7 Housing Expenses to Watch Out for When Buying a Home

In order to process a loan, banks and financial institutions require a fee for the application reviewing process known as a home loan processing fee. This fee stands between 0.5% and 2% of the loan amount, depending on factors such as your income profile and loan type. Note that this is charged irrespective of whether your application is approved or rejected.

Some lenders require a legal and technical assessment of the property to validate its worth. These charges, usually faced by the buyer, are based on the property’s value and location. The fee may also vary if the lender organisation partners with a third party to carry out these legal formalities.

Stamp duty is a direct amount paid when a property is acquired or transferred. This expense can vary from state to state. If you are purchasing a property in a particular state and applying for a loan in another state, then the stamp duty charged on the property will be based on the rates of the state in which it is applied.

Registration fees, usually 1% of the house price, are also one of the additional costs. These charges are unavoidable and contribute significantly to the house expenses.

Many lenders suggest that the borrower should take an insurance policy on the home loan to cover the cost of the loan in case of adversity. Although helpful, this cost translates to a few extra hundred bucks per year that you will have to bear.

Should you wish to repay your loan before the agreement period in a lump sum, certain lenders charge prepayment or foreclosure costs. In the case of borrowers who choose floating interest rates, lenders usually do not charge the foreclosure fee.

GST applies to various home loan-related charges, including processing fees for housing loans, legal fees, and insurance premiums, adding an extra 18% to these costs.

Certain documents may have to be notarised during the home loan process. While relatively minor, these charges should still be accounted for in your overall budget.

Housing costs include total housing expenses, which means paying both the cost of monthly rent or mortgage charges and the amount of that payment as interest. Total housing expense, therefore,  encompasses all costs associated with owning and maintaining your home. This includes:

Principal and Interest: These are the primary components of your monthly mortgage charges for a home loan.

Property Taxes: The annual taxes levied by local authorities.

Homeowner’s Insurance: Coverage for property damage and liability.

HOA Fees: Maintenance fees for properties managed by a Homeowners Association.

Utilities and Maintenance: Routine expenses include electricity, water, gas, repairs, and property maintenance expenses.

HER helps lenders ascertain whether your housing expenses can be comfortably managed based on your income. Here’s how to calculate it:

Calculate Total Monthly Housing Costs: Sum up all the elements of your housing costs as mentioned above.

Determine Gross Monthly Income: This is your contingent income before taxes and other subsidies.

Apply the Formula: Housing Expense Ratio = Total Housing Expenses  X 100

                                                                                             Pretax Income

Housing Expense Ratio provides valuable insights into your financial health:

Below 28%: From most lenders’ perspectives, it is considered ideal. It means you have enough take-home income to cover other necessities and some savings, too.

28% – 36%: This may still be okay depending on your debt-to-income status, but it can also indicate a tight cash position.

Above 36%: This indicates that you are probably overleveraged. This could result in experiencing some form of potential financial strain or struggle to obtain a loan.

The Housing Expense Ratio (HER) is a key criterion lenders use to assess your loan application. A high value has been equated with reduced capacity to save, invest, or meet emergencies. To maintain financial stability, it’s crucial to keep your HER at manageable levels. Here are a few tips to maintain a healthy HER:

Set a Budget: Determine a realistic budget for buying a house based on your income and spending.

Save for a Larger Down Payment: This reduces your home loan charges, loan amount, and monthly installments.

Limit Other Debts: To enhance affordability, keep your overall debt-to-income ratio low.

Negotiate Costs: Explore opportunities to lower expenses, such as negotiating HOA fees or seeking tax benefits where applicable.

Choose Fixed-Rate Loans: Fixed-rate loans provide predictable monthly payments, simplifying your financial planning.

Ideally, your Housing Expense Ratio should not exceed 28% of your gross monthly income. This ensures you have sufficient funds for other needs and savings.

Some home loan processing charges are negotiable, while others are not. It depends on the lender. At times, aspects such as the processing fees can be lowered or completely done away with during promotional periods or under special deals.

A home inspection identifies potential issues like structural damage or faulty wiring, helping you avoid unexpected repair costs.

HOA fees stand for Homeowners Association fees. The association charges these fees to maintain the property and provide amenities for the entire community. These fees are mandatory in properties governed by an HOA.

Some lenders allow the buyer to include the closing costs in the overall processing fee for a home loan. However, this increases the total loan balance and may attract high interest rates.