Your Proven Home Loan Eligibility Checklist

Before you zero in on a property of your choice, you must first determine whether you’re eligible for a Home Loan (should you decide to apply for one), and the loan amount you will be eligible for. After all, you wouldn’t want to choose a property you cannot afford, right?

You must also bear in mind that there are several other factors besides your income which will be taken into account when deciding the loan amount you are eligible for.

Additional Reading: Your Guide To The Home Loan Application Process

Ready to know more about your Home Loan eligibility? Read on.

The Calculations

While you could certainly make use of a Home Loan eligibility calculator, you can also calculate your Home Loan eligibility on your own. It really is quite simple!

The first component you need to take into consideration when calculating your eligibility is, of course, your income. Most lenders use your monthly income specifically for this purpose. Lenders then go through your bank statements to determine the kind of expenses you incur every month and what your liabilities are.

All your other payments such as Personal Loan and Car Loan repayments will also be included. This means that the more loans you have, the lower your Home Loan eligibility will be. Typically, lenders subtract your liabilities from your income to determine the quantum of loan you are eligible for.

Additional Reading: Home Loan Sanction Letter And Its Importance

Let’s look at some examples to understand this better.

If your monthly income is Rs. 40,000, and your monthly expenses amount to Rs. 22,000, you could afford to pay Rs. 18,000 towards your Home Loan EMI. This is assuming you have no other loans. Now, you can use this to calculate your Home Loan eligibility. Here’s how you can go about it.

At a Home Loan interest rate of 9% for example, the Home Loan EMI for a Rs. 1 lakh, 20-year loan will be Rs. 900. You can use the simple formula below to calculate your eligibility.

Home Loan eligibility per lakh =Income available / Loan EMI per lakh.

Using the example mentioned above, this works out to Rs. 18,000 / 900 x 1 lakh =Rs. 20 lakhs.

As is evident, the larger the income available to you post expenses, the higher your eligibility will be for that Home Loan.

There is another way that lenders might calculate your eligibility. This is by excluding the rent you pay. Suppose you pay rent of Rs. 6,000 every month. You will save on this amount after you move into the property that you purchase.  Lenders may include these savings. When you exclude your rent, your total expenses will come to Rs. 16,000, down from Rs. 22,000. So, Rs. 24,000 will be available for you to pay your EMI.

Therefore, your loan eligibility will be:

Rs. 24,000 / 900 x 1 lakh =Rs. 26.6 lakhs. Up from Rs. 20 lakhs.

Additional Reading: Your Guide To The Home Loan Application Process

Since it isn’t easy determining a borrower’s monthly expenses using bank statements alone, lenders use a pre-determined percentage of their income to calculate the monthly expenses of the borrower.

For example, a lender may assume that if your income is Rs. 40,000 per month, 60% of your income will go towards expenses. This will then be used to calculate the amount that will be available to repay your Home Loan.

You must understand that this percentage might vary based on your income. Lenders will assume that those who earn more will be able to spare more money for their Home Loan repayment. Most lenders have slabs such as 35%, 40%, 45% and 50% for monthly incomes up to Rs. 20,000, Rs. 50,000, Rs. 1,00,000 and more than Rs. 1,00,000 respectively.

As per the above slab, if your income is Rs 60,000, your Home Loan eligibility will be calculated as below:

Amount available for Home Loan repayment =Rs. 60,000 x 45% =Rs. 27,000

Home Loan eligibility =Rs. 27,000 / 900 x 1 lakh =Rs. 30 lakhs.

If you have other loan liabilities at the time of applying for a Home Loan, your net eligibility will reduce to the extent of the EMI that you pay every month.

Additional Reading: This Is A Great Time To Take A Home Loan

The Tenure Factor

Another factor that comes into play is the tenure of the Home Loan. This has an impact on your Home Loan eligibility. For longer tenures, the EMIs per lakh borrowed becomes lower, and thus the individual will be eligible for higher amounts.

Consider this: At a Home Loan interest rate of 9%, the Home Loan EMI for a Rs 1 lakh, 30-year loan will be Rs. 805. As we have seen previously, this was Rs. 900 for a 20-year loan.

So, if the income available for repayment is Rs. 27,000, the Home Loan eligibility for a 30-year loan will be Rs. 33.5 lakhs. This was Rs. 30 lakhs for a 20-year loan. Thus a borrower’s loan eligibility for a 30-year loan tenure will be higher than that a 20-year tenure.

This is the reason why many opt for a higher loan tenure. However, you must understand that the higher the loan tenure the more the interest that you will need to pay. Don’t believe us? Here’s proof.

The total interest for a Rs. 10 lakh, 20-year loan at 9% will come to Rs. 11.59 lakhs. If you choose to go for a 30-year tenure, you will have to shell out as much as Rs. 18.96 lakhs in interest. That is why you must choose a lower tenure.

Is there any other way you can increase your Home Loan eligibility? Yes! Some lenders do include alternate sources of income in calculating Home Loan eligibility. So, if you are receiving any other income, be sure to ask your lender to include the same.

Additional Reading: Terms For Adding Co-applicants To A Home Loan Application

You could also consider adding a co-applicant to your Home Loan. This way your income and your co-applicant’s income will be considered for Home Loan eligibility and you will be able to get a higher loan amount.

Do you know that BankBazaar helps you check your Home Loan eligibility for FREE? What are you waiting for? Go right ahead!