Last week, FE Investor touched on the basics of housing finance and what was available in the market to consumers. One of the key points we found all banks highlighting is the amount of loan they are willing to give to a customer. This amount seemed to vary from 85-90% as per most banks on the overall cost of purchase, including stamp duty, registration, etc. While this sounded like a fabulous deal allowing so many people to finally go ahead and buy their dream homes, the reality is a little different. This is as the main word that all these banks use when highlighting the extent of loan they can sanction is ?maximum?.

Therefore, in reality, the maximum one can get is 85% of the loan amount. However, very few people seem to get the maximum as there are multiple factors that go into determining the loan amount. Understanding these factors better and making the most of them should help prospective home loan takers improve their chances of being in the category, which gets the elusive 85% of the overall value.

Rishi Mehra, product manager and co-founder, deal4loans.com told FE, ?The amount of money one can get from the bank depends on the income of the customer and the value of property. So, say he is earning one lakh a month, the maximum he can pay is 40% of his salary as EMI and hence his overall loan amount maybe only between 60-70% of the property value. Now that the markets have eased however, achieving up to an 80% of the loan amount is no longer a major issue. However, certain specific properties, this is certain localities and certain builders only, will get such loan amounts sanctioned. Apart from the top 5-7 construction companies, which will be in the category A for all bankers and in their pre-approved list, the next 100 builders will be split between category A and B for some banks and this may not be the case in other banks. Banks however do not wish to disclose this information publicly due to the highly competitive nature of their industry, and hence only the loan applicant will know if that area where he/she wishes to purchase property is okay or not. Also, this list keeps changing, as certain areas that were considered risky earlier may not be any more.?

A bank executive of a government bank, when asked about the average levels of loan amounts given, mentioned, ? The maximum we can give is 85% but say if you get 80% of the house cost as a loan it is really good, since we average at around 70-75%.?

Current debt levels

Every debt one has ever taken as well as ones credit card records are all compiled, assessed and tracked by credit investigating agencies. In India, the largest one is Cibil and these reports that are prepared by them can be requested for by any bank one may approach for a home loan. Therefore, in order to stand any chance of being in the top bracket of customers eligible for a higher loan amount, one must ensure that their past record is as clean and upright as possible. Even a small thing like credit card defaulting can go a long way in hampering ones chances of getting a decent home loan.

Sriram K, director and head, business banking and asset products, PBC, Deutsche Bank, India explains the factors that determine the loan amount a person can receive for purchasing a house. He feels ?Essentially the factors that go into deciding a loan amount that can be given are, the property, whether it is being purchased as a new flat or a resale flat, the builder, the location and the debt burden ratio of the customer. The debt burden ratio is essential here as no bank wants a customer to be highly leveraged in such a market. This is as it is a proven fact and track records show that when a customer?s equity is there, they seldom default.?

For many a bank, having a customer that is over leveraged is the worst case scenario and if one wishes to improve their credit standing and debt burden and they have multiple loans to clear for instance, it is better to go in for one consolidated loan, which can repay all the existing loans and help keep ones EMI in check.

Also, since the amount of money one can spend towards the loan largely depends on their income and expenditure, lower the expenditure and fewer the EMI?s one has to pay, the better is a chance of getting a decent loan amount.

Property and location

Sriram also adds that as far as builders and property go, ?We have our own list of pre-approved builders. Also most of the banks including us check up properties as well, to see if the legalities are clear, to see if the project has gotten all the necessary clearances from all the regulatory authorities, so and so forth. The location comes into play in two counts. One, is if there is a resale; this is as one has to keep in mind that this is not a consumer role of 2-3 years but a 15-year role. On a 15-year role, some locations can go up and some can go down, so one needs to be quite careful. This is even more from a customer?s point of view than a bank?s point of view. This is as there could be times when the customer may want to sell his flat for whatever reason, not necessarily a default or a crisis. Therefore, one needs to consider this, match it and say this is the best we can do as a bank. This is as especially in India, a home loan still lasts eight to nine years and hence it is important for location to also come into play. If it is a place like let?s say Peddar Road or Bandra in Mumbai, I can still safely say in the next 5-10 years irrespective of the development, the prices will not have a catastrophe or crash. Property values will not crash down unless it happens across the board. Some areas may crash further if there is a real crisis and this is the point which comes into play. One will also have to consider what is the supply potential of property in that area or development in that area.?

The location of ones new home is as essential to the banker financing it as it is to the customer buying it. This is as simply speaking under construction property for instance is always considered risky for so many times a project stops mid-way or gets endlessly delayed. The customer prefers buying early and before construction property since the cost is a lot less. However, banks seldom prefer taking on the additional risk. This can seriously hamper ones loan amount, unless the builder is extremely reputed and has a good and proven track record. Legalities are another issue that banks try to avoid especially in India, as the settlement of a dispute could take a lifetime and end up costing a lot more than the bad debts written off. India, being a developing nation, has the advantage that most property should rise up in value. However, there is no such universal rule and hence the more reputed and trusted the builder, the easier it is for one to get a loan.

Each area too has their own property rate cycles and in developing areas the prices can either rise steeply over say the 15-year loan tenure, in which case, a bank is more comfortable covering more of the cost, or it could remain stagnant, maybe fall or be in a place where one cannot be sure. Hence, choosing a good locality that is there to stay and which will get better developed and always is in demand for staying is also essential to get a good loan amount from the bank.

Income, economy and finer points

As far as a clearer definition or formulae to the matrix of things that play a role in determining the loan amount, Sriram felt, ?In India, the matrix and scoring model to assign say a 20% or 30% weightage to any of the factors, be it debt burden or building location or income even, is not possible, as such scoring models are only in the experimental stages in mortgage in India. This is still very subjective out here and therefore the mortgage market is still more an art coupled with science than a pure science. The formulae for calculations are fine but the subjectivity that comes in certain norms needs to be laxed or a customer comes back to us to say ask for a little more.

However, one cannot say that I will give 20% weightage to the debt burden ratio as an absolute. Though, one should keep in mind, the two key factors in determining the loan are the debt burden ratio and the loan-to-property value.?

With income, things are relatively easier, as the maximum amount of EMI a company is comfortable taking from a customer is up to 40% of their income. However, since most people expect their income to keep increasing, especially over 15 years, the 40% cap is not very appreciated.

However, the banking world being the way it is, more conservative these days after the last credit crunch and housing finance crisis that led to the global economic jolt, looks unlikely to lax these norms any time soon. Hence, while buying a house young is always a good ideal, maybe waiting for a while till one?s salary can get them a better deal and house, is not that bad an idea.

The economic conditions and environment also depend on the loan amount one can get. Hence, applying for a home loan when the monetary policies are tightening is foolhardy since one will always get less than they can as such.

Mehra also adds, ?A builder?s relationship with the bank also plays a vital role and having a good brand name and standing amongst the bankers will help people wanting to buy a particular builder?s flat get a loan more easily. The converse can also happen though. A customer?s credit history is another area which plays a major role.?

Another key point which determines a bankers ease at giving out a home loan and the amount as per Sriram is, ?The customer?s purpose for buying the flat is very essential these days. Banks are more understanding and adjusting towards customers who want a home loan to buy a flat and live, than when it is customers who are buying their second or third flat as an investment. The main reason for this is that banks do not prefer giving out loans for speculative purposes and hence a person who wants a loan to live in a flat may get a higher loan amount then someone who is investing in it as he/she feels its price will rise,?

Keeping these above points in mind while looking for a house to buy and before applying for ones loan is probably a good idea, for while they all say first find a house and then think of the loan, planning one step ahead never hurt anybody, and if it improves your chances of getting a better loan amount, why not.