How banks determine home loan eligibility
May 16, 2014
Source : The Times of India

 

DELHI: Buying a home is an important personal finance decision. This not only compels us to use our savings for paying down payment for homeloan, it also makes changes to our lifestyle to accommodate the new EMI payment for the home loan.

Eligibility of home loan, that is the maximum amount of loan an individual can avail, depends on various factors. Here they go:

CIBIL Score

The most important factor which determines the loan eligibility of an individual is the assurance to the banks that the individual can repay the loan amount.

Credit Information Bureau India Limited (CIBIL), founded in 2000, assesses the credit worthiness of an individual by collecting information about his loans and credit card payments from all Indian banks on a monthly basis.

CIBIL tracks the financial transactions ranging from how well one maintains the bank account, credit cards, and existing loans to any lapses in the form of skipped credit card payments or cheque bounces.

“After analysing these details, CIBIL provides a credit score on a scale of 300 to 900. Individuals with a CIBIL score greater than 700 are more likely to get a home loan at competitive rates. All the home loan lenders approach CIBIL for this score whenever one applies for a home loan,” says Nitin Vyakaranam, CEO of a leading online financial planning firm.

Income criteria

From the perspective of repayment of home loan, banks or non-banking financial companies (NBFCs), consider various factors ranging from age, type of employment, salary structure and existing loan payments.

Age of the individual:

Age of the individual determines the remaining earning potential. This plays an important role in determining the loan tenure. Majority of the loan providers have an upper limit on the eligibility age. Since the loan eligibility is also dependent on the loan tenure, individuals who have an option to increase loan tenure from say 15 to 20 years can increase their loan eligibility as well.

Type of Employment:

Employment history and the current employer of an individual also play an important role in determining the loan eligibility of the individual. From the perspective of the amount that a person can avail for home loans, banks determine the eligibility based on income as per the tax returns. Salaried professionals are generally considered to have higher repayment ability than the self-employed individuals.

For salaried professionals, banks lend up to sixty times the net monthly salary of an individual.

However, when assessing the income criteria, banks usually do not consider some heads of the salary slip. They only consider the income heads which can be used to repay a loan. For instance, heads of a salary slip like medical allowances and LTA are not considered when computing the eligibility amount for a loan applicant.

“If we have any existing loans, then the EMI of those loans are deducted from the total amount otherwise eligible. These are some of the reasons why we generally see a difference in the eligibility amount quoted in the website and the actual amount realized once the application is accepted,” Vyakaranam says.

Co-applicant of home loan: If we wish to avail higher amount as home loan than what is being offered by banks, we can include the names of our spouse or parents as co-applicant.

Co-applicants’ income adds value to home loan application and helps in increasing the overall loan eligibility amount. Banks favour such applications as the loan repayment commitment is shared by both the applicants, thus reducing their own risk. Co-applicants’ status also helps in tax planning as the tax benefit interest payment under Section 24 of the Income Tax Act, 1961, can be taken by both the individuals.

Time taken for approval

From the time all the required documents along with the home loan application is submitted, the time taken for the approval of loan varies from 3-15 business days and differs from bank to bank.

The documents generally required along with the application form are:

-Identity proof

-Address proof

-Income proof (Tax returns, employment details, bank statements)

-Proof of educational qualifications

-Age proof

-Details about the property

Financial institutions validate the information provided by home-loan applicants through their independent investigation and once they are satisfied, they approve the loan. In case they reject an application, they would normally give the reasons on request.

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