Arriving at home loan eligibility

Ashish Gupta outlines some methods banks use to arrive at the eligibility of a borrower

Credit appraisals constitute an important step in determining the eligibility for a loan, and the amount of loan that can be given. The potential borrower has to go thorough the various stages of the credit appraisal process of the bank. Each bank has its own criteria to satisfy itself on the credit worthiness of the borrower. The eligibility of a person depends on his credit worthiness, determined in terms of the norms and standards of the bank. The credit worthiness basically assures the repayment capacity of the borrower - whether the borrower is capable of repaying the loan and dues in time. The norms differ from bank to bank. Each has certain norms within which the potential borrower needs to fit to be eligible for a loan. Based on these parameters, the maximum amount eligible is worked out. However, the broad parameters to determine the eligibility remain the same for all banks. Some aspects assessed: Incomes of the applicant and co-applicant Age of applicants Qualifications Family details Profession Experience Employer/business Security of tenure Tax history Details of assets and their financing patterns Additional sources of income Past loan record, if any Recurring liabilities Investments Some methods to arrive at eligibility: Instalment-to-income ratio A bank looks at the instalment-to-income ratio. This helps in finding the eligibility of the borrower. It is generally expressed as a percentage. This percentage denotes the portion of the monthly instalment on the home loan taken. Usually, banks use 33.33 to 40 percent ratio. It is assumed that in normal circumstances, a person can pay an instalment up to 33.33 to 40 percent of his salary. For example, assume the instalment-to-income ratio is 33.33 percent and the gross income is Rs 60,000 per month. As per the ratio, the borrower is eligible for a loan where the instalment does not exceed Rs 20,000 per month. Fixed obligation to income ratio A bank also calculates the fixed obligation to income ratio (FOIR). In a FOIR calculation, the bank takes into account the instalments of all other loans already availed of by the borrower and still due, including the home loan applied for. This ratio includes all the fixed obligations that the borrower is supposed to pay regularly - on a monthly basis. The fixed obligations do not include statutory deductions from the salary like provident fund, professional tax etc. For example, assume an income of Rs 60,000 per month, car loan instalment of Rs 8,000 per month, TV loan instalment of Rs 2,000 per month and the proposed housing loan instalment of Rs 20,000 per month. Accordingly, the FOIR is 50 percent (50 percent of the monthly income). A bank may have a standard of 40 percent of FOIR. So, the total instalments the person can pay,

as per the bank's FOIR standard would be Rs 24,000 per month. As he is already paying Rs 10,000 towards the car and TV loans, he has Rs 14,000 left and the loan would be calculated taking Rs 14,000 per month as the basis. Thus, a backward calculation of the repayment capacity is done to find the amount to be given as loan. Loan-to-cost ratio Banks also compute on the basis of loan-to-cost ratio (LCR). They use this ratio to calculate the loan amount that a borrower is eligible for on the basis of the total cost of property. This sets the upper limit or the maximum loan amount that a person is eligible for irrespective of the loan eligibility under other criteria. The maximum amount is pegged to the cost or value of the property. The loan eligibility as per the other parameters may be higher but the loan amount can't exceed the cost or value of the property. The ratio varies between 70 and 90 percent of the registered value of the property.

Are you Eligible for Home Loan? Find it Yourself

Eligibility Criteria
Your eligibility and amount of home loans are evaluated using simple parameters given below. You can also find out your eligible home loan amount approximately. Every Bank in India has its own policies and standards to evaluate the amount of home loan you are eligible for. It is known as credit appraisal process. Using this process a bank can decide on your loan eligibility. You repayment of home loan installments depends on the following criteria : 1.Your Income 2.Your Age 3.Qualification 4.Job Experience 5.Employer 6.Nature of Business (if you are self employed) 7.Tenure of Loan 8.History of yor tax payment 9.Assets owned by you 10.Your other sources of income 11.Any outstanding loans 12.Your investments Your eligibility of loan varies from bank to bank for which every Indian bank has its own guidelines and policies. Using these parameters your maximum eligible loan amount is calculated. Banks use the following banking parameters to find your eligibility.

 FOIR : Fixed Obligation to income ratio LTR/ LCR : Loan to Value Raio / Loan to cost ratio IIR : Installment Income ratio What is FOIR? This is the ratio of your fixed obligation to your income. Fixed obligation includes all of your monthly installments of other loans previously availed, including your home loan applied for. This Fixed obligation does not include salary deductions for provident fund, insurance premium and any recurring deposits. Example : Your monthly Income : Rs : 50,000 If the bank is having 30% FOIR, then your total loan repayments (fixed obligations) per month shall be 30% of your monthly income (30% x Rs. 50,000 = Rs. 15,000) If a bank is offering 50% FOIR then it will be 50% x Rs.50,000 = Rs.25,000 Let us assume that a bank is giving 50% FOIR, means you can have fixed obligation up to Rs. 25,000 Out of this Rs. 25,000, if you have a monthly Car and furniture loan repayment of Rs 10,000. Then, your proposed home loan monthly installment will be Rs. 15,000 (Rs. 25,000 minus Rs. 10,000) What is LTV and LCR in home loan evaluation? LTV and LCR are used to evaluate the loan amount as per values of the property. Although you may be eligible for a higher loan amount as per your income or other parameters. You are eligible for a maximum loan of the value of the property. This may be usually between 70% and 90% of the registered value of the property. What is IIR in home loan evaluation? This is one of the important parameter to evaluate your loan amount, generally expressed in percentage. It shows the portion of your monthly installment in home loan. It will be between 33.33% and 40%. Following example can help you to understand better. Example: Your Gross monthly income : Rs 1 Lakh As per this, you are eligible for a loan where your installment repayment should not exceed Rs 40,000 per month. Conclusion : The above mentioned 3 parameters (FOIR, LTV/LCR and IIR) are mainly used by our Indian Banks to calculate your home loan value. The final approved home loan value will be the lowest value derived among the 3 parameters.

Home Loan Eligibility How Banks Calculate Loan Eligibility Amount

In this blog post we are going to discuss three important parameters namely Fixed Obligation to Income Ratio (FOIR), Loan to Value Ratio (LTV) and Installment Income Ratio (IIR), which are instrumental for deciding the home loan eligibility amount as calculated by different banks and financial institutions. We will also discuss about different parameters of your credit profile, which help the lenders to determine your home loan eligibility amount. Banks and financial institutions help individuals fulfill their dreams of owning a home by extending loans and mortgages. But it is to be remembered that they are also commercial organisations and they are

doing business for earning a profit for their shareholders. Before sanctioning a loan to a prospective borrower, every lender tries to ensure that the borrower has the capacity to pay the EMI installments in time and repay the principal. For this purpose the first thing which every lender tries to ascertain is the loan eligibility amount for which you qualify depending upon your credit profile. Every bank in India has its own policy and standard for reviewing the loan application and to evaluate the home loan eligibility amount.

The Criteria Which Decide Your Repaying Capacity

Although every bank has its own policy and the standard for reviewing a loan application, but following is the list of the general criteria, used by almost all banks and financial institutions while reviewing a loan application.

Your monthly fixed and variable incomes from different sources Your present age Your qualification Your current employer (if you are a salaried employee) or the nature of your business (if you are self-employed) Your job experience Your tax payment history Your outstanding loans and all the instalments you are required to pay on a regular basis Your asset and liability statement Tenure of your loan

This is not an exhaustive list and the bank may ask for any particular information depending upon your current situation and details given in the loan application.

Three Ratios, Which Determine Your Loan Eligibility Amount

Based upon that information provided by you in your loan application, banks calculate three important ratios as given below.

1. Fixed Obligation to Income Ratio (FOIR), 2. Loan to Value Ratio (LTV), 3. Installment Income Ratio (IIR)
Your loan eligibility amount is calculated based upon each of these individual ratios and then minimum of these three eligibility amounts, your final loan eligibility is determined, which is mostly a minimum of all the three values arrived at. Let us go into details of these three ratios and understand how these are actually calculated.

What is Fixed Obligation to Income Ratio (FOIR)

This is the ratio of your fixed obligation to your income. To calculate fixed obligation to income ratio, banks consider the other fixed obligation of the customers which are currently due to him and indeed act as the maximum monthly repayment capacity of the customer. Statutory deductions like provident fund, professional tax, investment deductions like insurance premium, recurring deposit installments etc. are not included under fixed obligations.

FOIR is significant as it considers repayment of loans (existing and proposed home loan) from the applicants income. Your loan eligibility is determined in such a way that this ratio doesnt cross the usual limit of 50%. This ratio is also known as Debt Service Ratio (DSR) or Debt to Income Ratio (DIT). Following example may help you to understand how it is calculated.

What is Loan to Value Ratio (LTV)

Most of the banks and financial institutions shy away to finance more than 70% to 80% of the property value. Loan to value ratio sets the uppermost limit of the maximum amount of loan to be granted, irrespective of your eligibility for a higher amount depending upon your credit profile and your repayment capacity. Loan to value ratio is limit of finance an individual can get based upon the property type and the value of the property. The value is the cost of the property and excludes furniture and f ixtures, stamp duty, government charges or society registration fees. Limiting the loan eligibility on the basis of LTV is very natural because the hypothecation or mortgage is based upon the property itself. By limiting the home loan eligibility to 70 to 80%, the lender actually protects himself from the possible downturn in the property cycle and the reduction in the property value in case the borrower is not in a position to repay the loan. Following example may help you to understand how LTV is calculated.

What is Installment to Income Ratio (IIR)

Installment to income ratio helps lender to know the eligibility of a person to repay the loan. Lenders usually assume that a person can pay a maximum installment of about 35 to 45% of his monthly income. In case the total sum of all the EMI installments due to him increases more than this amount, he will not be able to sustain his lifestyle and is likely to default in future. Following example illustrates how installment to income ratio is actually calculated

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