Arriving at Home Loan Eligibility

March 26, 2010 - PRLog -- Credit appraisals constitute an important step in determining the eligibility for a loan, and the amount of loan that can be given. The potential borrower has to go thorough the various stages of the credit appraisal process of the bank. Each bank has its own criteria to satisfy itself on the credit worthiness of the borrower.
   
The eligibility of a person depends on his credit worthiness, determined in terms of the norms and standards of the bank. The credit worthiness basically assures the repayment capacity of the borrower - whether the borrower is capable of repaying the loan and dues in time. The norms differ from bank to bank. Each has certain norms within which the potential borrower needs to fit to be eligible for a loan. Based on these parameters, the maximum amount eligible is worked out. However, the broad parameters to determine the eligibility remain the same for all banks.

Some aspects assessed

Incomes of the applicant and co-applicant Age of applicants Qualifications Family details Profession Experience Employer/business Security of tenure Tax history Details of assets and their financing patterns Additional sources of income Past loan record, if any Recurring liabilities Investments Some methods to arrive at eligibility:

Instalment-to-income ratio

A bank looks at the instalment-to-income ratio. This helps in finding the eligibility of the borrower. It is generally expressed as a percentage. This percentage denotes the portion of the monthly instalment on the home loan taken. Usually, banks use 33.33 to 40 percent ratio. It is assumed that in normal circumstances, a person can pay an instalment up to 33.33 to 40 percent of his salary.
   
For example, assume the instalmentto-income ratio is 33.33 percent and the gross income is Rs 60,000 per month. As per the ratio, the borrower is eligible for a loan where the instalment does not exceed Rs 20,000 per month.
   
Fixed obligation to income ratio : A bank also calculates the fixed obligation to income ratio (FOIR). In a FOIR calculation, the bank takes into account the instalments of all other loans already availed of by the borrower and still due, including the home loan applied for. This ratio includes all the fixed obligations that the borrower is supposed to pay regularly - on a monthly basis. The fixed obligations do not include statutory deductions from the salary like provident fund, professional tax etc.

For example, assume an income of Rs 60,000 per month, car loan instalment of Rs 8,000 per month, TV loan instalment of Rs 2,000 per month and the proposed housing loan instalment of Rs 20,000 per month. Accordingly, the FOIR is 50 percent (50 percent of the monthly income). A bank may have a standard of 40 percent of FOIR. So, the total instalments the person can pay, as per the bank’s FOIR standard would be Rs 24,000 per month. As he is already paying Rs 10,000 towards the car and TV loans, he has Rs 14,000 left and the loan would be calculated taking Rs 14,000 per month as the basis. Thus, a backward calculation of the repayment capacity is done to find the amount to be given as loan.

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