9 Factors That Influence Your Prospects Of Getting A Home Loan
Have you applied for a home loan, or is planning to apply for one? Most young Indians apply for a home loan while buying a home. Banks and financial institutions sanction home loans according to certain terms and conditions. Lenders evaluate home loan applications according to very stringent norms. Apart from the parameters according to which banks and financial institution evaluate your application, there are certain factors that influence your prospects of getting a home loan.
MakaaniQ throws light on the major factors that influence your prospects.
Your home loan eligibility is estimated for a certain period called “tenure”. Your tenure is based on your age, and your ability to pay it off in a certain period. The ability of a young applicant to pay back his loan will be different from that of a middle-aged or retired person. Home loan borrowers in different phases of their lives face challenges that are very different. Banks consider such factors while evaluating applications. By planning and budgeting well, you can overcome the obstacles people of your age group face, and find the best option available to you.
Qualification and experience
If your academic credentials and work experience are impressive, the odds of the bank sanctioning your home loan is higher. For example, if you are a salaried employee, you must have at least two to three years of work experience to be eligible for a home loan. Similarly, if you are a self-employed individual, your company must have been operational for a couple of years, with sufficient cash profits and revenues. Tax returns must have also been filed in the company’s name. Your academic credentials and work experience predict career progress and stability fairly well.
This does not require further explanation. Your income highly influences the money banks and financial institutions are willing to lend you. Higher your income, greater the amount of money banks are willing to lend you. All lenders insist that applicants should have a certain level of income to be eligible for a home loan. This, of course, varies according to your profession. Your home loan eligibility is calculated based on your income.
The number of dependents you have will have an impact on your home loan eligibility. Greater the number of dependents, lower the chances of your home loan being sanctioned, all other things being equal. In fact, your income should be high enough to support your dependents, and take on the extra burden of a paying off a home loan at the same time. Lenders calculate the Fixed-Obligation-to-Income Ratio (FOIR), which eliminates a part of your income used to support family member/dependents.
Type of employment
The type of your employment will have an impact on your home loan eligibility. Banks care about whether you are salaried, or whether you are a Self-Employed Professional (SEP) or a Self-Employed Non-Professional (SENP). The eligibility criteria vary according to your form of employment. Frequent job changes can affect your prospects of getting a home loan.
Credit and payment history
Your credit and payment history gives the lender a picture of how you handled your liabilities in the past, and of how capable you are of repaying the loan. A credit score is assigned based on your credit history. Banks decide whether to sanction your home loan based on your credit score. The credit score tells your lender what kind of borrower you are likely to be. You do not have to panic if your credit score is less than ideal. Your credit score is not the only criterion according to which banks evaluate your home loan application.
Types of credit in use
If you have too many loans running, the probability of the bank sanctioning your home loan will be lower. This indicates that the applicant’s appetite for debt is too high. Similarly, if you have too many unsecured loans running, the risk of granting a secured loan is too high for banks and financial institutions. Lenders calculate the Debt-Service-Coverage-Ratio (DSCR) to ascertain the ratio of your total current debt to your total current income. Let us understand what this means, with an example. There is always collateral (security) involved in a home loan. In other words, the lender is interested in your equity in the flat/property mortgaged with the lender. This equity is, basically, the difference between the current market value of the property and the outstanding loan amount. The chances of a new credit/loan become less with the shrinking difference between the two (i.e. the market value of the property and the outstanding loan amount).
Down Payment/ Margin Money
It is not merely the principal and the interest components of your EMI that you need to worry about. You also have to arrange the funds for margin money on the home loan. The lender funds only the 80 per cent of the market value of the property called (LTV) i.e. Loan-to-Value Ratio (90 per cent in case of home loans below Rs 30 lakhs). The borrower must arrange the 20 per cent (or 10 per cent as the case may be) of the market value of the property. The down payment you are able to make will have a huge impact on your home loan eligibility.
Market lending rates
The Reserve Bank of India’s (RBI) policies and market lending/interest rates have a huge impact on your debt and advances. Interest rates determine the cost of borrowing money. Higher the interest rate, higher will be the cost of your home loan. In simple terms, rising lending rates will raise inflation and discourage borrowing, making savings more attractive. Declining interest rates make borrowing more attractive.