It was a busy morning for Prakash Chadda, as the month end was nearing. Files were piled up on his desk. Chadda was hunched over a bunch of papers with a magnifying glass held really close to his nose. He was a detective of a special kind.
Prakash Chadda was the credit manager of home loans at a leading private bank. His job is to scrutinize each and every document in home loan applications to filter out possible default cases and fake profiles.
How does Prakash decide the eligibility of the home loan applicants?
Read ahead to find out how home loan applications are scrutinized and processed.
All about home loan eligibility calculation
Applicant 1 – Salaried with other liabilities:
Shyam Krishna, 35, earns a salary of Rs.75000 per month. He applied for a loan of 40 lakhs over already having a car loan with an EMI of Rs.15,250, and a personal loan with a EMI Rs.9,850. Is Shyam then eligible for 40 lakhs loan?
Now let us assume that the bank offers home loans at 11% interest rate.
Prakash decided that Shyam is eligible only for a loan of 12 lakhs and rejects the application.
Surprised?
Prakash checked his income-to-debt ratio first. This is also known as the FOIR (Fixed Obligations to Income Ratio). As Shyam is already paying an EMI of Rs.25,100 (car loan + personal loan), with Rs.75,000 as monthly income and a monthly liability of Rs.25,100, his FOIR stands already at 33%.
The bank could offer him another loan, keeping his FOIR at a maximum of 50%. If he takes a loan of 12 lakhs, his maximum FOIR will be 50%. If he takes 40 lakhs, as applied, his FOIR will be 88%, which cannot be agreed upon.
So what way could Shyam get the loan amount he requires?
If Shyam closes the other liabilities (car loan and personal loan), he is eligible for a loan up to 37 lakhs (at FOIR 50%).
How do the banks arrive at this figure?
Most banks calculate home loan eligibility with the formulae: Monthly Income X 50% – minus other liabilities if any / per lakh EMI.
Applicant 2 – A Business man:
Navodit, 30, is a business man. His annual income is 6 lakhs (not his actual income). Prakash takes his average income as per his ITR, for the last 3 years. He then divides it into 12, to get his monthly income. He then follows the same process. So if Navodit has no other loans, he is eligible for a loan of 20.32 lakhs.
Illustration: Navodit’s monthly income: Rs.50,000 (6,00,000 /12)
Now if Navodit applies for the loan for 15 years at 11% interest rate, his eligibility is calculated as: 50000 X 50%/1230* =20.32 lakhs
*(50% is the FOIR and 1230 the EMI per lakh at 11% for 15 years tenure)
For the self-employed, banks calculate the loan eligibility based on their Income Tax returns. If you do not reveal your actual income while filing tax, or write off part of your income as expenses (to save tax), it may be difficult for you to get a higher loan amount.
Applicant 3: A retiree:
Can loans be offered to retirees? Yes, under special conditions, there are other home loan options to be considered.
Condition 1: The loan tenure should not exceed the age of 65 for the retiree (70 years for some banks)
Condition 2: The retiree should have a pension income and the loan eligibility is calculated on the basis of pension
Condition 3: A lower FOIR and LTV, and some banks ask for any of their children as guarantors
Mr. Gupta, 60, earns an annual pension of Rs.1,00,000. Let us consider that the bank offers him a loan for 5 years, i.e., till he turns 65. His loan eligibility, therefore, will be Rs.18.39 lakhs.
Illustration: Rs.1,00,000 X 40% /2174
(Here the FOIR is taken 40% only and 2174 is per lakh EMI at 11% for 5 years)
Applicant 4: A person nearing retirement
A person nearing retirement can usually go for a loan up to his retirement year. But if he has a pension lined up, he can get a loan until he turns 65 or 70, as in Mr. Sharma’s case. But, in case of extended tenure after retirement, the loan eligibility will be calculated on a flip calculation method. This means, he will be paying a higher EMI till the time he is in service, and a lower EMI thereafter. This is also called step down repayment.
Here the loan eligibility will be calculated in two steps:
First, by taking his income till the retirement period. For example, if Mr. Sharma has 5 more years to retire, first his eligibility will be calculated for 5 years. Then the eligibility post his retirement will be calculated separately based on his expected pension and the agreed tenure (5 or 10 years). His total loan eligibility will be the pre-retirement eligibility plus the post retirement eligibility.
But the FOIR will be taken only at 40%, to ensure that the combined loan amount shouldn’t be a toll on his monthly income at both, pre-retirement as well as post-retirement stage. The EMIs here will be scheduled in a different way, unlike usual home loans.
Tips for enhancing your loan eligibility
Adding co-borrowers: You can add co-borrowers to enhance loan eligibility. A co-borrower can be your spouse, children, parents (if you are the only child or get NOC from your siblings) or a sibling (if you have taken NOC from your siblings).
Opting for a higher tenure: The longer your loan tenure, the more your eligibility. This is because your EMI outflow is lesser at a long tenure.
Options like step-up repayment: Those who are expecting hike in salary after a couple of years can use options like step-up repayment, where they pay lesser EMI initially and gradually increase it in proportion with the hike in salary.
Closing other unwanted loans: Closing other unwanted loans can considerably increase your loan eligibility, as we have seen Shyam’s case.
Adding perks and passive income: If you have any passive income, like a rental income, incentives, or income from a part-time job, apart from your salary, providing proof may help the bank consider a loan. As long as your passive income is regular.
Relationship with the bank: Your relationship with the bank is a decisive factor for your loan eligibility. If you have a long standing relationship with the bank, like having an FD, an old savings account, or a promptly paid loan, they won’t mind going for 60% FOIR.
Other things you should know:
Besides these, for professionals, banks may go up to 60%-70% FOIR, and at the same time, for business men, banks are usually reluctant to go beyond 40% FOIR, provided the risk involved in the business, the number of years the business has been around etc.
All banks have a minimum income criteria, as decided internally for different categories. While the minimum eligibility criteria for a comfortable profile like that of a government employee is lesser, banks keep it higher for a business man.
It is always recommended to check your loan eligibility prior to approaching a bank with application. This will save your time, as well as keep you away, last minutes surprises in the form of rejection or a lesser loan amount than you expected. Online loan calculators can help you to check your loan eligibility before approaching the bank.
In case your home loan gets rejected despite all your homework, you know whom to blame. Prakash Chadda. Just kidding!