How loan eligibility is calculated? For most salaried people, buying a home is working on a sense of well-being. They often ask, “Is it easy to get a mortgage? How loan eligibility is calculated? If you are one of those who want to make your dream of buying a home come true, learn how loan eligibility is calculated and how you can qualify for a home loan. The loan amount you qualify for will depend on several factors, such as current age, monthly income, financial obligations, credit score, employment status, and credit history.
As an employee, it is essential to know the portion of your salary that is taken into account to calculate the eligibility of a home loan, the salary ranges, and the eligible amount.
Know your salary
Your salary is usually stated as gross salary. A gross salary is a total of:
- Basic salary
- Medical reimbursement
- Travel permit (lta)
- Housing allowance
- Car allowance, and
- Other concessions
The above components together are the cost to the business (CTC), not what you take home. The net pay is what you take home and is calculated after deducting the employee’s pension amount, withholding tax, and any other deductions made under company policies. Your take-home pay is usually considered to qualify for a home loan.
How Loan Eligibility Is Calculated – How Do You Calculate The Suitability Of Your Home Loan?
You are eligible for a home loan of up to 60 times your net salary or monthly income. For example, if your net salary is Rs. 55,000, you are eligible for a loan of about Rs 33 lakhs. The creditor bank excludes medical devices and travel authorization devices as they are intended for specific purposes. IDFC First Bank uses a calculator to qualify for a home loan, taking into account your monthly net income and other factors.
The table below provides a brief overview of the amount that qualifies for a home loan in the usual salary scales. The amount provided is calculated using the IDFC First Bank Home Loan Eligibility Calculator, taking into account the following:
- Existing EMIs: None
- Duration: 20 years
- Interest: 7% per year
- Number of family members: 3
Note: An earning member of a household is considered one family member, and if there is more than one earning member, the net monthly income of two or more earning members can be added together to arrive at a higher qualifying amount.
How Loan Eligibility Is Calculated – How Is The Eligibility Of A Personal Loan Calculated?
Different lenders use different methods to calculate eligibility criteria. Below are 2 common methods that lenders use:
How Loan Eligibility Is Calculated Method 1: Multiplication Method
This method uses a simple formula.
- Loan Eligibility = (your salary) x (a number from 9 to 18)
Banks offer a base multiplier that ranges from 9 to 18, depending on your credit profile and the company you work for.
How Loan Eligibility Is Calculated Method 2: FOIR (fixed liabilities about income)
With this method, banks assess your ability to repay. They take into account all of the regular liabilities that you pay monthly or daily, including EMIs from existing debt, and then subtract them from your monthly income.
The formula to calculate FOIR is:
- FOIR = (sum of existing liabilities / net salary for monthly household) * 100
- An example to help you understand better.
- If your income is ₹ 70,000 per month and you have outstanding loans, such as:
- An EMI personal loan of ₹6,000
- An EMI car loan of ₹9,000
To determine repayment capacity, banks take into account that 50% of income can be paid in debt. So in this example, 50% of 70,000 is ₹ 35,000.
Total of all debts = Car loan EMI + Personal loan EMI = ₹9,000 + ₹6,000
= 15,000
So your disposable income for this new loan = 50% of your income – Total debts
= 35,000 – 15,000 = ₹20,000
According to the FOIR formula mentioned above, ₹ 15,000/₹ 70,000 * 100
FOIR = 21%
In this case, if EMI’s new personal loan exceeds ₹20,000 even in the longer term, the bank/lender will not grant the loan. But if the EMI of the new loan is less than 20,000, you can get the loan.
Therefore, the FOIR method helps you decide how much EMI you can afford on a new personal loan while paying off your other debts.
What Are The Factors That Influence Eligibility For A Home Loan?
Age Limit:
It is the first and most important factor a lender/lender considers when applying for a home loan. Financial institutions usually try to limit the term of the home loan to the retirement age of the main applicant. As a result, young professionals (20 and 30 years) can easily benefit from a loan with a term of up to 25 years. But older candidates, especially those over 40, may find it a little difficult to qualify for an extended term. Single applicants aged 50 and older were often refused a home loan on this basis alone.
Income:
Let’s divide this into salaried, professional, and self-employed. Whatever category the candidate falls into, a steady and regular source of income is required. There are fewer risks in borrowing money if the applicant has an income.
Paid Person:
If you work for a government department or a registered private company, you belong to this group. Most banks insist that the applicant must have worked in the current company for at least one year at the time of application. Payrolls, Form 16, bank statements, and employer reference letters are the documents that almost all creditors need. Evidence is also required for the co-applicant and guarantor (if applicable).
Self-employed professionals:
Doctors, dentists, architects, engineers, business consultants, accountants, self-employed, etc. belong to this category. Bank statements and ITR documents must be submitted.
Self-employed:
Do you have your own company/company? Or do you have other sources of income, such as rent or stock? Then you belong to this category. If you have bank statements and tax documents to show, you can certainly apply for a home loan.
Interest rate:
Eligibility for a mortgage is always inversely proportional to the interest rate. If the rate is higher, the eligibility is lower, and vice versa.
Loan term:
If you opt for a longer term, you will be more eligible. EMIs will also be smaller and more manageable. But the disadvantage of this is that you end up paying more interest.
Outstanding Loans:
Indian banks and financial institutions always recommend keeping the EMI/Income ratio between 50 or 60 percent. This is to leave the window for future loans or to pay off any existing loans. But bad loans can put a damper on your eligibility.
CIBIL Score Report:
Banks also examine your credit payment history from CIBIL (Credit Information Bureau India Limited), the country’s regulatory body and the first credit reporting agency. They maintain detailed records of all information about the credit history relationship between you and the creditors/lenders. A negative listing can significantly reduce your eligibility.
How Can You Improve Your Loan Eligibility?
1. Check Your Credit Score Before Signing Up
You must have a credit score of 750 and above to qualify for a personal loan with the best loan terms. If you have a lower score, it is best to improve your credit score and then go to a bank/NBFC for a personal loan. Some of the ways to improve your credit score include: Paying off your existing debts, not using your credit cards, paying all your bills on time, etc.
2. Don’t apply for too many loans too often
Applying for multiple loans in the hope that one will work is a mistake that can hurt your credit score and ultimately your chances of getting a personal loan. Your loan applications are a tough question on credit reports, and if lenders see too many of these questions, they’ll assume you’re desperate for credit and it’s not making a good impression on your financial behavior. Instead, it is recommended that you have a gap of at least 6 months between applications for a personal loan.
3. Choose your lender carefully
Before finalizing your lender, do your homework. Compare different personal loan offers and their interest rates to find the lender that fits your needs.
4. Be careful with the debt/income ratio
Your monthly debt divided by your monthly income is your debt-to-income ratio. More than 40% of your income should not be spent on paying EMIs. This means that if your income is ₹25,000, you should not spend more than ₹10,000 on EMIs. So keep your debt-to-income ratio as low as possible. Because lenders will not approve your loan if they believe that you are unable to repay the loan.
How Loan Eligibility Is Calculated Frequently Asked Questions
How loan eligibility is calculated based on salary?
As mentioned, mortgage lenders determine eligibility for a home loan applicant based on their monthly income (among other factors). Salary is taken into account to determine whether the applicant can repay the loan. The LTV ratio or the Loan-to-Value ratio is used to assess the risk factor in the disbursement of a loan.
How loan eligibility is calculated loan for wage earners and the self-employed?
The eligibility criteria for home loans differ slightly for wage earners and the self-employed. For most lenders, requirements regarding age group, residential status, credit score, etc. are generally the same for salaried and self-employed. However, the requirements in terms of general work experience and minimum income may be different. Based on your employment status, you can contact your lender and find out the minimum work experience and minimum income requirement.
If you are an employee of a private company, you can find out how private employees can get a home loan.
What are the documents to qualify for a home loan?
The list of documents required when applying for a home loan application may vary by lender. In general, the candidate must provide the following:
- Recent passport photos
- Proof of address
- identification
- Bank statements
- Application form for a mortgage and so on.
What is the role of co-applicant ineligibility for a home loan?
You can use a home loan together with a co-applicant to increase the chance of approval of the loan. The main role of a co-applicant is to repay the home loan together with you (if you are the main borrower).
Many banks require co-owners to be co-applicants for home loans. Here’s everything you need to know about co-borrower vs co-owner vs co-applicant.
What are the eligibility criteria for a home loan?
The central government, through the Ministry of Housing and Urban Poverty Alleviation, has launched the Pradhan Mantri Awas Yojana Scheme, through which beneficiaries can take advantage of subsidies on their respective housing loans. Under the terms and conditions of the PMAY scheme, applicants are classified into 4 broad categories: EWS, LIG, MIG 1, and MIG 2. The PMAY eligibility criteria for these groups are determined based on annual household income.
What are the minimum requirements to qualify for a home loan for an NRA?
In general, the eligibility criteria for home loans for NRAs are in line with those of the general public. To be eligible for an NRI home loan, the applicant must be a salaried or self-employed person with a good credit score. He or she must be in the age group of 18 to 70 years and must be a non-resident Indian or NRA.
How to improve the suitability of a home loan?
The suitability of a home loan is not easy to assess. The terms and conditions may differ for most lenders. Also, banks and lenders will take into account your current liabilities, income, assets, etc. when calculating your home loan. If your mortgage requirement is slightly higher than your qualifying loan amount, a few changes in the way you present yourself can help raise the eligibility factor.
You can follow some important tips to improve the suitability of your home loan.
What factors does a lender/bank take into account when approving a home loan?
Banks or lenders take into account several factors to determine whether you are eligible for a loan. These factors are mentioned below:
- Age of applicants.
- The income level of the candidates.
- Qualification of the applicant.
- A spouse’s income level.
- Resident status.
- Existing loan situation.
- Credit score and credit history.
Can I get an additional loan on top of my existing home loan?
Yes, you can get an extra loan on top of your existing home loan. However, to qualify for this, you must regularly repay your existing loan.
Can I apply for a loan for a house under construction?
Yes, you can take advantage of home loans for properties under construction. However, keep in mind that the amount will be paid in installments as judged by the creditor.
Who is eligible for a joint home loan?
Eligibility for a joint home loan depends on the relationship of the co-applicants. Co-applicants must be related to eligibility for a joint housing loan.
Can my children be co-applicants for my home loan?
Yes, your parents, children, and spouse are eligible as co-applicants for the home loan.
Am I entitled to a tax benefit if I take out a home loan?
Yes, you can enjoy a tax advantage if you take out a home loan with a bank or financial institution based on Article 80C and Article 24 of the ICT Act.
Am I eligible for a home loan if I have a bad credit score?
If you have a bad credit score, it will be difficult to get a mortgage. Banks or financial institutions consider your credit report to be of great value in determining your eligibility for a loan. If you have a good score, the banks are happy to offer you a home loan at an attractive interest rate. However, with a bad score, lenders will question your ability to pay and may not consider you for a home loan.
Is it mandatory to have a co-applicant when applying for a home loan?
While there is no mandate to have a co-applicant for a home loan in India, most lenders (both public and private) insist that there is one to guarantee the repayment of the loan amount. In addition, having a co-applicant when applying for a home loan ensures that you are more eligible for the home loan. Please note, however, that there is no legal requirement to have a co-applicant when applying for a home loan.
What is meant by the market value of a property?
The price of a property agreed upon by the seller and the buyer for a transaction is called the market value of that property. In the simplest terms, the price of the property at which the seller is ready to sell the property and a buyer is ready to buy the property is the market value of the property.
What is the payout process for a property under construction?
In the case of properties under construction, the amount borrowed is paid by the creditor in installments and is based on the creditor’s assessment and not that of the developer. The loan amount is disbursed based on the progress of the construction of the property.
What does your contribution include?
Most lenders in India (public and private) require you to provide an amount of 10% to 20% of the amount of the home loan as a down payment. This first amount that you must provide yourself is called your contribution. Here are some expert tips on how to get a mortgage without a mortgage.
What guarantees must be provided when applying for a home loan?
Your lender may ask for security when you apply for a home loan. You can provide one of the following as a guarantee that you are eligible for a home loan:
- NSS or national savings certificate
- Life Insurance Allocation
- Bank deposits
- mutual funds
- Other investments
Can I get a higher loan through my existing loan account to buy a new home?
Yes, you can use your existing loan account to buy a new home. However, this benefit is offered at the discretion of your lender. For example, HDFC Bank offers a “Home Conversion Loan” feature that can be used to transfer the existing loan to buy a new home. In addition, you can also get extra money for the new home, depending on your eligibility for a mortgage.
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