Usually, most banks and non-banking financial institutions (NBFCs) have a common standard set of criteria for home loan eligibility, as directed by the RBI. However, lending institutions often apply their own unique set of parameters. Knowing how to calculate your home loan eligibility and understanding the influencing factors are important to ensure a smooth and swift processing of your application.
Factors affecting home loan eligibility
There are several factors that collectively decide your eligibility for a home loan. While they may vary in type and specific weightage across different lenders, here are some of the common ones:
- Credit Score – Possibly the most important factor is your credit score. A home loan is a financial risk being taken by the lender. A high credit score shows you have a good track record of borrowing and paying on time. A credit score of 750 or above is likely to get you a home loan at attractive interest rates.
- Employment Status – Your employment status, years of regular employment, and the sector/company employed with, all influence your home loan eligibility.
- Annual Income – The higher your annual income, the more chances your application will be approved. Moreover, a higher income also allows higher loan amounts.
- Debt-to-Income (DTI) Ratio – Not only your income but your expenses are considered too. DTI is used by lenders to calculate your net income vis-a-vis your costs and other outstanding debts. Lower DTIs are looked upon favourably by lenders.
- Collateral – Many lenders may either ask for upfront collateral (like putting the house deed in their name). Alternatively, they would expect you to show enough savings to give them confidence in your repaying ability in the future and minimize the risk of loan default. For example, you may be asked to furnish proof of investments like FDs, Mutual Funds, etc.
- Property type and location: The type of property you’re buying and its location can also affect the eligibility assessment process. For example, you may find it hard to secure a home loan for Power of Attorney (POA) or leased properties.
- Age – Many lenders assign a minimum and maximum age for home loan applicants.
In a nutshell
There is no fixed formula for calculating home loan eligibility. Most banks offer up to 60 times the net monthly income as a loan. In other words, if your net salary is ₹1 Lakh per month, you can expect a maximum loan of up to ₹60 Lakhs. This is speculative, though, as several other factors are at play, as described earlier.
How to improve home loan eligibility?
Here are some tips to improve your home loan eligibility.
- Your credit score is one of the factors affecting your eligibility for a home loan. Keeping it above 750 will help you get loans at competitive rates. To achieve this, you should borrow only what you can repay and ensure all the instalments are paid on time.
- Taking a joint home loan with an earning spouse or another member of your family gives the lender more confidence in your ability to repay, thus increasing your application approval chances.
- Longer tenors mean lower EMIs and lesser chances of defaulting on payments, in the eyes of the lender. While this may improve your eligibility, it can also increase your total cost of ownership due to an increase in overall interest payable.
- Keeping your debts low is important too. If you already have outstanding loans, it would be better to clear them off before applying for a home loan.
- Offering a higher down payment means you will require a lower loan amount. This is a more agreeable proposition for the lender and bodes well for your application. Try to pay 15-20% of the cost as an upfront down payment.
How to Check Home Loan Eligibility Based on Salary?
Most banks and NBFCs offer a loan that is 60 times your net monthly income. The monthly income includes salary and income from other sources such as capital gains, rent received, etc. You should first calculate your net monthly income to check your housing loan eligibility. This should not include any variable salary components and deductibles such as PF or income tax. Multiply the net monthly income by 60 to get your eligible loan amount.