You found your dream home and you need a home loan for buying it. Have you assessed whether you are eligible for that loan? After all, everyone wants to choose a property that they can afford. How can you check your home loan eligibility in a jiffy?
While you could use a home loan eligibility calculator that’s available online, you can also calculate your home loan eligibility on your own. It is quite simple! Here’s how.
The formula for calculating your eligibility is income available / loan EMI per lakh. This will give you how much you are eligible for the loan that you need. This example will help you understand how to calculate your eligibility.
Let’s say your monthly income is Rs. 75,000, and your monthly expenses are Rs. 30,000. So, you could afford to pay Rs. 45,000 towards your home loan EMI. This is assuming you have no other loans. Now, let’s calculate the EMI per lakh. At an interest rate of 9%, the EMI for a 20-year Rs. 1 lakh loan will be Rs. 900.
Using the formula mentioned above, your home loan EMI will work out to Rs. 45,000 / 900 x 1 lakh = Rs. 50 lakhs. The higher the income available post expenses, the higher will be your eligibility for the loan.
There is another way that lenders calculate your home loan eligibility if you are living in a rented house. Lenders will exclude the rent you pay from the edibility calculations as you won’t be paying rent after you buy the property.Let’s say you pay rent of Rs. 10,000 every month. You will save on this amount after you move into the property that you purchase. If you exclude your rent, your total expenses will come to Rs. 20,000, down from Rs. 30,000. So, Rs. 55,000 will be available for you to pay your home loan EMI.
So, your loan eligibility will be:
Rs. 55,000 / 900 x 1 lakh = Rs. 61.1 lakhs, up from Rs. 50 lakhs.
Sometimes it isn’t easy determining a borrower’s monthly expenses using their bank statements. So, lenders often use a pre-determined percentage of the borrower’s income to calculate the monthly expenses of the borrower. For instance, a lender may assume that if your income is Rs. 70,000 per month, 45% of your income will go towards expenses. This will then be used to calculate the amount that will be available for paying your EMI.
Note that this percentage may vary depending on the borrower’s income. Lenders will assume that those who earn more will be able to spare more money for their loan repayment. Most lenders have expense brackets such as 35%, 40%, 45%, and 50% for monthly incomes up to Rs. 30,000, Rs. 50,000, Rs. 1,00,000 and more than Rs. 1,00,000 respectively.
For instance, if your income is Rs 1,55,000, your home loan eligibility will be calculated as follows:
Amount available for loan repayment = Rs. 1,55,000 x 50% = Rs. 77,500
Loan eligibility = Rs. 77,500 / 900 x 1 lakh = Rs.86.1 lakhs.
If you have other loan liabilities at the time of applying for a home loan, your net eligibility will reduce by the amount of EMI that you pay every month.
Also read: CRR, SLR, Repo Rate & Reverse Repo Rate and its impact on your Home loans
Home Loan Tenure
Your eligibility will depend on the tenure of the home loan too. For longer tenures, the EMIs per lakh borrowed will be lower, and so, you will be eligible for higher amounts.
Let’s consider some calculations to understand this. A home loan for a 9% interest rate, Rs 1 lakh loan will be Rs. 805 if the tenure is 30 years. As we have seen previously, this was Rs. 900 for a 20-year loan. So, if the income available for repayment is Rs. 77,500, the loan eligibility for a 30-year duration will be Rs. 96.27 lakhs. This was just Rs. 86.1 lakhs for a 20-year loan. So, your loan eligibility for a 30-year loan will be higher than that of a 20-year tenure loan. This is the reason why many opt for a higher loan tenure.
However, note that the higher the loan tenure the more the amount of interest that you will need to pay for the loan. For instance, the total interest for an Rs. 10 lakh, 20-year loan at 9% is Rs. 11.6 lakhs. If you choose a 30-year tenure, you will have to shell out as much as Rs. 18.9 lakhs in interest. So, it is better to choose a lower tenure if you can afford the EMI.
Factors that affect your home loan eligibility
There are many other factors other than your income that can lower or increase your home loan eligibility. Here are the details.
- Age
The borrower’s age is one of the most important and influential factors that determine whether a lender will consider a home loan application. Usually, the younger you are the easier it is to get the loan for a higher tenure. For instance, if you happen to be in your 20s or early 30s, you should be able to get a home loan with a tenure of up to 30 years. However, individuals over the age of 40 could find it difficult to get a home loan with a longer tenure as lenders expect borrowers to repay their loans by the time they retire.
- Credit Score
Your credit score is important to get your home loan approved. A good credit score and repayment history can help you get a home loan without any problems. However, a low credit score could lead to lenders sanctioning a lower loan amount or rejecting your loan application. So, check your credit score before applying.
Also read: Reverse Mortgage Loans for regular income post retirement
- Other Loans
If you have any additional or outstanding debt, then you might be eligible for a lesser loan amount. Note that before a lender issues a loan, they refer to the central database maintained by the Credit Information Bureau of India (CIBIL). This will give them detailed information regarding all loans and dues of an applicant. Even outstanding credit card payments could adversely affect your home loan eligibility. So, have minimal loan liabilities when you apply.
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- Your Company
It is true that if you are a salaried person with a steady income, you will get a loan easily. However, the company for which you work matters too. Banks consider certain employment sectors riskier than others. Banks maintain a separate list of top companies to which they offer lower and better interest rates when compared to smaller or lesser-known companies. So, it is not just your income, your company too plays an important role in your home loan eligibility.
Now that you know all about the factors that affect your eligibility, here are a few tips on how you can increase your eligibility:
Also read: 15 Home Loan Hidden Charges
Some lenders include alternate sources of income in calculating the eligibility. So, if you are receiving any other income such as rental income or income from a part-time job, be sure to ask your lender to include that income.
You could consider adding a co-applicant to your loan to enhance your eligibility. This way your income together with your co-applicant income will be considered for eligibility and you will be able to get a higher loan amount.
Always check your credit report before applying for a home loan and compare it across lenders for getting the lowest interest rates available.
