# How Much House Can I Afford? – Calculate Home Affordability

Buying a home is a dream of every individual. But before we go house hunting we must first analyze our financial situation. The first step in the process of home ownership is to answer the question “How much house can I afford?” or in other words you need to calculate your Home Affordability. In this article, I will show you how to calculate maximum value of house that you can buy and additional costs that you should not ignore.

## Cost of Home Ownership

When you buy a house, you should know that there are other costs involved in home ownership. Please do not ignore these extra costs because they may create cash crunch at the last moment. Here is a list of major costs that are involved in home ownership:

1. Purchase Price – The price of house as agreed between Buyer & Seller.
2. Registration & Stamp Duty Charges – To be paid to state government for registering the Sale Deed of your house. It can vary from 4-10% of purchase price, depending on type of ownership (male/ female/ joint) and the state in which the property is located.
3. Brokerage – The fee charged by Real Estate agent for deal making. Depending on location, it varies from 0.5% – 2% of purchase price.
4. Loan Processing Fee – The fee charged by the Bank to cover their administrative expenses while processing your loan. It is generally charged @ 0.25-0.5% of loan amount.
5. RWA Membership Fees – In case, you are buying a house in a gated community, many RWAs (Residents’ Welfare Association) charge a one-time membership fee. There is no thumb rule but generally RWA of an Apartment may charge a lump sum amount of Rs. 20,000 – Rs. 2,00,000 for a flat. Many people do not foresee this cost and it may come as a surprise at the last moment.
6. Renovation Costs – These costs can vary by a wide margin depending on the condition of house and your personal taste. In case you buy a Raw House, you will have to spend much more in renovating the house than if you buy a semi-furnished one. You must carefully assess the situation of the house before making the final offer to the seller.

Out of these costs Banks will finance upto 80% of the Basic Purchase Price of the house and may include Registration & Stamp Duty charges in some cases.

Now coming back to our question “How much house can I afford”, let us explain with an example.

## An Example

Rajiv, a tax consultant in Delhi, has a gross monthly income of Rs. 1 lakh. His current EMI liability is Rs. 15,000 that he is paying every month for his car loan. Now, he is looking to purchase a house in Delhi taking a home loan with a maximum tenure of 20 years. Using Home Loan Eligibility Calculator, we can easily calculate the maximum Loan amount that he is eligible to take. He is eligible to take a home loan amount of Rs. 38,75,262. The loan processing fee @0.5% will be Rs. 19,000 approx. Let’s say, including loan processing fee, Rajiv is eligible for a home loan of Rs. 36 lakhs.

Considering 20% Down payment and using our Home Loan Eligibility and Affordability Calculator, we can calculate that  maximum Purchase Price that Rajiv can afford is Rs. 48,44,077 (say Rs. 48 lakhs). This means that Rajiv can fund his house with Rs. 12 lakhs of Down payment and balance Rs. 36 lakhs using home loan.

Now, as said earlier, Purchase Price is only the Basic Cost of Home Ownership. Let us calculate other costs for him.

Registration and Stamp Duty charges @ 6% = Rs. 2.9 lakhs (say. Rs. 3 lakhs).

Brokerage @ 1% = Rs. 50,000 (approx.)

RWA membership fees (lump sum) = Rs. 50,000

Renovation Costs @ 10% = Rs. 5 lakhs (approx.)

By adding all costs, the total cost of home ownership for Rajiv will be Rs. 57 lakhs.

At the outset any person in the place of Rajiv would think that I can easily afford a house of Rs. 48 lakhs. But in reality, without careful planning, arranging those extra Rs. 9 lakhs at a short notice can sometimes become very difficult. Out of Rs. 57 lakhs, Rajiv will get a home loan of only Rs. 36 lakhs and he should have Rs. 21 lakhs in his Bank account for Down payment and additional costs.

Using the above example, we can deduce a thumb rule.

## Thumb Rule

Cost of Home Ownership is 20% more than the Purchase Price of the house. The extra 20% is to take care of transaction costs (about 10%) and renovation costs (about 10%). If, however, the house is completely renovated and ready to move-in, you can add only 10% transaction cost to the purchase price to arrive at the cost of home ownership.

## How much House can I afford? – A Simple Way

1. Calculate Purchase Price of House – First calculate Purchase Price of the house. You can do that by using our Home Loan Eligibility Calculator.
2. Calculate Extra Costs – Add to the purchase price, 10% towards transaction costs and 10% towards renovation costs (if applicable).
3. Plan for Extra Costs – Plan to source additional funds to take care of transaction and renovation costs.

Hope you can easily calculate your home affordability now and plan your finances better.

### Other Useful Calculators:

• EMI Calculator – Calculate EMI for any loan amount, interest rate and tenure. Also check out Smart Tricks to save your EMI.

### Over to You

We need your love! Like, Share and Rate this article on “How much house can I afford?“, if you found it useful.

# Become a Smart Real Estate Investor! Get latest Real Estate insights, tips & tricks straight to your inbox.

Mukul Malik is the founder and editor of AssetYogi.com. He is passionate about Real Estate, Personal Finance, and Digital Marketing. He believes that Asset Creation is Wealth Creation in Auto Mode and likes to help others create Real Assets with knowledge and research. Connect with him on Google+.

1. Good read. Thank you for explaining the details. Lets say I want to buy a house after 3 years. I am trying to figure out how much should I save for the down payment. And how would the price/sqft will rise in Tier II city like Visakhapatnam or a Tier I city like Hyderabad. Because that will ultimately affect the calculations.

• Hi Rakesh

You can get home loan upto 80% of the house cost, so you would need minimum of 20% for the downpayment.
Assuming the house costs Rs. 30 lakhs today, you would need Rs. 6 lakhs for the downpayment.

In my view, over the next few years, property prices in India will not rise as fast as they have in the last 12-13 years. They may increase at the rate of inflation at the max.

So, I would say, in the above example, you would be safe if you save Rs. 6 lakhs plus another 6-8% inflation per annum over next 3 years.

I would suggest that you also read:
http://assetyogi.com/down-payment-for-home-loan/

Hope it helps!

2. Amazing article again by Asset yogi. Thanks

## Become Smart at Real Estate!

Be the first one to get latest Real Estate Insights, Tips & Tricks straight to your email.

Your information is safe with us