You have applied for a home loan but you are worried that you may not get the requisite amount. In an earlier post, I had discussed aspects that the banks consider while calculating your loan eligibility. In this post, let’s use the findings of the aforesaid post and see how you can increase your loan eligibility. Before we move on to the ways to improve your loan eligibility, let’s first briefly touch upon how your loan eligibility is calculated.
How Is Your Loan Eligibility Calculated?
The banks will lend you only so much money that you can repay. While deciding your loan eligibility, the banks would consider if you can pay the EMI. Banks have a threshold for Fixed Obligations to Income Ratio (FOIR). The idea is that your fixed obligations for the month (all the EMIs including for the loan under consideration) must not exceed a certain percentage of your net income.
FOIR = Fixed Obligations ÷ Net Income
Each bank may have a different threshold. It can range from 40% to 50%. The banks will not give you a loan whose EMI breaches the threshold percentage of your net monthly income. So, if your net monthly income is Rs 50,000 and FOIR is 50%, you will not get a loan whose EMI is more than Rs 25,000 per month.
By the way, you may have other fixed obligations too such as the house rent. If the bank considers rent as a fixed obligation, then the threshold can be a bit higher. I have covered this aspect in great detail in an earlier post.
Most of the ways that we discuss below will focus on either decreasing the numerator or increasing the denominator. Let’s look at how you can increase your loan eligibility.
#1 Increase Your Income
Clearly, this is the most obvious way out, perhaps not the easiest. The more money you make, greater will be your loan eligibility. If you have income generating assets, you can put them to use. For instance, if you have a second house but it is not on rent, you may consider putting that house on rent. By the way, this income must show in your income tax returns too.
#2 Opt for a Joint Loan
If you have a co-borrower for your loan, then it will help increase your home loan eligibility. An additional source of income always helps. Let’s say if your spouse is working or has a source of income and applies as a co-borrower, then your joint income will result in higher loan eligibility.
#3 Increase the Loan Tenure
A loan of Rs 40 lacs for 20 years at 9% per annum (and 50% FOIR) will require you to have a minimum monthly income of Rs 71,978 (With EMI of Rs 35,989 and FOIR of 50%, net income must be double the amount).
A loan of Rs 40 lacs for 30 years at 9% per annum (and 50% FOIR) will require you to have a monthly income of Rs 64,369 (EMI of 32,184). Therefore, by stretching your loan tenure, you reduce your EMI and thus increase your eligibility.
By the way, your loan eligibility will also be higher if you can find a lender with a lower rate of interest. For instance, a loan of Rs 40 lacs for 20 years at 8% p.a. will have an EMI of Rs 33,457. As discussed above, a lower EMI amounts to higher eligibility at the same level of income. The problem is that the home loan market is quite competitive, and you are unlikely to find offers with a wide difference in interest rates.
#4 Clear Existing Loans
If you can, close some of your existing loans. Closing your existing loans will bring down your fixed obligations. The numerator goes down and the eligibility goes up.
#5 Opt for Loan Products with Innovative Loan Repayment Schedule
Step-up Loans
SBI FlexiPay Home loan is a prime example. Under such loan products, you make lower monthly payments initially. The EMI goes up after a few years (moratorium period). The hope is that your income would have gone up during this time and you will be able to afford the full EMI. Under such loans, you are asked to pay only the interest period during the moratorium period. You need not make any principal repayment. Since you have to pay less, this adds to your loan eligibility. With such loans, your loan eligibility can be up to 20% higher than a regular home loan.
Step-down Loans
I have taken liberty with the nomenclature. Essentially, it is a joint loan product where you pay more initially and lesser amount during the latter part of the loan tenure. Consider a scenario where you want to add an earning parent as the co-borrower. However, the parent will retire in the next few years and will not be able to contribute towards EMI payments. Step down home loans have a repayment structure that can be useful in such cases. You pay a higher EMI till both of you are working and a lower EMI once your father / mother retires. A regular home loan will not consider such nuances of changes in the family’s repayment ability.
Apart from the ways discussed above, there may be other ways too, albeit not as objective, to increase your loan eligibility. A way could be to offer additional collateral. The bank may be willing to relax some of the rules if you can provide better security. Moreover, the bank may take a kind view of your application if you have a good credit score. For all you know, the bank may have internal credit guidelines where the applicable FOIR increases with your credit score. Therefore, keep an eye on credit score and take corrective action, if required. In fact, some banks have even started linking your loan interest rate to your credit score.