Home Loans Eligibility Factors

Majority of people aspire to have their dream house where they can live in their own lifestyle and comfort.  With sky rocketing property prices a home loan is among the most viable options out there to fulfil this desire.

In recent years the home loan market has been booming all over the world and housing loans are more accessible. However, availing a home loan without analysing repayment capacity can put a borrower in a tough financial situation. Therefore, it is of utmost importance to ascertain if you can afford the loan.

As a result of the huge demand for home loans, almost every bank and nearly every NBFCs provides attractive home loan options to rope in new customers. Unfortunately, the process to apply for a home loan can still have a number distinctive attribute of bumps and in the following sections I shall discuss some of the common pitfalls so that you can avoid these to affect the process at the time of applying.

1. Your Ability To Repay


I. Monthly Income:

Your monthly income will determine the chances of returning the loan and timely payments of EMIs. If you are salaried person, your monthly income and if you are self-employed, in that case your annual profit would decide your home loan maximum eligibility.

The loan amount basically depends upon the net income of an individual. Most of the banks lend a home loan up to 60 times of an individual's net income. For instance, if your take home salary is Rs. 30,000, You are eligible to get a loan of around Rs.18 lakhs.

Your monthly income plays an important role in determining your home loan affordability. Usually, 35% – 45% of your monthly income can be spent towards your EMIs. If the home loan EMI on a particular home loan exceeds this percentage, it is likely that this loan is unaffordable.

II. Other debts to pay off and other EMI:

Before opting for a home loan one must assess his / her current financial liquidity and arrive at an estimated amount on how much one can comfortably afford. This EMI is the monthly EMI, which you have already taken from any bank and now you are still repaying it. The loan amount should be able to derive a specific monthly instalment and repayment amount.

III. Available Income:

It is considered on the amount left with you after deduction of any EMI amount that you are currently paying for any kind of loan. Your Home Loan Eligibility will be calculated after deductions of the EMIs that you are paying.

Lending institutions fund an individual for a home loan based on the income, which ultimately is the yardstick of perceived ability to pay back.

Banks generally give loans up to 80 percent of the total property cost and one is expected to pay around 20%* as own contribution (down payment).

Assessing your need is a crucial step while applying for a home loan and one needs to do his / her due-diligence before taking it further.

2. Check and Improve Your Credit Rating

A credit score is a three‐digit number that measures how likely you are to repay a loan on time. It uses information from your credit report to predict the risk of you not paying that loan back 24 months after scoring.

A credit report is an explanation of your credit history. It states when and where you applied for credit, whom you borrowed money from, and whom you still owe. Your credit report also tells you if you’ve paid off a debt and if you make monthly payments on time.

Your credit history is a vital part of your home loan application process. The lender will check to ensure that there is no record of you defaulting on previous loans, credit cards, or other lines of credit.

Having a strong credit history, reflected in good credit scores, will allow you to qualify for lower interest rates and fees. This helps you to free up additional money to set aside for emergencies, retirement, and other smaller unexpected expenses.

If you can prove that you’re a reliable borrower who meets his financial obligations on time, you may be able to borrow a higher amount. Of course, if there are any defaults or late payments mentioned in your credit history, this may work against you when you’re trying to obtain a home loan.

3. Your living expenses and the cost of maintaining your lifestyle

When working out your borrowing capacity, the lender will also consider your living expenses and the cost of maintaining your lifestyle. They look into these areas because they want to ascertain if you can truly afford the repayments while still maintaining the lifestyle you’ve become accustomed to.

Unnecessary commitments beyond the need is rocky to your inner peace and personal freedom. Therefore, financial discipline should be perceived and you should measure any new expenditure in terms of your need and not the desire. Consequently, it is of paramount importance to size your financial commitments to that which is necessary to achieve your long term objective.

Furthermore, you should take into consideration any changes that might affect your future income patterns, interest rates fluctuations and your lifestyle. Try to close any other loans which are active as they might reduce the eligibility factor while applying for a loan.

To avoid problems down the road, it’s important to work out your living expenses and the cost of maintaining your lifestyle. Once you have these figures, you’ll be able to work out a mortgage repayment scheme without adversely affect your standard of living.

4. Possess, a strong savings history

The more money you have put aside for your property deposit, the easier it will be to obtain finance and increase your borrowing capacity. Lenders also want to see that you have an obsessive habit of genuine savings.

In order to have good credit scores you must demonstrate a habit of good credit management over a long period of time. It is always prudent to deposit part of your check into a savings account automatically each month to pay down debt and ensure you have enough money to meet any exigency.

When applying for a home loan, be sure to list as many assets as you can. Include the assets’ insured value, and list down any investments and savings.

5. Maintain a financial ‘safety net’

You should maintain an emergency fund, also known as stash of money in a savings account. This fund should be set aside for unexpected events that carry some financial impact viz. losing your job, sickness, or necessary home or car repairs. It is the most basic piece of your financial safety net and this money should never be touched under normal circumstances. The only objective for this fund is to meet emergency needs.

6. Avoid applying with too many lenders abruptly

Applying to multiple mortgage lenders allows you to compare rates and fees to find the best deal. Having  multiple offers in hand provides leverage when negotiating with individual lenders. However, applying with too many lenders may result in score-lowering credit inquiries, and it can trigger a spate of unwanted calls and solicitations. However, comparative shopping is always the wisest move to make, especially when you're financing a major purchase like a home or car. It is, therefore, wise to strike the right balance of options to avoid too much enquiry in your credit history.

7. Maintain stable employment


When determining your ability to pay, a lender will calculate your average income based on your pay from the past 24 months. It’s pretty straightforward if you’ve had the same job and same income and pay structure, but if any of those things changed in the past two years — or will change soon, you may face challenges when trying to get a mortgage.

Banks care about their brand and as such, they need certainty that the loan will be repaid, and this is evidenced through the documentation you provide them with, in terms of your income and employment.

When you submit a home loan application, the bank will give your loan a credit score based on the overall risk that you pose. The length of time in your current job and income stability forms a major part of this score.

8. Rejected Loan Applications, if any in the past

If you have had your home loan application rejected, for whatever reason, your credit score will diminish in number because of this. As a consequence of this action this may cause all future loan applications may be rejected, putting you in an endless cycle of rejection. Hence to avoid this happening ensure to get your credit score corrected before applying for a fresh home loan.

Before you apply for your next loan it is essential to check for any red flags in your credit, and see if you truly have sufficient income to repay the loan. Examine your credit report, and ask lenders if you anticipate any problems. They’ll gladly explain what matters and what doesn’t, and how long you need to wait after certain events like foreclosure. It’s also worth asking what the lender wants to see for your debt to income ratios.

9. Disclose all information to the lender

You have to provide following informations to your lender to make your loan application foolproof.

  • Your name,
  • Your income,
  • Your Social Security number (so the lender can pull a credit report),
  • The property address,
  • An estimate of the value of the property, and
  • The desired loan amount.

Your loan officer cannot require you to provide documents verifying this information before providing you with a Loan Estimate.

You can choose to give more information. The more information you can provide the loan officer about your financial situation, such as debts and nonwage income sources, the more accurate the information on your Loan Estimate is likely to be. Your Loan Estimate will also be more useful for you if you tell the loan officer what kind of loan you are interested in.