The amount that can be borrowed through a home loan depends on several factors such as credit score, income, and employment status
Owning a home of your own is one of the biggest achievements in life. However, there are certain aspects that must be well thought out, especially when applying for home loans. There are several factors that determine the maximum amount of home loan that you can avail including income, the current liabilities, credit score, the value of the property, the interest rate and the term of the loan. To know the above factors will help to know your home loan eligibility and hence plan your future financial needs well.
Assessing Your Repayment Capacity
Another critical determinant that determines home loan amount is the capacity to repay the loan. This means your capacity to repay the monthly amount as per the home loan you have taken from the bank. To determine how much EMI you can afford to pay, the lenders will verify your net monthly income and the current liabilities you have. Ideally, your total EMIs should not go above your 40-50 percent of your gross salary. If you earn a lot of money, you are less worried with paying off a larger sum of money. Therefore, having a steady, high income source is to your advantage.
Credit Score and Report
Lenders will scrutinize your credit report and CIBIL score before settling on a home loan repayment period. It gives them the information on your credit history – whether you have had any default ever, how often you have been late on your credit repayments, how much debt you currently have, etc. A high credit score (above 750) reflects good credit history and hence, banks and HFCs are more comfortable in providing higher loan amounts to you. However, if you have a low credit score, you may be able to borrow a smaller amount of money or at a higher interest rate.
Down Payment Amount You can make
Banks give better home loans if you make a substantial down payment of at least 20% of the value of the property. Hence, paying a bigger portion at the initial stages of the home buying process is more desirable. It also means that there is less chances for the lender to face loss since your loan balance decreases. Otherwise, you may be charged a higher interest rate or the value of the property you want to borrow against will be limited to 80-90% of its value.
Value of the Property
The maximum home loan amount depends on the value of the property that you intend to buy to secure the loan. Market trends, location, size, the availability of amenities, and the repute of the developer involved in the project affect the price of the property. The higher the property price the larger sum of money you can borrow as home loan on the property. Housing finance is given up to Rs. 1-1. 5 crores by most banks depending on the tier of the city and may be lower in other cities.
Fluctuating vs Non flucuating Interest Rates
Home loan interest rates also play an important role in determining your loan eligibility based on the current market rates. This means that when the rates are low, one may be in a position to borrow a bigger amount since the installments when paid monthly are less. In fixed rate schemes, the EMI is constant throughout the tenure of the loan even if the rates are higher after sometime. However, as mentioned earlier, fixed rates are normally 0. 5%-1% higher than the floating rates at the onset. So, the rate should only be fixed when one believes that rates will go up in the long run.
The Tenure You Prefer
Home loans are available for tenors starting from 5 years to 30 years. The longer the time to repay the amount, the lower the EMI is in terms of monthly installments to be paid. For instance, on a Rs. 50 lakh home loan – the EMI at 5 years is Rs. 1. 13 lakh p. m. At 20 years, it reduces to Rs. 42,000 p. m. So for the same income level, you may be able to borrow more by choosing a longer tenure and keeping EMIs within 40% of monthly income. Balance the loan amount, EMI and total interest out go depending on the factors like age, income stability etc.
Including a Co-applicant
Having a co-applicant for the home loan actually enhances your combined credibility. Generally, co-applicant is your close relation such as spouse, parents, children or siblings. Before approving the home loan amount, the banks will look at the co-applicants income, credit history, other obligations etc. Banks may offer a much higher loan since there are two earners who are available to repay the loan as opposed to only one.
Bonus, Other Income
The most important factor analyzed for home loans is the income derived from salary. However, banks also give weightage to annual bonus, rental income, dividend income, interest income if you have them. These let you repay a higher EMI. It is necessary to provide copies of the income tax returns for the two to three years preceding the application and bank statements to support additional and steady income.
Existing Debt Obligations
Your present loans and debts are also taken into account by the lenders to assess your repayment capability. This comprises of the personal loans, auto loans, credit card balances, current home loans etc. Make sure that you show your balance sheet as it is to the bank and do not hide any of your debts. It is interesting to note that if your existing EMIs are already a burden as compared to your income, then the home loan amount sanctioned is adjusted accordingly. Avoid having any outstanding balances especially through prepaying them if possible before proceeding to get a home loan.
Government Subsidies and Benefits
There are some government schemes such as Pradhan Mantri Awas Yojana, Credit Linked Subsidy Scheme etc. , which provide you with interest subsidy and other benefits if you qualify the criteria. For your principal outstanding, Under CLSS, you can obtain direct subsidies. These schemes may improve the maximum home loan quantity approved to you. Consult the lending institutions on how you can claim these benefits.
Thus there are ten broad factors that have an impact on the decisions made by the lenders for sanctioning your home loan. Determine how you compare to others in relation to each parameter quantitatively. Finetune those that are volatile such as credit score, tenure, and interest rates for an application that will secure the highest home loan. Finances, get your financial books in order, save as hard and as early as possible for the down payment. And time your home purchase when the market rates, as well as the interest rates are low. But if it is well planned, then it is not impossible to be able to buy the house you always wanted.
