Depending on your situation, there are several things you can do to improve your eligibility. One of the options is to have a co-borrower. If the co-borrower also has an independent income, then your combined income will be considered for the loan. It is also a good idea to close as many outstanding loans as possible before you apply for a home loan.
Buying a home is a major life goal, but navigating the financial aspects can be daunting. One crucial step in your journey is understanding how much home loan you might qualify for. This knowledge empowers you to set a realistic budget and search for properties that align with your financial capabilities.
Let's delve into some simple rules to estimate your potential loan amount and pave the way for a smoother home-buying experience.
Lenders in India typically consider these factors when determining your loan amount eligibility:
● Net Monthly Income: “Your income plays a major role. Lenders generally offer up to 60 times your net monthly salary as a home loan. A higher income means a larger potential loan amount,” Raj Khosla, founder and MD, MyMoneyMantra.com said.
“For example, if your net monthly income is Rs 50,000, and your FOIR is 40 per cent, potentially, you could be eligible for a loan of approximately Rs 30 lakh,” Khosla added.
As a thumb rule, you will be eligible for 4-4.5 times your annual income as a home loan. However, the lender will also take your FOIR into account. “This means if you have other ongoing loans, then the EMI on all the loans including the home loan typically needs to be less than 40 per cent of your income. So, even if your salary makes you eligible for a higher loan, you may not get as much. Finally, the loan amount will also depend on the property value. Typically, the bank will have a 20 per cent margin on the value. Say your income makes you eligible for a loan of Rs 50 lakh. However, if the property value is Rs 50 lakh, the maximum loan you can avail of would be 80 per cent of the value, or Rs 40 lakh. If your credit score is low, the lender may increase this margin to 30-50 per cent,” Adhil Shetty, Chief Executive Officer (CEO), BankBazaar said.
The amount of home loan you can get against your income depends on various factors, including your income, existing debts, credit score, and the lender's policies. “Generally, lenders consider your equated monthly instalment (EMI) to income ratio, which ideally should not exceed 40-50 per cent of your gross monthly income. For example, if your monthly income is Rs 50,000, the maximum EMI you can afford would be around Rs 20,000 to Rs 25,000,” Atul Monga, CEO and co-founder, of Basic Home Loan said.
● Fixed Obligations To Income Ratio (FOIR): “Lenders look at your existing debt obligations (like EMIs on other loans). A lower FOIR (ideally below 50 per cent) indicates greater capacity to repay a home loan,” Khosla added.
● Loan-To-Value Ratio (LTV): This is the percentage of the property's value that the lender is willing to finance. The RBI usually limits LTV to 75 per cent-90 per cent. You'll need a down payment to cover the rest.
● Age: Younger borrowers have a longer earning potential and hence may be eligible for a higher loan amount and longer tenure.
● Credit Score: A good credit score (750 and above) significantly increases your chances of getting favourable loan terms.
● Employer's Reputation: If you work for a reputable company, it reflects stability and may make you eligible for a larger loan.
Increase Down Payment: Paying a higher down payment reduces the loan amount, making it easier to qualify.
Increase Your Income: “Consider ways to boost your income through salary increments, bonuses, or additional income streams,” Monga said.
Reduce Existing Debts: “Pay off or reduce your existing debts to lower your debt-to-income ratio, making you a more favourable borrower,” Monga added.
Reduce Debt: Pay existing loans or credit card dues to lower your FOIR.
Build Good Credit: Make timely payments and maintain a healthy credit mix. Avoid actions that negatively impact your credit score.
Opt For Longer Tenure: A longer loan period lowers the EMI, potentially improving your eligibility. But be mindful that this also increases the overall interest you pay.
Add A Co-Applicant: Including a co-applicant with a stable income stream can boost your collective eligibility.
Maintain Stability: Consistent employment and residential stability show lenders' responsibility.
Choose Reputable Builders: Lenders favour projects from established developers as they are deemed less risky.