LTV And FOIR For Self-Employed People
Have you ever wondered why it is more of a cumbersome process for self-employed professionals and non-professionals (SEPs and SENPs) to get a home loan? Unlike salaried employees, cash flows to their accounts is erratic. The risk of their business being shut down is higher too.
However, suspicion is not the only emotion self-employed home loan applicants (be it professional or non-professional) evoke in lenders. Had it been so, no bank or financial institution would have designed home loan product for self-employed home loan applicants.
We will focus on this in this article.
Did you know that many lenders provide higher loan eligibility particularly to SEP and SENP borrower categories when their Loan-to-Value ratio (LTV) is within comfortable levels?
Is this difficult to understand?
MakaanIQ explains how an LTV ratio can raise the home loan eligibility of self-employed borrowers.
Before explaining how you can improve your home loan eligibility, let us try to understand what Loan-to-Value Ratio (LTV) and Fixed Obligation-to-Income ratio (FOIR) mean.
Loan-to-Value ratio (LTV)
It is a financial tool based on which the lender extends a loan to you. The LTV ratio shows the amount of loan that bank grants you, relative to the market value of the property. It is expressed in percentage, and reflects the percentage of your property that is mortgaged or against which you take a home loan. As the name suggests, LTV is calculated by dividing the home loan/mortgage amount by the appraised/market value of the property. Most of the lenders fund only up to 80 per cent of the market value of the property. In 2015, the RBI allowed 90 per cent LTV on home loans up to Rs. 30 Lakhs.
Fixed-Obligation-to-Income ratio (FOIR)
FOIR is a parameter that banks use to calculate the loan eligibility. While estimating home loan eligibility, all the fixed obligations (that he pays monthly/ daily) of the applicant are taken into account (i.e. instalments of all running loans including the home loan applied for are excluded from the eligible income). The statutory deductions are excluded while calculating FOIR. The loan amount bank extends to you depends on your FOIR rating.
The FOIR ranges between 40 to 60 per cent as an applicable norm.
The LTV and FOIR norms for Self-Employed People
Many lenders offer a low LTV scheme for SEP and SENP home loan borrowers. Under this scheme, a comfort is established while assessing home loan eligibility for SEPs and SENPs based on the LTV percentage.
Higher the FOIR percentage, higher the loan amount you are eligible to. But why would the lender give you the benefit of a higher FOIR? Why would the bank cross the stipulated limit of FOIR?
The lender will do so ONLY if your LTV is within comfortable levels. The LTV relies on the market value of the property. If the market value of the property is high, it means that your equity in the property is strong. The property's equity also rises with time as the debtor makes loan payments, and/or as the price of the property appreciates.
Let us suppose your LTV is as low as 65 per cent (maximum LTV according to bank norms is 80 per cent). Your maximum FOIR can go up to 100 per cent at the discretion of the authorised credit officer. Similarly, if the LTV ranges between 65 to 70 per cent, an SEP or SENP home loan borrower can enjoy the FOIR limit of up to 95 per cent. In short, lower the LTV, more can be the FOIR limit, but only if the lender is willing. Too many running loans or a low credit score can weaken your case.
Special features of LTV and FOIR scheme
- The scheme is applicable only to SEPs and SENPs
- The scheme is applicable only where the LTV is lower than the stipulated existing norms
- FOIR cannot exceed the limit of 100 per cent
- A deviation in FOIR is permissible if the SEP/ SENP home loan applicant meets other eligibility criteria satisfactorily
One Quick Tip
Always pre-check with the lender if he offers the low LTV scheme or not. Not every bank or financial institution provides the margin in FOIR based on low LTV.