Home loans are the most easily accessible means of funding support to purchase a house . To understand how you can ‘enhance' your eligibility to apply for a home loan, make a simple self-assessment. Here is how banks do it.
The credibility factor
Credit appraisal is the process followed by banks to determine the borrower's ability to repay his loan and determine how trustworthy he is. A prospective borrower has to go through various stages of credit appraisal practiced by different banks.
The main factor commonly considered by banks before its decision to lend, is ‘proof' that shows that the borrower is capable of repaying the loan on time. For this, they will look into your income documents, personal credit history, current assets and liabilities, education, work experience etc.
Older banks and co-operative banks to certain extent rely upon an existing relationship or the previous experience with a bank client while deciding on eligibility. A common pattern they follow is the sanction of a loan amount which will be a fixed multiple of the annual income. However, the new generation banks strictly follow other distinct parameters.
The loan eligibility in this case may be calculated by applying Fixed Obligations to Income Ratio (FOIR). Most banks restrict FOIR to a maximum 45-50 per cent of the client's monthly income.
Loan-to-value
Loan-to-value is also a factor in eligibility calculation. Banks finance up to around 80 per cent of the property value determined by the bank's evaluator. For those who have not yet decided on the property, there is an option to sanction an in-principle amount, which helps to know the amount a bank would be able to give out.
For businessmen, banks will analyse the financial statements to see how the business has been faring for the past 2-3 years considering the Income Tax returns, Balance Sheets and Profit & Loss Accounts (audited and certified).
Before deciding to sanction a loan, banks also look into your credit history for your record on existing loan repayments, mishandled accounts or delinquent credit cards. This can be checked through a database of past loans and repayments available with the Credit Bureau of India Ltd (CIBIL). Cross checking of the income with documents like bank statements or initiating credit verifications is also part of the process.
A couple of factors could lend to enhancing your loan eligibility:
Clubbing an income - The income of your spouse also can be considered towards eligibility if you apply jointly.
Increasing tenure - Higher EMIs reduce the eligibility for the loan. The longer the tenure is, less the EMI will be. So, opt for a higher tenure. Usually banks offer a maximum of 20-30 years tenure.
Additional income - Your salary income may not be the only criteria to consider. Any source of consistent additional income like rental income may also qualify. Expected rental income from the property and any performance linked pay can be considered to enhance your loan eligibility.
Step-up loans- A step-up loan is a loan wherein an individual pays a lower EMI during the initial years and the same is enhanced periodically on conditions put by the banks. This is made after factoring in the individual's expected future salary hikes.
Pre-closure of existing loans - Existing loans like car loans or personal loans may reduce one's loan eligibility. As per norms, only existing loans with over 12 unpaid instalments are taken into account while computing home loan eligibility. So, prepaying the existing loans in full or part will help expand your eligibility.
Employer-bank relationship - A lower interest rate will naturally increase your eligibility.
Check with the banks if there are any schemes where the bank is tied up with your employer. Banks usually categorise companies based on their profiles and offer different schemes that could get you special interest rates, processing fee waiver etc . People working in MNCs can usually wrangle favourable terms.
Always remember, taking too many loans will reduce your credit worthiness and increase borrowing costs. Keep your credit score in good shape. Good and steady repayments keep you out of debt problems and keep your credit profile in great shape to use the power of leverage.
(The author is CEO, BankBazaar.com)