5-20-30-40 Checklist for Home Loans
The 5-20-30-40 home loan rule is a smart budgeting checklist that helps first-time buyers make informed financial decisions. It outlines the ideal percentages of savings, down payment, EMI limits, and maximum income allocation for home ownership.
Why it matters: This checklist gives you a realistic view of how much you can afford, ensuring you avoid financial stress while repaying your home loan.
The 5-20-30-40 Rule at a Glance
5%
Emergency Fund
20%
Down Payment
30%
EMI Limit
40%
Max Loan Coverage
1. 5% – Emergency Fund
Before you take any loan, ensure you have at least 5% of your property value saved as an emergency fund. This helps cover initial fees like legal, processing, and unforeseen costs after moving in.
2. 20% – Down Payment
Most banks in India fund up to 80% of the property value. That means you'll need to make a 20% down payment from your own funds. A higher down payment reduces your EMI and overall interest burden.
3. 30% – EMI Limit
Your monthly EMI should ideally not exceed 30% of your monthly income. Keeping EMIs within this range ensures you have enough cash flow for other expenses like food, children's education, and savings.
4. 40% – Max Loan Coverage of Monthly Income
Most lenders prefer that your total loan obligations (including EMIs from other loans) do not exceed 40% of your gross monthly income. Exceeding this limit increases the risk of default and may reduce your loan eligibility.
Conclusion
Use the 5-20-30-40 checklist as a thumb rule before applying for a home loan. It promotes financial discipline and helps ensure that home ownership is a dream you can afford — not a burden you carry. Always consult with your loan advisor to customize the numbers to your specific profile and needs.
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Use our free home loan calculator to check if you meet the 5-20-30-40 rule criteria.
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