How is Home Loan Eligibility Calculated?

Owning a home offers a sense of stability and security, while also being a great investment for your future. However, despite these advantages, a considerable portion of the population remains reluctant to buy homes due to soaring property prices.Yes, purchasing a house is a significant financial commitment. And nowadays, it is nearly impossible for many to buy a house without a home loan . Lenders reject applications as borrowers apply for more loan amounts than they are eligible for. Hence, calculating Home Loan Eligibility beforehand is a must. Using a Home Loan Eligibility calculator is an ideal way to start your Home Loan application process.Now, let's understand how to calculate loan Eligibility.Also read: What is Composite Home Loan?

Home Loan Eligibility refers to the criteria individuals should meet to qualify for a Home Loan or mortgage.When you plan to take a Home Loan, the first question that comes to mind is, "How much Home Loan can you get?" However, this is not a straightforward answer. The amount of Home Loan available to you depends on several factors, including your income, CIBIL score, down payment, your relationship with the lender and more.Here are some key considerations:

Income

Before offering you a Home Loan, lenders check your income to ensure you have a steady cash flow. They may consider your salary, business profits, rental income, and other sources of earnings.If you're a salaried person, lenders may also consider various allowances you receive, such as house rent allowance, medical allowances, conveyance allowances, and more.

Employment stability

Lenders prefer borrowers that have a stable employment history and show a steady income stream. They also consider factors such as the duration of your employment, job type, and employer reputation. Changing jobs frequently can hurt your Eligibility for a Home Loan. Furthermore, lenders consider the number of years left until your retirement.

CIBIL score

Lenders put extra stress on your CIBIL score when calculating your home loan eligibility. Your CIBIL score implies how well you manage and repay debts. An excellent CIBIL score is necessary to get a Home Loan at a reasonable rate. Further, a higher credit score reduces the chances of rejecting your loan application.

Your age

This plays a vital role in loan Eligibility. Younger individuals usually have a more extended repayment period, increasing their chances of Home Loan approval.

Down payment

The amount provided in down payment can significantly impact your Home Loan Eligibility. A higher down payment amount can reduce the loan-to-value ratio or LTV of your Home Loan , making the loan more attractive to lenders. A low LTV can also make you eligible for a low-interest-rate loan.

Property details

While calculating Home Loan Eligibility, lenders consider the market value and location of the property. Several lenders also consider the reputation of the builder. If the property is in a prime location or constructed by a reputable builder, lenders can quickly sell it and recover their money in case of a loan default.

Loan tenure

Your selected loan tenure can influence your Home Loan Eligibility. Longer tenures may result in smaller EMIs, making the loan more affordable. However, lenders may have age-related restrictions on loan tenure. In brief, a longer loan tenure can enhance your Home Loan Eligibility.

Your relationship with the lender

If you are a current bank or housing finance company customer with a positive banking history, you can enjoy certain benefits when applying for a Home Loan, such as better interest rates and special loan Eligibility. Typically, lenders prefer to offer favourable terms to their loyal customers.

Your existing debt and liabilities

During the Home Loan Eligibility calculation, lenders assess your current debts, such as credit card dues, outstanding loans, etc. Based on this, they calculate your debt-to-income ratio, which is also called the fixed obligation-to-income ratio (FOIR).The eligibility criteria for a home loan for a non-resident Indian (NRI) differ slightly from the standard ones. Check for the Eligibility criteria an NRI should meet to get a Home Loan.

The Eligibility criteria for Home Loans vary from one lender to another. However, some of the common factors that most lenders consider include:

• Age: The minimum age requirement is usually 21 years, while the maximum age limit is typically 60-65 years.
• Income: The minimum income requirement may vary depending on the lender and the property's location. Most lenders prefer people with a monthly salary of ₹25,000 or above.
• Employment/ business stability: Salaried people must have a work experience of at least 2-3 years. As a business owner, you must provide evidence of at least five years of business continuity to qualify for a loan.
• Credit score: Your credit score must be 750 or above.
• Nationality: Indian citizens
• Loan amount: The lender decides the loan amount based on your repayment capacity and the property's value.

Using a Home Loan calculator to calculate Home Loan Eligibility is beneficial. A Home Loan Eligibility calculator is a financial tool that helps you estimate the potential cost of borrowing money to purchase a home through a loan. To get the estimation, you must input various financial details.Here is how to use the Home Loan eligibility calculator of Aditya Birla Capital:

• Visit the website of Aditya Birla Capital .
• Go to Advising and then ABC of Calculators.
• Now, select Home Loan Eligibility Calculator from the list.
• Select your occupation type and input your financial details like annual income, monthly income/profit, monthly expenses, loan amount and loan tenure.
• The calculator will show you the eligible loan amount and the EMI you should pay for that loan.

When calculating FOIR, lenders consider your income and the sum of all the instalments you are currently paying. Instalments include all your loan EMIs, credit card dues and repayment for any other form of credit.Lenders use the below formula of FOIR calculation for Home Loan to assess your repayment capacity.FOIR= (Sum of existing fixed obligations/ Net monthly income) *100Let's take an example to understand FOIR better.Sam has a monthly income of ₹70,000. He pays EMIs for various credits: ₹12,000 for a personal loan, ₹8,000 for a car loan, and ₹6,000 for his credit card EMI.Here, the sum of the fixed obligations of Sam is ₹26,000 per month.Now, let's calculate his FOIR using the FOIR calculation formula.FOIR= (26,000/70,000) *100 = 37%Here, Sam's FOIR is below 50%, which implies he has a better repaying capacity.A low FOIR indicates fewer financial obligations and more disposable income. Lenders always like to offer Home Loans to people with less debt, so a low FOIR enhances your loan approval chances.Also read: How Much Home Loan Can I Apply For As Per My ITR?

When planning to take a Home Loan, there are several factors you should take into account, and some of the key elements are:

• Compare interest rates offered by various lenders and select the one that is most favourable for you.
• Decide on the loan tenure that works best for you. A shorter tenure usually results in higher monthly payments. Hence, take the maximum available term to lower your EMI burden.
• While applying for a Home Loan, you may encounter many new words associated with Home Loans. Getting familiar with housing loan terminology beforehand makes sense.
• Apart from interest rates, several other charges are associated with Home Loans. Read the loan's terms and conditions to understand them better.
• Each lender has different documentation requirements for processing Home Loan applications. Therefore, check with your lender and gather all necessary documents beforehand.

Also read: Stamp Duty & Registration Charges for Homebuyers

Improving your Home Loan eligibility helps you get a higher loan at better interest rates. Here are some tips to improve your Home Loan Eligibility:

Improve your credit score

An excellent credit score is an essential factor that lenders consider when evaluating your loan application. A few ways to increase your credit score are:

• Paying your bills on time
• Reducing your credit card balances
• Avoiding new credit applications

Increase your income

Lenders prefer borrowers with a stable income, as it indicates the ability to repay the loan. You can increase your income by changing your job, taking up a part-time job or doing freelance work.Improve your debt-to-income ratio: Your debt-to-income ratio reveals the portion of your monthly earnings spent on paying off debt. Lenders favour borrowers with a low debt-to-income ratio as it indicates their financial management skills. You can improve this ratio by repaying debts or increasing your income.

Add a co-applicant

Adding a co-applicant with a stable income and good credit score increases your chances of Home Loan approval.

Choose a longer loan tenure

Opting for a longer loan tenure can reduce your monthly EMI, making it easier for you to repay the loan.

Save for a higher down payment:

A larger down payment reduces the loan amount you need. Lenders often favour borrowers who pay a significant down payment, as it lowers their risk.

Do not apply for multiple loans simultaneously:

Be careful about applying for multiple loans or credit cards within a short period, as it can impact your credit score negatively.Also read: Who Can Be A Co-applicant For a Home Loan?

When checking your eligibility for a Home Loan, lenders use a calculation called FOIR to assess your ability to make repayments. FOIR determines the percentage of your income used to pay off existing debts. If a large chunk of your monthly income goes towards debt repayment, your FOIR will be higher. A high FOIR can result in loan application rejection or lenders offering a lower loan amount.FOIR is not the only aspect that decides your loan eligibility. When calculating your eligibility, they also check your age, income, CIBIL score, employment stability, and more.