Credit history may not be much relevant for the purpose of pricing or eligibility of home loan amount.
For all those who are looking for a home loan, make sure you have calculated your home loan eligibility before approaching any bank or a housing finance company (HFC). Every HFC or the bank will initially calculate your home loan eligibility based on certain information such as your income, age and the tenure of the home loan.
Is loan based on gross or net income
For a salaried individual, the income details can be had from the salary slips or the Form 16. but, salary slips shows gross income as well as net income post-taxes and provident fund deductions. So, will the lenders consider your gross monthly income or your take-home net pay? No matter, gross or net income is considered, the lender will deduct regular household expenses on estimated basis and any existing EMIs of the borrower to arrive at the final figure. Out of the income left after household expenses and serving of existing EMI’s lenders typically lend loan that will have EMI not exceeding 50 per cent of take home pay.
“Several NBFCs were considering even gross income particularly in case of lower income group, in which case EMI is generally calculated at 40 per cent of gross income. However, realistically, the income net of taxes is more apt particularly for higher income group, as disposable income is relevant for servicing of debt. Generally, the EMI should not exceed 50 per cent of disposable income. EMIs of all existing loans are deducted from the same to ascertain eligibility for the home loan,” says Mukesh Jain Corporate Lawyer, Real Estate Specialist, and Founder- Mukesh Jain & Associates (law firm).
For borrowers in the informal sector, there could be more specific requirements. “For loans to the informal segment, we look at additional documents for salaried individuals such as their bank statements or a salary declaration by their employer. For self-employed, one would consider the ITR, P&L and Balance Sheets and currently even accept GST returns,” says Sanjay Chaturvedi, CEO, ShubhamHousing Finance.
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Home loan eligibility example
Lets us assume, Saurabh working in a private firm has a monthly income of Rs 42,000 but his take-home net pay pay is Rs 38,000 and he has an existing loan of Rs 4,000 a month, the disposable monthly income for him is Rs 34,000. Then, the new loan will be for an amount on which the EMI cannot exceed approximately Rs 17,000 i.e. 50 per cent of Saurabh’s net pay. An EMI of Rs 17,000 at an assumed interest of 9 per cent for 15 years can provide a home loan of about Rs 17 lakh.
Here are three ways to increase home loan eligibility:
1. Increasing eligibility – By increasing tenure
By increasing the tenure of the loan, one can increase the home loan eligibility. In the example above, at the same interest rate, if Saurabh agrees to increase the tenure of the loan from 15 to 20 years, the EMI stays at about Rs 17,000 but the home loan eligibility increases to Rs 19 lakh. Similarly, at same rate of interest, the loan amount increases to Rs 21 lakh for a loan tenure of 25 years. A word of caution: Increasing the tenure, increasing the interest burden if one keeps the loan running till the end of tenure. Therefore, always have a back-up plan to repay the loan as early as possible and not run it till its original tenure.
2. Increasing eligibility – By adding co-applicant
Saurabh in our example above can add a co-applicant to the home loan thus increasing the eligibility amount of the loan. A co-applicant can be his spouse, siblings or even the parents if they too are earning members of the family. “At times when the main applicant’s income is not enough to meet her loan requirements, the co-applicant’s income is taken in to consideration. This increases the eligibility of the main applicant and a higher loan amount is taken in to account,” says Chaturvedi.
3. Increasing eligibility – By opting for low interest rate
Banks and HFCs are providing loans at a varying interest rate and the differential is sizeable among them. Choose a lender that gives you the home loan at the the lowest rate interest. A difference of even 1 per cent can increase eligibility by a lakh.
Does credit profile matter
All lenders will anyhow look at the borrowers credit profile before disbursing the loan. However, it is more to assess the risk and not much with the home loan eligibility. “Credit rating and credit history are relevant for acceptability of the proposal. However, it may not be much relevant for the purpose of pricing or eligibility of amount because this loan is primarily asset backed having adequate realizable value,” says Jain.
Still, few banks do offer a lower interest rate to borrowers with higher Credit Score. With a higher Credit Score, a borrower may persuade the lender to reduce the effective home loan rate. Remember, home loans are MCLR linked and lender add a Mark-Up, which may be negotiated if the Credit Score is good. “These days several fintech companies consider alternative scores for those who lack a traditional credit score. These may include but not limited to their banking habits, bill payment transactions, social profiles etc,” Says Chaturvedi.
By scouting for a effective lower rate of interest, adding a co-applicant and by increasing tenure of the loan, you may increase your home loan eligibility. Be prepared with these before you walk into the lender’s office for a better home loan deal.