How Home Loan Eligiblity is Calculated on Your Salary?

HOUSING | Know More 11 January 2022

For credit companies, the primary driver of profit is their lending activities. These include the provision of issuance of home loans, personal loans, or any other type of loan. One may assume that more loans would then mean more profit. However, this is only partly correct. A lender can only make a profit if the borrower is actually able to repay the loan, including the interest component. Thus, credit companies have developed stringent guidelines to assess whether or not a borrower will be likely to repay the loan. An example of the same is the guidelines that you may encounter if you’re trying to determine your home loan eligibility.

How Home Loan Eligiblity is Calculated on Your Salary?

A home loan often spans more than a decade, and a lender needs a basis to ascertain what amount you will be able to repay. One of the most efficient ways lenders come up with to assess this is through your salary. For a home loan or any other loan, the basic premise is that the more you earn, the more you can borrow because the more you will potentially be able to repay. Let’s however, take a look at how this calculation is actually carried out so that you can carry out your own calculations with or without a home loan eligibility calculator.

How home loan Eligibility is calculated

As part of a home loan, you are borrowing money from a lender. The risk that the lender is exposed to varies based on each borrower. In order to streamline the determination of a borrower's eligibility for a home loan, there are some base parameters that have been set that are common across lenders, regardless of the home loan amount, repayment tenure or home loan interest rates. Let’s take a look at some of these criteria.

  1. Age: To get a home loan, the borrower has to be between the minimum ages of 18, and a maximum of 70 years of age.
  2. Credit Score: Your credit score is essential to ascertain your repayment credibility, and much emphasis is laid upon it. Your credit score, therefore, has to be a minimum of 750 or above.
  3. Salary: To get a home loan you are required to have a minimum salary of Rs 25,000 per month.
  4. Experience: It is also mandated that an individual have about two years of work experience before they can apply for a home loan.
  5. Loan-to-Value (LTV)Ratio: Upto 90%. This refers to the percentage of the property value that the lender is allowed to provide as credit to the borrower.

These are minimum home loan eligibility criteria that have to be met. Over and above this, however, specific lenders might have specific parameters that you might have to meet, which can be either more stringent or more lenient as well. However, none of these parameters superseded your income level. Based on your salary, you are restricted to certain loan amounts and interest rates. Typically, you will be eligible for a home loan, whose EMIs do not exceed 40 - 50% of your net monthly income.

A Home Loan Eligibility Calculator

It is undoubtedly beneficial to know how your home loan is calculated so that you do not end up paying extra. However, carrying this process out manually to account for your salary can be time-consuming and taxing. In the interest of saving time, therefore, you could make use of a home loan eligibility calculator to make your assessments. However, ensure that you are not relying solely on the calculator, and have an understanding of the specific requirements of your chosen lender.

Conclusion

Taking out a home loan can be a daunting task. You also do not want to overextend yourself as you have to be sure about your income for the loan period to ensure you do not miss payments, and if you want a larger loan you might have to look for a higher salary as well. Understanding how home loan rates are calculated and home loan eligibility ascertained based on your salary plays an important role in being able to accurately gauge your repayment capacity, ensuring you take a loan that is comfortable to repay and does cause you any trouble. If you are looking to get a home loan, the Piramal Finance website has a number of offerings for all income bands, meaning you are likely to find a loan for you regardless of what salary you earn (as long as you meet the minimum requirement). Here’s how you can apply.

[Also Read: Guide for First time Home Buyers in India ]

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