How your Home Loan Eligibility is Decided?
While giving home loans the lenders want to ensure that the home loan being given is serviced back. Primarily the banks and housing finance companies use the credit score and credit history to determine whether you should be given home loan or not. However in order to determine how much home loan can be given to you, the home loan providers consider many factors like your income as well as income of the co borrowers, tenure of the home loan, your age, amount of any existing home loan outstanding and value of the house being financed. Let us discuss how these factors affect your home loan eligibility.
Your income will be the starting point for processing your home loan application. Lenders consider around 40% to 50% of your monthly income being used for your consumption and the balance available for servicing your any loan. The proportion of your income which is considered available for servicing your home loan eligibility is not static and goes up as the income levels go up. So for example for a person with monthly income of one lakhs rupees the lender may consider 50% but if the monthly income is five lakhs rupees the lender may consider 70% or even higher as available for servicing the loan, as the expenses do not go up in the same ratio as the income goes up.
Even the percentage of income considered for servicing home loan varies from one lender to another lender. Moreover, the criteria of disposable income considered for a salaried person is different from that a self-employed borrowers. The lenders consider a higher proportion of income being available for self-employed professionals, like doctors, chartered accountants as they are presumed to be having higher actual income than the one reported for income tax purposes. Some lenders take into account the gross receipts of the professional instead of the taxable income as the expenses in case of professionals are generally inflated and thus suppressing the income reported.
Loan being serviced presently
Since the amount available for servicing of any loan will be dependent on the income, the lenders will take into account the amount of EMI (Equated Monthly Instalment) being presently paid for any existing loan. So your home loan eligibility comes down to the extent of the EMI being paid. So in case you have a running loan on which a small amount is outstanding, it makes sense for you to clear off the outstanding loan amount to enhance the home loan eligibility. Since the home loan is generally for a longer duration the incremental home loan eligibility, will be significantly higher than the outstanding amount being cleared.
Your age and remaining years of service
Home loans are generally available for 20 years tenure. As the lender wants the home loan to be serviced properly and which can happen only while you are earning, the home loan lender gives you the home loan which does not stretch beyond your earning life. So your age will determine the tenure of the home loan and reduction in home loan tenure bring down your home loan eligibility consequently. For example, if your age is 50 years and your age of retirement is 60 years, your loan tenure will be of only 10 years and the home loan eligibility shall accordingly get reduced. For a salaried person 60 years is considered as retirement age while for self-employed borrowers, the lenders consider 65 years as retirement age, for determining the home loan tenure.
Availability of co-borrowers
In case you are able to make any of your close relatives like children or parents to join the home loan application, the lender will take into account the combined income for determining the amount available for paying the EMIs. The co borrower may or may not be a co owner of the property being purchased but each of the joint owners of the property has to be a co-borrowers, irrespective of whether they have any separate income or not.
It is not necessary for the co-borrower to regularly contribute for payment of the EMI but in case of any default in servicing the home loan, the home loan lender can take action against all the co borrowers for recovery of the home loan amount outstanding.
Tenure of the home loan
The amount of home loan eligibility is directly linked to the period for which you are taking the home loan. Longer the tenure of the home loan, higher will be your home loan eligibility. Since arranging funds for purchase of a houses is a problem for almost all the home loan buyers, it makes sense for you to go for longer tenure home loan.
Moreover as there is no prepayment penalty floating home loans and majority of home loan lender mostly offering home loans under the floating rate of interest, I strongly advise you to go for longer home loan tenure. This gives you higher flexibility as you can always prepay your home loan partly or fully at any time, in case you have surplus funds without incurring any cost for such prepayment of the home loan, while having the flexibility of higher home loan eligibility at the initial stage.
Value of the property being financed
In addition to the above income based reasons, the amount of home loan will also be decided by the market value of the property being financed. The lenders normally allow you home loan upto 80 % of the value of the property. So even if you are eligible for home loan upto or even more then the value of the property based on your income, the ultimate amount of home loan will be restricted to value of the property being financed . However if your income based eligibility is lower than 80% of the value of the property, your loan amount eligibility will get restricted based on your repayment capacity as determined by the above factors.