Shorter tenures imply higher EMIs, which may impact the repayment capacity of borrower and hamper their loan eligibility as well.
By Ratan Chaudhary
Majority of home buyers require a home loan to buy a house. The first hurdle towards approval of loan application is to meet various loan eligibility criterion such as age, income, credit score, location of property, repayment capacity, etc. Adopting the tips mentioned below would assist in enhancing your home loan eligibility.
Pay higher down payment
As per RBI guidelines, home loan lenders can finance up to 75-90% of the property’s value (as LTV ratio). The borrower may have to contribute 10-25% as down payment. However, instead of arranging just the bare minimum down payment, it’s wiser to provide a higher contribution from your own pocket. The higher you contribute as down payment, the lower your LTV ratio would be, which will enhances your loan eligibility.
Opt for joint home loan
Insufficient income, low credit score, higher debt to income ratio, etc., are some of the common reasons behind rejection of home loan applications. Borrowers need to enhance their loan eligibility in order to get their next application approved. Opting for a joint home loan can help boost loan approval chances if the co-applicant has a stable income, strong credit score and satisfactory repayment capacity.
Moreover, adding a co-applicant can even assist in availing higher loan amount. Also, when women are co-applicants or first loan takers, home loan is usually offered at lower interest rates by a majority of lenders.
Choose a longer loan tenure
Borrowers often tend to opt for shorter tenure in order to quickly complete their loan repayment and not stretch it over a long period. However, shorter tenures imply higher EMIs, which may impact the repayment capacity of borrower and hamper their loan eligibility as well. It is prudent to opt for a longer loan tenure. Higher the loan tenure, lower the EMIs, thereby ensuring the EMIs are affordable according to borrower’s income.
Even if you are financially capable of paying higher EMIs through shorter tenure, its wiser to opt for longer tenure and then either make part prepayments or foreclose the loan whenever you have accumulated surplus funds.
Although RBI has mandated banks to not charge prepayment charges for floating rate home loans, fixed rate loans may still attract prepayment charges. So before you make prepayment, make sure the prepayment charges, if any, do not defeat the sole purpose of prepayment, that is overall saving on interest cost.
Reduce your FOIR to 40-50%
Fixed Obligation to Income Ratio (FOIR) is another vital parameter upon which the lenders evaluate customer’s loan application. It is the proportion of your income currently being used for repayment of mandatory expenses such as credit card bills and loan EMIs. Since breaching the 40-50% mark is indicative of major proportion of your income going out for mandatory debt repayments, lenders usually consider the chances of default in future for such borrowers as high. Therefore, to avoid rejection on ground of high FOIR, limit your FOIR to up to 40%-50% to enhance loan approval chances. If it is higher, consider paying off some of your existing debts, preferably the costliest ones such as personal loan or outstanding credit card bills.
Build a strong credit score
While evaluating your home loan application, lenders consider your credit score as one of the key parameters to adjudge your credit worthiness. A strong credit score certainly enhances loan approval chances, since it signifies disciplined handling of finances. Moreover, apart from increasing your loan eligibility, a strong credit score also enables the consumer to avail lower interest rate from the concerned lender.
If you are new to credit or have a low credit score, consider adopting regular and disciplined usage of credit cards to gradually build a strong credit score, and only then apply for a home loan. Additionally, if you are opting for a joint home loan, remember that lenders check the credit score of co-applicant as well, apart from that of the primary borrower. However, multiple home loan applications within a short span of time may damage your credit score.
-The writer is AD & head of Home Loans, Paisabazaar.com