is a proof that the builder has obtained all licenses and permissions from the appropriate statutory authorities. In case the buyer doesn't hold the NOC and the builder defaults on his mortgage payments, the buyer may be evicted from the property. The builder should provide a clear land title, which implies that the property is free of litigation and associated debt. A source of risk for under-construction projects is the uncertainty on completion time.

Banks and housing finance companies (HFCs) are pre-approving residential projects by carrying out property due diligence themselves. This provides credibility to the project from the buyer's perspective. Hence before opting for a loan one can check if the particular project they are interested in is pre-approved.

The buyer should ensure that the property he is evaluating has adequate water supply and there is no problem of voltage fluctuation which can damage electrical appliances.

Evaluation of hidden costs:

Buyers ought to be wary about per square feet price quoted by builders, as there are myriad hidden costs not captured in the quote. Stamp duty and registration fees are mandatory fees and amount to approximately 5% of the value of the property. Majority of urban property purchases are financed by home loans and therefore there is the cost of an insurance policy to cover the loan. Customizing the property to the buyer's tastes and preferences entails a substantial expenditure on purchase of, interior furnishing, furniture and white goods. Liabilities like unpaid telephone and electricity bills may be present in case of a second hand property.

Accessing your home loan:

It is advisable for buyers to approach a bank or housing finance company only after selecting the property to buy. Some banks are averse to financing purchases of more than 15 years old property which has been resold more than twice. Financing purchases of under construction properties, which are not listed with any of the banks for pre-approved loans, is difficult. Large builders may have tie ups with banks or HFCs which offer lower rates and lend up to 85% of the property value. It is always advisable for borrowers to lower their loan exposure.

Interest rate on home loan:

As per the prevailing economic situation, floating rate loans score over fixed rate loans. Transparent floating rate home loans are at least 2% cheaper than a loan of identical tenure. There is the risk of rate charged on a floating rate loan being revised upwards when market rates rise. 90% of home loan consumers opt for floating rate loans making it difficult for policymakers to raise interest rates dramatically. The buyer should check whether a bank passes on the benefit of reduced rates to the consumer by going through its past record of benchmark rates say in 2002-03.

Other charges associated with a home loan:

These should be looked into to understand the exact amount of expenses the buyer would incur towards the home loan. Processing fees, amounting to 0.5-1% of loan amount is charged by most lenders, in addition to administrative fees and legal charges during loan disbursement. The buyer has to pay stamp duty which depends on the amount of the loan and the state in which the property is purchased. Prepayment charges are levied on loan repayments made over and above the amount stipulated by the repayment schedule. Making EMI payments after the due date attracts delayed payment charges. Hence, it makes sense for the buyer to take into consideration the total loan cost or money outgo throughout the loan tenure when comparing loan offers. This will provide a clear picture of which loan is the most affordable for the buyer.