Buying a home is one of the biggest purchases many of us make in our lifetime – and this inherently involves taking a big sum of housing loan to fund the home, which takes years to pay off! Hence proper planning for funding for house loan is very much important so that one is left with enough money for other goals too in life, such as retirement, education funds, vacations etc.

How the bank calculates loan eligibility?

Loan eligibility is calculated by the bank after considering various factors such as gross monthly income, rental income, monthly obligations if any, age of applicant, retirement age, credit history, credit score and regulatory guidelines, among others.

Some examples of how these factors can influence one’s eligibility are:

• Current age and retirement age will determine the tenure of the loan, which in turn will determine the quantum of the EMI.
• Gross Monthly income, rental or other income and monthly obligations will determine the surplus funds at one’s disposal which may be used to pay the EMIs.
• Credit history and credit score will help the bank understand the repayment history and creditworthiness and accordingly affect eligibility.

How much home loan can I get on my salary?

The amount one can borrow depends on how much he/she can afford to repay per month in EMIs or Equated Monthly Instalments.

Steps in calculation the EMI:

Step 1
A bank refers to the income statement of the customer (salary slips, tax returns, bank statements) and calculates the total monthly income by adding up salary, interest income, rental income, etc.

Step 2

It then calculates the amount one saves. Since savings depend on a variety of factors like income level, lifestyle etc, there is a standard thumb rule of 30 per cent that banks apply to arrive at this number. For example, if the income is Rs 100,000 per month, the bank assumes that one saves 30 per cent, that is Rs 30,000 per month.

The higher the income, the more one should save, is the general assumption.

Step 3

Already existing EMI amounts will be reduced from the calculated savings.

Step 4
After that, a little backward calculation is done to find out the amount of loan that would result in an EMI equal to the amount that you can save. The bank uses the latest interest rate to calculate this.

Illustration

If the monthly net savings is around Rs 30000, the bank assumes that is the amount available to pay off the EMI. If the prevailing interest rate is 10 per cent and the loan tenure is 10 years, the loan eligibility will be of around Rs 23 lakh.

How much of your budget should be used for housing?

Rule of thumb

While it is not fixed, the financial planners and experts suggests a rule of thumb that expenditure on property loans/rent must not exceed 35% of your income. Most lenders will calculate this based on income size, income stability, credit score, down payment size, and other factors. However, they provide the maximum amount possible and hence it is not necessary that one needs to stick to the number provided by them, if the same is not within one’s financial capability.  It is advisable to decide upon an affordable number before one even starts looking for a home so that he/she is well aware of the budget and limitations. This will also make it easier for one to shortlist one’s home buying options, too.

In the initial years, the interest component of the housing loan will be higher which should help to reap tax benefits, so making part-payments after 5-7 years could work well.

Thus, Planning plays a very important role in deciding on the amount of home loan so that one is never overburdened by heavy EMIs.

What is the good score in CIBIL to get loans? (Credit Information Bureau of (India) Limited)

Getting a loan in India can often be a tedious process for the un-initiated, but not for individuals with a good credit score.

What is a CIBIL Score and Report ?

CIBIL Score is a three-digit numeric summary of credit history. The score is derived using the credit history found in the CIBIL Report (also known as CIR i.e Credit Information Report). A CIR is an individual’s credit payment history across loan types and credit institutions over a period of time . A CIR does not contain details of savings, investments or fixed deposits.

This report will contain complete details of credit history across various lenders and products, enabling one to check all the aforesaid information.

What is a good CIBIL Score

TransUnion CIBIL (Credit Information Bureau India Limited) provides a 3-digit number that ranges between 300 and 900. If the credit score is closer to 900, it is considered good by financial institutions.

Whenever one applies for a loan, banks check the CIBIL Score and Report to evaluate a person’s credit history and credit worthiness. The higher the score the better are the chances of the loan application getting approved. 79% of loans or credit cards are approved for individuals with a CIBIL Score greater than 750.

Meeting the required credit score limit set by the lender leads to the application being processed further and faster. Thus , maintaining a good credit score helps in getting a loan approval faster and at cheaper interest rates.

Debalina Roy Chowdhury

Dilzer Consultants

Sources

https://www.thehindu.com/real-estate/how-much-monthly-income-should-you-spend-on-your-home-loan/article19336924.ece

https://www.cibil.com/faq/understand-your-credit-score-and-report

https://www.apnapaisa.com/home-loan/eligibility-calculator/