Understanding home loan eligibilityBuying your own home is probably one of the most sought-after dreams in today’s times. However, this is one dream that seems hard to fulfill given the ever-rising property prices. Your hard-earned money proves insufficient to foot the expenses of owning a decent property. Therefore, you apply for a home loan. If you are planning to take a home loan, it’s important to understand all about it, since it’s a commitment that takes a long time to repay the whole amount. But the amount of home loan you're eligible for varies from one loan provider to another, and each provider will have its own eligibility criteria. Let's understand the home loan eligibility parameters.
Home loan eligibility criteriaEligibility criteria for a home loan may differ from lender to lender, but the general consensus is that loan approvals are mainly dependent on your age, income, credit score and history, repayment capacity, and property value. In general, one must meet the following conditions to be apply for a home loan:
- Age: Banks require the applicant to be of a minimum age of 18 years and not more than 70 years of age. Younger borrowers can easily get a loan for a longer tenure, while borrowers in late 40s or 50s, you may find it difficult to avail a long tenure loan as they approach retirement.
- Income: You must be earning a regular income as it reflects your ability to repay your EMIs on time. You could be a salaried employee, self-employed professional such as a doctor or a businessman running your own business or company. As long as you have documents to show a steady income, banks will approve your home loan application subject to the condition that you meet other eligibility conditions.
- Loan tenure: Maximum loan tenure is up to 30 years. However, some banks restrict loan tenure to 25 years. Opting for a longer loan tenure means a lower EMI, which in turn increases your ability to service a higher loan amount and hence, your loan amount eligibility. However, one should bear in mind that longer tenure entails paying a higher amount of interest over the loan tenure.
- Fixed Obligations to Income Ratio (FOIR): It is an important parameter which banks use to determine your home loan eligibility. FOIR takes into account all the fixed obligations that a borrower is supposed to pay on a monthly basis including rental income, existing EMIs and estimated EMI on the proposed loan. This requires it to be limited to 50% of your net take-home monthly income. Alternatively, banks assume that you need around 50% of your income for living, with the rest available to service your EMIs. Before issuing a loan, banks also check your credit reports to get details of all other existing loan obligations.
- Credit score: Good credit rating will increase the chance of getting the loan with more flexibility on loan amount, EMI, tenure and interest rates. Default payment records, fraudulent tracks, and outstanding loan, will reflect negatively on the applicant, this could lead to bank’s cancelling the loan request or will charge high rate of interest. A minimum credit score of 650 and above is considered suitable while applying for a home loan in India. You run a high risk of rejection on loan application with a credit score of below 650.
- Company, employment history: Income history and job continuity of 3 years and more is required (except for some professionals). If the applicant is working with an employer who has high reputation and impressive turnover, the credibility of the applicant will respectively increase. Being a part of reputed and high turnover companies is an asset for the applicant especially when it comes to applying for home loan. Company or sector in which you work should not be black listed by bank.
- Loan-to-value (LTV): Banks also limit the value of loan up to 75- 90% of the property. Hence, banks calculate your home loan eligibility on the basis of both FOIR and LTV and calculate your loan amount eligibility at the lower of the two.
- Property approval & validation: The builder and property against which you are taking loan should be approved by banks. For property being bought in resale, banks get a valuation report from an independent valuer. For higher ticket size loans (Rs1cr and above), banks may get valuation reports from two independent valuers and take an average of the two to arrive at value for the purpose of calculating maximum loan eligibility based on LTV. For arriving at property value of under construction property being bought from a builder, most banks include basic cost, development charges, preferred location charges and cost of parking in cost but do not include heads like stamp duty, club charges, registration charges, maintenance charges, security deposit, etc.
- Opt for a joint loan: If your spouse or parents are earning, then it is a good idea to do joint application for a home a loan. This increases the home loan eligibility dramatically. This also means that the liability of repaying the home loan is left to both. Suppose, your monthly income is Rs30,000/month and the loan amount you are eligible for is Rs15 lakh. If you add your spouse as co-applicant and their earning is Rs20,000/month, this can increase your eligibility to Rs25 lakh. So, it is advised to add a co-applicant, wherever possible, to improve your eligibility.
- Clear your existing loans: Suppose you have credit card loans or personal loans that you took a couple of years ago. In this case, your eligibility decreases as your FOIR is calculated on your income left after paying obligations. This is clearly a red flag when a lender is trying to assess your eligibility. Clear these loans, close these accounts, and ensure it is updated in your CIBIL credit score.
- Variable pay: Make sure you keep a record of how much variable pay or perks you earn as part of your job. This record will help your potential lenders to consider while calculating your eligibility.
- Increase the tenure of your loan: Apply for a tenure which is maximum to your age. If you apply for housing loan for 30 years, it will enhance your eligibility as the EMIs go down. In this case, however, you will end up paying more interest by the end of the tenure. In contrast, if you take loan for 10 years tenure, you might be eligible for a lower loan amount.
- Consider step-up loans: Step-up home loans are home loans where the borrower can get a higher amount as home loan as compared to his eligibility. Banks sanction higher home loan than eligibility based on an assumption that the borrower’s salary will increase a certain percentage annually in the future. The step-up home loans have no standard procedure and are based upon the respective policies of different banks. In step-up loans, lending institutions give different repayment options to its borrowers, wherein the borrower can chose to pay a lower EMI in the first half tenure of the Home Loan and then step-up the EMIs in the second half or they can chose to pay just interest amount in the initial years and make repayment of principal later.
- Fixed rate home loans: This type of loan involves repayment of home loans in fixed equal installments over the entire period of the loan. In this case, the interest rate doesn't change with market fluctuations. During the early part of the loan tenure, majority of monthly payments are used to service the interest and the principal is served in the later parts of the tenure.
- Floating rate home loan: This loan implies that the rate of interest varies with market conditions. Home loans on floating interest rates are tied to a base rate plus a floating element thereof. So, if the base rate varies, the floating interest rate also varies.
- Combination loans: These loans offer a part of the loan at a fixed rate of interest and part at an adjustable or floating rate of interest.