Home purchasing is an expensive affair, and we cannot wholly rely on our savings to buy a new home. Often, we need to take a home loan to meet the need of buying a home. To determine home loan eligibility, lenders mainly focus on two main determinants of the borrower: monthly income and repayment capacity. Monthly salary is an important component for salaried individuals and it majorly dictates their home loan eligibility.
The monthly salary or gross salary is composed of basic salary and other allowances. Other allowances comprise house rent allowance, conveyance allowance, leave travel allowance, medical allowance, and books and periodicals allowance. Gross salary is also known as CTC (cost-to-company). However, gross salary is not drawn by the salaried individuals, rather it is the net monthly income i.e., take-home salary or in-hand salary. The net income drawn is calculated after deducting the provident fund, gratuity, and other deductions based on company policies. The net monthly salary is evaluated for home loan eligibility.
Few quantitative factors on which the home loan eligibility depends include:
- Monthly income: The net income that you draw every month determines your home loan eligibility. A higher monthly income will help to avail a home loan.
- Interest Rate: A higher interest rate will increase the home loan eligibility and vice versa.
- Loan Tenor: Loan tenor plays an important role in regulating home loan eligibility.
- Loan-to-value (LTV) ratio: Loan-to-value ratio allows financial institutions and other lenders to examine the risk involved in extending the loan before approving the loan. For example, if the property value is Rs.50 lakh, then the lenders will provide a loan of 80% of the property value, i.e., Rs.40 lakh.
- Other EMIs: Lenders consider other financial obligations of the borrower, such as other payable EMIs, while determining home loan eligibility.
How to Calculate Home Loan Eligibility?
Your net income from your employer determines your home loan eligibility. As a rule of thumb, salaried individuals are entitled to avail of a home loan up to 60 times their net income monthly salary. For example, if you are earning a net income of Rs.50,000 per month, then you are eligible to draw a home loan of up to Rs.30 lakhs approximately.
Generally, it is assumed that 50 per cent of your net income will cover your monthly expenses including medical and other miscellaneous expenses. Then in such situations, the home loan eligibility can be calculated using the formula:
Home loan eligibility (in lakhs) = (monthly fixed income ×50%)- other EMIs
Per lac EMI
Here, monthly fixed income is the net income, other EMIs stands for additional expense of the borrower, and per lac EMI is the standard EMI charged by bank according to the loan tenor and lending rates of the bank.
For example, if rate of interest is assumed to be 10.5% then, per lac EMI will be Rs 2150 for a loan tenor of 5 years. Similarly, the table below explains the per lac EMI for different loan tenor.
|Per Lac EMI
Let’s assume that the applicant with a net income of Rs.50,000 applies for a loan tenor of 20 years at an interest rate of 10.5%. Assuming that s/he has no other financial obligation or EMIs to pay, using the home loan eligibility formula and the chart above for per lac EMI, the applicant will be eligible for a home loan eligibility of Rs.25 lakh.
Let’s take another example where the net income is Rs.50,000, the interest rate is 10.5%, loan tenor is again 20 years, but the applicant has another EMI of Rs.5000 to pay as well. Using the above formula, the home loan eligibility will be Rs.20 lakh.
However, it is important to note that for higher net income, say over Rs.1 lakh, the expenses could be reduced by 35 to 40 per cent, where the net fixed income will be multiplied by 35% or 40%, and then calculated using the above formula.
Other than the quantitative factors, some qualitative factors also determine the home loan eligibility of salaried individuals, such as:
- Type of Property: Lenders immediately release loan amounts for ready-to-move homes, whereas the loan is released in multiple stages for under-construction property.
- Age of borrower: A young applicant can be entitled to higher home loan eligibility compared to older applicants, as the service years increase considerably.
- Credit History: A good credit score is essential for availing of a huge loan amount.
- Employer Category: Applicants associated with stable and ‘A’ category companies are considered for better interest rates by lenders.
- Work & Income Stability: Professions, such as doctors, CA, and IT professionals, are considered less risky and thus, have higher home loan eligibility.