Most Indians resort to home loans as a means for owning their own home. These loans charge an interest rate over the principal and allow for long repayment terms. Home loan eligibility is one of the most common questions and concerns among prospective new home loan seekers. Lenders like banks and other non-banking financial companies (NBFC) take into account several factors before approving the loan and the amount. While certain aspects might vary from lender to lender, in general, the concepts and considerations are similar and typically include your credit history, past financial track record, current earnings and repayment capacity, among other aspects. It is important to understand these factors so as to get the best home loan possible. They are briefly described below.
Your age, especially your remaining earning age, is an important factor considered by lenders. The closer you get to the general age of retirement, the shorter the loan tenure tends to get, thus leading to higher EMI amounts. This is due to the perceived risk that your regular income stream is expected to end soon, and thus, your repayment capacity will be reduced. Hence, it is advisable not to delay getting home loans so as to reap the benefits of age and earning capacity.
Possibly the most important factor used to determine the borrowing limit for new home loans and consequential EMI amounts are your net monthly earnings. While different lenders may use different formulas and calculations, their main variable is your net monthly income. The focus is on net salary or take-home amount since most lenders do not consider mandatory deductions like PF, Gratuity, Pension Schemes etc. While a common consensus is that the approved amount is usually 70-80 times the net monthly salary, this is not a bona fide rule, other considerations are also part of the final calculation.
Your home loan eligibility is also dependent on your credit score. Due to the large amounts and long tenure, it is natural for the lending institutions to be risk-averse and aim to safeguard their loan. The credit score is like your financial report card and maintains a history of your previous credit repayments. This profiling helps the lenders factor in the risk cost and arrive at the final loan amount to be sanctioned. Most lenders prefer a minimum credit score of 750 or above.
The net salary is an indicator of how much you earn presently. However, it may not necessarily be the optimum measurement of your repaying capacity. This can be due to existing loans or other monthly expenses / financial obligations. While securing a new home loan, the lenders will inquire about your monthly expenses to understand how much net income is left to repay the potential loan amount being considered.
As you must have learnt, there is a combination of factors that come together to determine the final approved loan amount. One needs to be mindful of these in order to secure the best home loan. Your home loan eligibility can be enhanced by following some best practices, like: