Understanding the Concept of FOIR

About a decade or two back, banks were concentrating on the large corporate loans for their business. However, many of the large corporates have failed thereby resulting in a colossal NPA (Non-Performing Assets) situation for the banks. It has forced the banks to focus on the retail sector. Therefore, you see a spurt in the retail finance portfolio such as Home Loans, Personal Loans, and so on. Banks have designed attractive products for the retail sector. They have also diluted the eligibility norms to cater to a broader clientele. It includes the self-employed professionals and non-professionals.

One of the critical factors that affect the Home Loan eligibility of an individual is the Fixed Obligations to Income Ratio (FOIR).

What is FOIR and how does it affect the home loan eligibility?

Fixed Obligations to Income Ratio (FOIR)

FOIR is a popular parameter that banks use to determine the loan eligibility of the applicant. It is not a new concept as the banks used the term ‘net take-home pay’ to denote a similar qualifying ratio. Under the FOIR concept, the bank considers the instalments of all loans availed by the applicant and still due. It also accounts for the Equated Monthly Instalment (EMI) of the prospective loan under consideration.

FOIR accounts for all the fixed obligations that a borrower is likely to meet regularly on a monthly basis. It includes the loan instalments outside the purview of the salary, Credit Card payments of a fixed nature (EMIs), and so on. It does not include the statutory deductions like Provident Fund, Profession tax, insurance, recurring deposits, and so on. We consider the loan instalments that the applicant makes directly from the savings account.

Standard FOIR

Banks have different FOIR for different loans. It can be 50% for a Personal Loan whereas the requirement can be 35% to 40% for a Home Loan. Usually, the banks fix up the FOIR as 50%. It also depends on the income earning capacity of the applicant. You cannot equate a person earning 30,000 per month with a person earning 2,00,000 a month. Banks are flexible enough in this regard by tweaking the FOIR accordingly.

Reverse Calculation

The principal objective of arriving at the FOIR is that it enables the bank to do a reverse calculation to determine the eligibility for a loan.

This example should make things clear:

Mr. A is earning an income of 90,000 per month. He is servicing a Personal Loan instalment of 8,000 and a car loan instalment of 6,000 directly from the bank account. Let us Calculate the FOIR.

• 50% of 90,000 = 45,000
• Car loan EMI = 6,000
• Personal Loan EMI = 8,000
• The disposable income for this loan is 31,000
• Therefore the bank can fix up the loan eligibility in such a manner that the EMI does not exceed 31,000

What is the Takeaway from This Example?

The example indicates that the applicant is eligible for a Home Loan amount that would entail a repayment up to 31,000. Using the Home Loan Calculator, you can do the reverse calculation easily. It will also enable you to compare various banks and settle for the one that offers the maximum loan eligibility.

One way of increasing the loan eligibility is to opt for a longer tenure. Alternatively, you should try to close your Personal Loan or car loan whereby you increase your capacity to repay. You can also explore innovative options like the step-up EMI concept offered by specific banks in the Home Loan sector. Under this concept, the EMI is low for the first couple of years. Subsequently, the EMI increases in the future as your income level increases.

How Does the FOIR Affect Your Loan Eligibility?

The lower the FOIR, the higher are your chances of approval. When you have a low FOIR, it entails that you have fewer liabilities. It automatically increases your disposable income thereby enhancing your repaying capacity.

The concept of FOIR has enabled the self-employed professional and non-professionals to become eligible for various loans from banks and Non-Banking Financial Companies (NBFCs). The concept is more beneficial to this class of borrowers because these applicants do not have a consistent income. Banks were hitherto reluctant to finance this category of borrowers because of the variation in the income levels.

The Role of MyMoneyMantra

MyMoneyMantra, an online loan services provider, can help calculate the FOIR for the applicants and guide them towards the banks that offer higher chances of approval of loans. You can use the services of the EMI calculators at this website to determine your future EMI and Calculate Your Home loan Eligibility.