Updated: Mar 30, 2022, 5:47pm
Home affordability has risen sharply in the last two years with home rates declining and interest rates on loans falling to their lowest. So if you’re planning to buy a home, chances are you would want to get as much of a loan as possible. If you’re a first time home buyer, cracking the home loan eligibility needs some bit of research.
Home loan eligibility is a key reference point for banks or non-banking finance companies (NBFCs) or housing finance companies (HFC) to ascertain the maximum loan amount a home loan applicant is permitted to borrow and assess her/his trustworthiness to pay back the loan.
On the basis of elements such as credit score, term of loan, repayment capacity, income, etc., the lenders carry out a detailed analysis of the eligibility of a home loan applicant. However, for home loan applicants, it’s essential to understand the ways to enhance home loan eligibility and that’s the way they can own dream homes.
An excellent credit score always boosts home loan eligibility. To achieve that, one needs to ensure all loan repayments are made on time. If you are paying credit card dues and monthly instalments (EMIs) on time, your seriousness in settling debt will reflect on your credit score. Any default or delay adversely impacts your credit score. Keeping a low credit utilization ratio (CUR) will also help your credit score.
When you apply for a home loan, the bank usually checks your credit score in order to determine your creditworthiness. There are various credit bureau scores which are used by banks and financial institutions. There is no minimum score for home loan but 750 and above is generally considered a good one for home loan approval. Good CIBIL score also leads to low home loan interests as well.
In case you have multiple earning members in the family, applying for home loans jointly considerably increases your chances to increase your home loan eligibility. The best option is to apply for a home loan with your spouse and/or parents.
Co-borrowing not only enhances home loan eligibility but also divides repayment burden and offers tax benefit. A co-borrower with a good credit score increases your EMI affordability, thus enhancing your home loan eligibility.
To increase home loan eligibility, one can go for a longer tenure home loan. Although a longer tenure home loan lowers the EMI amount, it ends up increasing your total interest payable. So, you have to factor in a higher cost of borrowing while going for a longer repayment period.
The debt-to-income ratio is critical for the lending institutions to evaluate the home loan eligibility of a home loan applicant. Therefore, for an applicant, it makes sense to clear all loan obligations which will positively impact her/his home loan eligibility. She/he should boost credit score by repaying pending debts.
The ratio of your debts to income is the Fixed Obligation to Income Ratio (FOIR) and it is a critical parameter for determining one’s home loan eligibility. Most financial institutions’ lending models assume that you need close to 50% of your income for spending on your living expenses. Ideally when opting for a home loan, try to limit your FOIR to up to 40% in order to increase the chances of getting the loan approval.
The home loan eligibility increases when you declare your additional sources of income. Adding another source of income such as rental income, part-time business, etc. can help in improving your financial health thus you must add another source of income as it helps in securing a higher loan amount. Additional income will boost FOIR, thus underlining your higher repayment capacity.
A financial institution or a lender finances a home loan to approximately 75% to 90% of the property value. However, you may have to bear the cost of the remaining amount. Lower the down payment, higher will be your loan value, and therefore higher payable interest. So it is always advisable to make higher down payment so as to avoid higher interest payout.
If you are a salaried person and are planning to apply for a home loan, then you should continuously work in an organisation for two years. Frequent job changes impact home loan eligibility amount. Therefore, planning should be made well in advance so that you can show two years of continuous service in an organisation.
If you are new to credit or self-employed you will have better chances of getting a loan from a housing finance company. Most housing finance companies have developed in-house models which help them ascertain repayment capacity and credit worthiness of applicants having informal sources of income.
HFCs have developed a niche in this segment along with expertise in affordable home loans and are sometimes a better bet. HFCs also have presence in micro markets where banks aren’t present. For salaried customers with a high credit score your options will be private or public sector banks. Always opt for lenders which have a strong parentage and track record.
Additionally, lenders usually consider 85% (loan-to-value) for loans. But if it is an approved project by the lender, or if they have a good relationship with the builder, they can consider up to 90% LTV.
It is advised not to panic or hurry in applying for a home loan. You should do proper research and give time before applying for a home loan. You should estimate your budget, calculate your earnings or income, check your CIBIL report for errors, compare loan options, choose between fixed or floating rate of interest and choose desired interest rates with minimum additional charges before applying for a home loan.
If you take the above-mentioned steps to improve and increase your chances of qualifying for a home loan, you can quickly become eligible for a higher loan amount, extended tenure and better terms and conditions. You should start the process by first improving your credit scores and fixing any errors if needed.
Creditworthiness is an important factor for getting home loans. Simultaneously, continue to lower your debt to income ratio and save actively for your down payment to buy the home of your dreams.
Ravi Subramanian is the Managing Director and CEO of Shriram Housing Finance. He has more than two decades of experience in the banking and financial services sector across organizations such as HSBC, Citibank and ANZ Grindlays. Ravi holds a management degree from IIM-Bangalore.
Armaan is the India Lead Editor for Forbes Advisor. He has more than a decade’s experience working with media and publishing companies to help them build expert-led content and establish editorial teams. At Forbes Advisor, he is determined to help readers declutter complex financial jargons and do his bit for India’s financial literacy.
Updated: Mar 30, 2022, 5:47pm