Does My Home Loan Eligibility Depend on My Income and Repayment History?

More often than not, a Home Loan involves a sizeable amount of money, which makes it mandatory for banks or lenders to investigate whether or not you will be able to repay the loan amount. Since there is no accurate measure to inspect one’s intentions or their ability to repay the loan, banks largely depend on two imperative factors:

• Income of the Loan Applicant
• Repayment History

Let us understand how each of these factors will play a vital role in your home loan eligibility:

Income

While the income of an individual is indicated via his salary slips, his income tax statements or the monthly invoices generated (in case of professionals), there is no full-proof way to determine the expenses, and thus calculate the net income. It is for this very reason that a concept called Fixed Obligations to Income Ratio (FOIR) was introduced. Most banks rely on calculations for the FOIR to gauge the repayment capacity of the loan applicant. As a rule of thumb, the lenders restrict FOIR to a maximum of 40-50% of the monthly income.

Here, it is evident that the higher the income, the higher can be the EMI (Equated Monthly Instalment), owing to the disposable amount of income available. In a vast majority of cases, your ideal Home Loan amount will be calculated based on 50% of your monthly income. Here, your liabilities will be deducted from the remaining amount, which will then be divided by the per-lakh EMI.

For instance, if you earn 50,000 per month and have no underlying financial liability; then the FOIR calculation will be as follows –

50% of 50,000 – 0/932 x 1,00,000

Where 932 is the EMI, you will pay per lakh on your loan considering a 20-year tenure along with a 9.5% interest rate. Hence, the maximum amount of loan that you will be eligible for would be 26.80 Lakhs!

On the other hand, if your income is the same – 50,000, but you are servicing a car loan of 7,500 per month, the calculation would go as under –

50% of 50,000 – 7,500/932 x 1,00,000

Here, you will only be eligible for a loan amount of 18.77 Lakhs.

In this case, it will prove to be in your interest to pay off your existing car loan, and only then apply for a Home Loan.

Repayment History

Banks and lenders prefer to approve loans of those individuals who display consistent financial discipline. A concise way to check whether or not you have reasonable financial health is by taking a quick look at your credit score. Your credit score indicates whether or not have you been paying your EMIs on time, and how much you depend on your Credit Card to meet your regular expenses. While the high use of Credit Card wouldn’t be a problem, but failure to repay the outstanding bills in full can be. Moreover, if you use your card regularly for payments exceeding 30% of your credit limit, it will reflect poorly on your credit score.

While 800 is the ideal score for an individual, a score ranging from 650 to 750 is widely acceptable. However, if your score is lower than that, you may either not be considered eligible for a loan at all or may be approved albeit at exceedingly high rates of interest. Here, you must remember that a good credit score doesn’t necessarily mean a lower rate of interest, but it will make sure that you get quick approval on your loan application. After all, your credit score is one of the most dependable sources of judging your repayment history.

Apart from your income, and credit history, there are two more factors which play a pivotal role in determining your eligibility for a Home Loan. These include your age and the income of your spouse. Lenders consider the age group of 30-50 to be ideal for Home Loan applicants, as this is usually the time when individuals enjoy a steady source of income with ample prospects of growth. As per this belief, people who are 60 years of age or above are deemed to be ineligible for a credit as significant as a Home Loan.

If your spouse is also earning, the lender will usually calculate your ability to repay the loan by both, your income as well as that of your spouse. This will help you take a higher credit, at the same interest rate for the same tenure. Now, isn’t that a great news!  Now that you are aware of primary factors that determine your eligibility for a Home Loan, why don’t you start looking for a lender that can help you with the best Home Loan offers? And while you are at it, don’t forget to look up the Current Home Loan Interest Rates, so that you can negotiate for a better deal!