Applying For a Home Loan? Here's What You Need To Know About Your 'Foir'
If you are seeking a loan from a bank, you have to be prepared for multiple layers of checks. But why do banks go for such extensive credit appraisals? Consider this: If an unknown person approached you and sought to borrow from you, you would hardly entertain such requests, would you? And, if the person you lent money was your friend or family and he or she failed to pay you back within the pre-determined time, you would repent.
This largely sums up why banks and financial institutions do their fact-checks before issuing loans and mortgages. The bank needs to know you well and make sure that it does not have to repent its decision. For any financer, determining the likelihood of loan repayment is crucial.
When you approach a bank for a home loan, the bank looks at your income, personal credit history, and current assets & liabilities, among other things. These are meant to determine your creditworthiness and help decide whether extending a loan to you is a wise business proposition.
Among the things that the bank evaluates, it sees your fixed monthly payment obligations vis-à-vis your monthly income, commonly known as fixed-obligation-to-income ratio (Foir).
How is Foir calculated?
Foir, the most common parameter the bank uses to ascertain your loan amount, is the ratio of your fixed obligations to your income. While calculating this ratio, the bank considers the existing instalments for your previous loans and the new loan amount you that have applied for. The statutory deductions, such as provident fund, professional tax or those for investments like insurance premium, recurring deposits, etc, do not fall in the fixed obligation category.
Suppose Rahul Sen, a school teacher, has a monthly income of Rs 50,000. He pays Rs 5,000 each towards his monthly instalments for an automobile loan, a personal loan and an education loan (a total of Rs 15,000). Also, he has another sanctioned consumer-durable loan from another bank for which his proposed monthly instalment is Rs 10,000 – he has availed of the loan and should start paying instalments in a month. So, Sen's fixed obligation comes to Rs 25,000, or 50 per cent of his monthly income – he has a Foir of 50 per cent.
If Sen's lender has 60 per cent as a standard Foir criterion for disbursing home loans, the most Sen will be assumed to pay as monthly instalments is Rs 30,000 (60 per cent of Rs 50,000). Since Sen is already paying Rs 25,000 from of his salary to service his various loans, he will be sanctioned a loan amount for which the equated monthly instalment (EMI) is equal to or less than Rs 5,000 (the amount after reducing his fixed obligation of Rs 25,000 from the total allowable obligation of Rs 30,000 under the bank's standard Foir criterion).
In other words, the bank will restrict the home loan amount in such a way that Sen's fixed monthly instalments, along with the proposed home loan monthly obligation, fall within the purview of bank's benchmark for Foir.
Is there a standard Foir for all banks?
Foir varies from bank to bank and from case to case, but it mostly falls within the bracket of 40-60 per cent. Your monthly net adjusted income (NAI) is a major indicator for deciding your Foir. For example, the Foir for you can be 40 per cent if your NAI is up to Rs 20,000 a month; but you can enjoy a Foir of 60 per cent if your monthly NAI is higher than Rs 75,000. Also, if you have no previous loan obligations, you can leverage the benefit of higher Foir than those with running loans. While providing any relief in Foir is the bank's discretion, some financial institutions provide relaxation in the overall norms to accommodate insurance premiums. The Foir for self-employed professionals and non-professionals can go up to 90 per cent, depending on certain parameters.
How to avail of higher Foir?
To enjoy a higher Foir, you may apply for a loan jointly. A working married couple, for instance, can share the burden of monthly instalments and avail of the benefits of a higher Foir.