Unlocking financial literacy tips for buying, maintaining, and selling homeownership

Introduction 

Did you know, as per the Reserve Bank of India, 59% of Indians actively plan a monthly household budget? This simple fact not only shows your affinity for financial planning but also highlights the importance of basic financial literacy for Indian households. This becomes even more important when it comes to homeownership. 

As you would know, embarking on the path of homeownership is a significant milestone for Indian families, filled with excitement and critical decision-making. Whether you’re dreaming of your ideal home, maintaining your current residence, or thinking of a property sale, each step requires careful consideration.

This blog will guide you through financial literacy tips for home buying, maintaining, and selling property, to make homeownership an easily accessible concept for you. Think of it as a roadmap to take your homeownership aspirations into achievable goals through financial literacy. Let’s dive into financial literacy and homeownership.

Need for financial literacy for homeownership

Going on to purchase your first home is an exciting venture, and as the saying goes, with great investment comes great responsibility. Your home purchase is likely to be the most substantial financial commitment you make, emphasising the critical importance of financial literacy in this process.

Homeownership, a cherished milestone for many, offers not only a sense of accomplishment and security but also serves as a tool for wealth building. Here’s where financial literacy unlocks the door to long-term, financial well-being for homeowners. 

Financial literacy is the toolkit that equips you with the skills and knowledge to make sound financial decisions. In the context of homeownership education, this involves a comprehensive grasp of topics including- 

1. Budgeting
2. Saving
3. Investments
4. Debt Management 
5. Tracking Spending 
6. Retirement Planning 

Financial education empowers you to achieve homeownership while maintaining financial health, ensuring a prosperous future instead of encountering unforeseen challenges and financial strain.

Now let’s move on to understand financial literacy in terms of real estate buying, maintaining and selling property. 

Financial literacy for homebuyers 

Homeownership starts by possessing a house and from here’s where financial literacy comes into play. Let’s dive into key property ownership tips that you need to know while buying your first house. 

Budgeting

When buying a house, budgeting becomes your financial compass. It’s not just about saving for a down payment; it involves creating a plan for your future EMIs and paperwork costs. 

Implementing the 28% rule where your mortgage doesn’t exceed 28% of your gross income, can help you practically to plan better. Budgeting for homeownership also ensures that your savings and investments serve as a safety net you can tap into during challenging times. You need to have home investment knowledge to make a decision. 

Check financial standing

Before stepping into homeownership, a thorough self-assessment of your financial health is essential. Financial literacy empowers you to scrutinise income, expenses, debt, and savings. It helps you realistically evaluate how much house you can afford, preventing potential financial strains. 

This crucial step ensures that your homeownership journey is not just a dream but a well-calculated financial decision. Check housing market trends and decide what type of house you wish to purchase and where you stand financially. 

Clear your debts

Before taking the plunge into homeownership, consider paying down existing debt. Lenders scrutinise your debt-to-income ratio when deciding mortgage terms. Reducing your debt not only improves your mortgage terms but also frees up more money for home-buying expenses. 

It’s a strategic move that not only enhances your financial standing but can help you in wealth building through real estate ownership.

Check your credit history and build your credit score

Your credit history speaks volumes to lenders. A favourable credit history and a good credit score are your allies in securing the best mortgage terms. With lenders often considering 650 as the minimum CIBIL Score for a home loan, building and maintaining good credit becomes pivotal. 

Also read: Credit history: What is it and why it matters?

Mortgage planning

Understanding the variety of mortgage options, from conventional to government-insured loans, empowers you to make informed choices aligned with your financial goals. Common home loan options include:

1. Basic home loan
2. Construction loan
3. Extension/improvement loan
4. Government schemes like Pradhan Mantri Awas Yojana (PMAY)

Financial Literacy for Maintaining House

After a successful acquisition, it’s time to maintain and overlook the overhead costs of owning a property. Now let’s understand the financial concepts important for maintaining a house. 

Maintenance costs

To ensure your home remains a comfortable haven, it’s important to set aside money for ongoing maintenance. Financial literacy guides you to anticipate and budget for expected and unexpected expenses. 

An easy way to calculate maintenance rate is through per sq ft. For instance, if you set the rate at Rs 3 per sq ft and your space is 800 sq ft, your maintenance cost would be Rs 2,400. These property maintenance tips help you prevent debt and financial stress if your house needs repairs. 

Debt management

You can take control of your debt through financial planning and budgeting. Using tools like budget calculators and financial management apps can help you to create a debt plan. You can also negotiate with creditors to lower your payments or interest rates. 

Considering credit counselling for a structured debt management plan (DMP) is another opti on that lasts three to five years, with monthly concessions like lower interest rates or reduced payments to improve your debt repayment. 

Also read:Want to be debt-free soon? Here are some strategies to manage your debts! 

Managing property taxes and home insurance

As a homeowner, it’s essential to navigate ongoing expenses like property taxes and home insurance by including them in your household budget. This is a part of real estate financing. 

While property tax is a mandatory contribution to the local government, home insurance is a voluntary shield against unexpected events.

Property tax assessments play a role in determining home insurance premiums. Some states offer homestead exemptions (exemption from property taxes on homes), reducing property taxes for those who make the residence their primary home.

Another savvy approach involves selecting mortgage lenders with escrow services. They collect a portion of property taxes with your monthly mortgage payment, managing the payments on your behalf. You can also explore other options like tax deductions for mortgage interest and specific home improvements. This helps you make smart homeownership decisions.

Build an emergency fund

An emergency fund is a vital safety net designed for unexpected situations. Financial experts suggest stashing away three to six months’ worth of living expenses in this fund. For instance, if your monthly income is Rs. 70,000 and your living expenses amount to around Rs. 30,000, aim for an emergency fund of approximately Rs. 2,10,000. 

This fund acts as a financial cushion during challenging times like job loss or emergencies. 

Financial literacy for selling a house

Keeping up a house can be a financial challenge, but selling it doesn’t always guarantee a boost to your bank balance. Before putting your house on the market, careful considerations and financial planning are crucial to saving your bank balance. Let us explore them below. 

Home value/equity

Financial literacy empowers you to comprehend the concept of home equity— the fair market value of your home minus the outstanding mortgage balance. With every mortgage payment, equity grows, representing the cash you’ll receive when selling your home. 

Even a sizable down payment while purchasing the home, avoiding mortgage insurance, and enhancing the portion of each monthly payment can supercharge your equity growth.

MOU/NOC for India

Navigating the sale process involves understanding legal documents like the No Objection Certificate (NOC) and Memorandum of Understanding (MOU). Obtaining an NOC to certify no objections to the property transfer, and creating an MOU for a mutual understanding with the buyer, is necessary to avoid property transfer issues. 

Clear dues

Before listing your property, clear all outstanding dues, including utility bills, society maintenance, and property taxes. Investigate all transfer charges and processes applicable to your property to ensure a smooth transaction.

Capital gains tax

When selling a property in India, the profits, termed Capital Gains, are subject to taxation. Capital gains are calculated by subtracting the acquisition and improvement costs from the sale value. The tax rate depends on whether the gain is short-term or long-term. 

To avoid losing all your money by paying taxes, you can avail of exemptions on Capital Gains Tax on Property through reinvestment, falling under Sections 54, 54B, 54F, and 54EC. 

There are different ways to avail tax exemption on your capital gains. 

1. Section 54 of the Income Tax Act offers tax exemptions on reinvested capital gains from property sales. Conditions include reinvestment in housing properties or investment in construction projects. 
2. Section 54B applies to capital gains from the sale of agricultural land outside rural areas. 
3. Section 54EC allows tax exemptions through reinvestment in NHAI or REC bonds. 
4. Section 54F grants exemptions for reinvesting long-term capital gains excluding housing property.

Financial literacy can help you here and make you tax-savvy.

Conclusion 

Real estate investment literacy is all about a comprehensive understanding of budgeting, debt management, property taxes, insurance, emergency funds, and the intricacies of selling property in a dynamic market.

In the end, this journey is not just about bricks and mortar; it’s a transformative experience where financial wisdom turns aspirations into reality. Learn how to manage your finances with StockGro blogs.