You are looking to buy a house, but you need to take a home loan to finance that dream. However, before you decide on the property it is important to understand how much loan you will be eligible for. If you are not eligible for the amount that you want, you might have to make more cash-down payment for the house. So, find out your home loan eligibility before choosing a property.
Unlike popular perception, it is not very difficult to calculate the home loan amount that you will be eligible for. You actually don’t need a calculator.
As you might already know, the most important factor that is considered for calculating eligibility is your income. Banks usually take your monthly income rather than your annual income for their calculations. They also go through your bank statements to check the kind of expenses that you incur every month. This will give them an idea of your liabilities.
Of course, if you already have loans running you will need to declare them. These existing liabilities will reduce your home loan eligibility. The more you already owe, the lower will be the loan amount you will be eligible for. Let us consider an example to understand this better.
Your monthly take-home pay is Rs 60,000, and your monthly expenses come to Rs 34,000. You will have Rs. 26,000 left to make payments towards your home loan. This is only if you have no other loans running. Let us assume it has a tenure of 20 years and an interest of 9% (which is roughly the prevailing interest rate). If you take a home loan of Rs 1 lakh, the EMI works out to Rs 900. In other words, you will pay Rs 900 for each lakh of rupees home loan. This information is enough to calculate the amount of loan that you will be eligible for.
Amount of loan you are eligible for = Income left every month / Home loan EMI per lakh.
In our example, your home loan eligibility will be 26,000 / 900 = 28.8
So, you will be eligible for a home loan of Rs. 28.8 lakh. It’s very simple. The higher the income that is available at your disposal, the higher will be your eligibility.
Sometimes banks do subtract the rent that you pay from the monthly expenses you incur, to calculate your eligibility. This is only if you are living in a rented house at present. Let’s take our example again. Let’s say you are paying a rent of Rs 6,000 out of your expenses of Rs 34,000. When the rent is excluded, your disposable income comes to Rs 32,000 (60,000 -34,000 + 6,000). Thus, Rs 32,000 will be available for your EMI payments every month. Now, your loan eligibility will be 32, 000/900 = 35.5. You are eligible for a home loan of Rs 35.5 lakh. You can see that your eligibility has improved considerably.
Sometimes it is very difficult to calculate a customer’s monthly expenses using their bank statements alone. So, some banks take a percentage of a customer’s income to be their expenses. For instance, some lenders might assume that 60% of your income will go towards your expenses if you earn less than Rs. 50,000. The amount that will be available to pay that home loan will be calculated based on this estimation of your expenses. Of course, this percentage will vary depending on the bank.
Most banks assume that those who earn more will have more to pay towards their EMI. Most banks have income slabs for customers and fix the percentage of expenses based on this slab. For example, the expenses percentage may be fixed at 40% for those who earn more than Rs 1,00,000 whereas, for those who earn less than Rs 50,000, it might be 60%.
Let us assume your income is Rs 80,000 and the bank considers your expenses to be 45% of your income.
Your monthly expenses will be Rs 80,000 x 45% = Rs 36,000
The amount of home loan that you are eligible for will be (80,000-36,000)/900 = 48.8. So, you will be eligible for Rs 48.8 lakh.
The tenure for which you need the home loan will also determine your eligibility. This is because the longer the tenure you choose, the lower will be your EMIs. If this is the case, you will be eligible for a higher amount. Let’s take an example.
If you are going for a home loan at an interest of 9% and choose a tenure of 30 years, you will be paying Rs. 805 as EMI for every lakh that you borrow. For a 20 year loan, this will be Rs 900. So, the longer the tenure, the lower the EMI.
Suppose the disposable income available for repayment is Rs 30,000, the eligibility for the 30-year home loan will be Rs 37 lakh (using the same formula that we used above). If it is a 20-year loan, you will be eligible for Rs 33 lakh only. This is precisely the reason why many borrowers opt for a longer tenure loan. However, you must understand that the longer the loan tenure the more the interest amount that you need to pay to the bank. Want to know how? Let’s take another example.
The total interest for a Rs 20 lakh, 20-year loan at 9% will amount to Rs 23.3 lakh. What if you choose a 30-year loan? In this case, the total interest that you need to pay will come to Rs 37.9 lakh. So, you are essentially shelling out Rs 14.6 lakhs more by choosing a longer tenure.
Is it possible to increase your home loan eligibility? Of course, it is possible! Got an alternate income source? Ask the bank to include that when they calculate your eligibility. Another way to increase your eligibility is by applying for the loan along with a co-applicant. Typically, working couples apply for home loans together with one of them as the primary borrower and the other as the co-applicant. As you already know, the more the income the higher the eligibility.
Age is also a factor in determining the eligibility. The number of working years left will be taken into account for deciding the tenure of the loan. So a 50-year old applicant is likely to get a maximum of tenure of 10 years.
It is very important that you check your home loan eligibility before you apply. This is because every home loan application rejection will affect your credit score.