Ever wondered if there is anything stopping you from taking a loan for 50 Crores and buying a penthouse in the most posh area in town? Sorry to bring you the bad news but yes, there is. The thing that decides which house you can and cannot buy is called Home Loan Eligibility. Home Loan eligibility is the maximum home loan amount that a lender is willing to lend you. In this article, we will look at 2 key factors that influence your home loan eligibility. Use it to build a profile that will give you an edge while applying for a home loan. The 2 factors that decide your home loan eligibility are:
Your Willingness to Repay
Your Ability to Repay
Your Willingness to Repay The Home Loan
Quick question. If a friend wants to borrow money from you. What is the first thought that crosses your mind? Most probably it’s: “Will he pay me back?” The same thing happens with home loans. Lenders look at you and wonder, “Will this person repay the loan? Or will she default on the payments?” To judge your willingness to repay the loan, lenders look at:
Credit Score (CIBIL Score)
CIBIL score or credit score is a score assigned to you on the basis of your credit history. Regularity in repaying loans, credit behaviour and type of credit taken are some of the factors which affect your CIBIL score. CIBIL score is assigned on a scale of 300 to 900: 300 is the lowest and 900 is a perfect credit score. To have a hassle free experience while borrowing a home loan, you should maintain a minimum CIBIL score of 700 or above.There are many people who believe that since they have never taken a credit card or borrowed money from a lender, they will easily get a higher loan eligibility as it shows responsible spending on their part. But this is really not true. If you have never borrowed money, then how will the lenders know whether you are a responsible borrower or not? They are completely in the dark. The absence of a CIBIL score makes it impossible for you to get a home loan. Before you can take a home loan you will need to build a good credit history that shows responsible credit behaviour.
Your Ability to Repay The Home Loan
Ok now the lender knows that you are willing to pay. But CAN you pay? Think about the 50 Cr loan we spoke about in the beginning. You can’t pay that back while earning 50 k a month right? Your repayment ability is calculated by looking at your:
The money that you have at your disposal each month will be used to pay the EMIs on the home loan. Actually, there’s a very direct cause and effect between income and eligibility. It’s called: EMI/NMI Ratio. NMI is Net Monthly Income.Ratios! Those horrible mathematical calculations from school have come back! Relax. It’s a very simple thing. In EMI/NMI, lenders calculate your Net Monthly Income by subtracting fixed expenses like taxes and other loan repayments. And based on this NMI, your EMI is decided. Generally, lenders have fixed EMI/NMI ratios for different income slabs according to which your loan eligibility is calculated.
2. Risk in Employment:
Different professions have different risks attached to them. A banker’s job is much safer compared to a fire-fighter’s. A government employee’s income is more secure than a self-employed businessman’s. The lesser the risk in your profession, the higher is the possibility that you can make regular EMI payments and successfully repay the loan. This is why, the nature and stability of your profession is considered by the lender while calculating your eligibility.
This one is a no-brainer. A 28 year old borrower who has her whole career in front of her has a higher repayment capacity than a 45 year old professional with only 15 years left before retirement. At a lower age you have lower health risks, expected salary bumps and you can take a home loan with the maximum tenure: 30 years. This is why your eligibility is higher at a lower age.These 2 broad factors are key in deciding your home loan eligibility and by extension, the price tag of the home that you can afford. You may find that as of this moment, your home loan eligibility is not high enough to meet your housing needs which will make you wonder:
How do I take a higher Home Loan?
The reason that any borrower would want to improve their eligibility is to be able to borrow a higher home loan amount and buy a more expensive home than the one they currently qualify for. There are two ways of doing this:
1) Improve your home loan eligibility:
Income structure change:
As a salaried professional your income might be split into a ‘Take Home salary’ and the various reimbursements you receive. Taking the option of reimbursements instead of a larger salary means you save on taxes but the downside is that a lender is going to think that you earn lesser than you actually do. Obviously, a lower income means a lower home loan eligibility.One way of increasing your borrowing capacity is to change your income format. Instead of getting reimbursements, change your structure to get your ‘Take Home Salary’ increased. This will be seen as a higher income by the lender after which they will happily lend you a higher home loan.
Take a loan from HFCs: They give higher eligibility than banks
The debate between the advantages of Housing Finance Corporations and Banks is an old one because they both have their own benefits and handicaps. In today’s topic, HFCs come out on top because they generally assign higher eligibility to borrowers. If you need to take a home loan from a lender and are unable to get the needed amount from a bank, knocking on the doors of an HFC like HDFC or LICHFL might be a good option for you.
Take the joint home loan with a co-applicant:
Applying for a joint home loan with a co-applicant has some major benefits. An increased home loan eligibility is one of these. If two people take a home loan together, naturally their repayment capacity gets combined and they can take a much larger home loan. This is how taking a home loan with a co-applicant increases your home loan eligibility.
2) Take home loan which is higher than your eligibility
Intrigued? Confused? “How can I possibly take a home loan which is higher than my eligibility?”, you ask?
Let us explain. There is a certain type of home loan offered by some lenders through which you can take a home loan amount which is higher than your eligibility. An example of this type of ‘Step-up Home Loan’ is the SBI Flexi Pay scheme. SBI Flexi Pay allows you to take a home loan which is 20% higher than your eligibility. This means if you qualify for a loan of Rs. 40Lc, then with Flexi Pay you can borrow Rs. 48Lc. If you urgently need a larger loan and none of the above options work in improving your eligibility, then you can think about taking a Step-Up Home Loan like Flexi Pay.So brings us to the end of our discussion on Home Loan Eligibility.After reading this article, you should have gotten a clearer idea of what home loan eligibility is and how it is affected by different factors in your profile. Home loan eligibility is calculated differently by each lender which is why you qualify for different loan amounts from each lender. Generally you can calculate your home loan eligibility using online calculators which are also available on websites of different banks. These tools give you an idea of how much you can borrow but don’t rely on them 100%; they are meant to be used as a guideline. The final eligibility is calculated by lenders only after studying your documents.If you are thinking of taking a loan in the future, then it is a good idea to start working on improving your eligibility from today itself. The moral we learned in our childhood rings true for home loans as well: “The seeds that you plant today will decide the fruit you get tomorrow”If you have any questions about the things that we talked about, please feel free to ask them in the comments below. In case you would like some personalized assistance, you can sign up using the form below and our Home Loan Advisors will get in touch with you to help you out.
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