Here’s how banks determine your home loan eligibility

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Updated: September 9, 2016 7:34:38 AM

Everything from your income and recent financial transaction history to your debt repayment potential plays a part in determining how big a loan is allotted to you.

Home insuranceIf you are a salaried individual, banks will check your financial credentials including your credit score. The home loan amount is calculated using the formula: 50% of monthly income minus other liabilities if any, divided by the per-lakh EMI.

For home loan, banks have their ways to evaluate your creditworthiness through various parameters. Everything from your income and recent financial transaction history to your debt repayment potential plays a part in determining how big a loan is allotted to you.

Salaried with no liabilities

If you are a salaried individual, banks will check your financial credentials including your credit score. The home loan amount is calculated using the formula: 50% of monthly income minus other liabilities if any, divided by the per-lakh EMI.

Illustration: If you are earning R42,000 per month and have no financial liability, the maximum home loan you can expect to get for a 20-year tenure at 9.5% interest rate would be (50% x 42,000)/932 where (R932 is EMI per lakh for a home loan for 20 years at 9.5%), which comes to R22.53 lakh.

Salaried with liabilities

Even if you have a higher salary than in the first example but have financial obligations, your loan eligibility may reduce. If you are earning R75,000 per month but are servicing debt such as a car loan or a personal loan, your eligibility will depend on your income-to-debt ratio.

Illustration: Suppose your financial obligations are R25,000. With a salary of R75,000 your FOIR (Fixed Obligations to Income Ratio) comes to 33.4%. Most banks fix the FOIR at 50%. This means that with existing liabilities, you will be eligible for a loan amount of R13.35 lakh. This is calculated as [(50% x fixed income) – (fixed obligation) / 932]

However, if you repay all your debt and then apply for the loan, the maximum the bank would offer you as home loan would be R40 lakh by computing as per the formula in the first example.

Self-employed

Suppose you file an annual return of R5 lakh from your own business with no financial obligations and apply for a home loan. The bank will check the average of your income tax returns in the last three years to arrive at your income.

Illustration: If your monthly income is R50,000. Now if you apply for a home loan for 20 years at 9.5% interest rate, your eligibility will be calculated as (R50,000 x 50%)/932 (where R932 is the EMI per lakh for a home loan for 20 years at 9.5%), which comes to R26.82 lakh.

Retired

If you are retired and not actively working, it may be difficult to get a home loan. Under special consideration, some banks offer loans to retirees between the ages of 60 and 70 years. The FOIR for home loans is maintained at a maximum cap of 40% to avoid defaults.

Illustration: If you are 65 years old with a pension income of R1 lakh, the maximum home loan you can get is (R1 lakh x 40%)/2100 (where 2,100 is the EMI per lakh for a loan for five years at 9.5%), coming to R19.04 lakh.

The writer is CEO, BankBazaar.com

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