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Assessing home loan eligibility- what do you really need?

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Assessing home loan eligibility- what do you really need?

Home loans are a must if you’re looking to purchase your own home and of course, they require a lot of planning on your part. This is because a home loan usually is a major financial commitment for people and a long-term one at that. It entails taking on major financial responsibility and maintaining the loan smoothly without compromising on other financial goals, household needs and aspirations. Before applying for a home loan, it works well if people have an idea about the eligibility criteria that is required by banks and NBFCs.

Too many people end up vaguely applying just when they have the down payment ready or can arrange the same soon. However, many a time, their home loan applications are rejected since their profiles do not meet the eligibility criteria for one reason or the other.

Home loan eligibility criteria to keep in mind 

The average home loan eligibility criteria across most banks and NBFCs usually encompasses the following:

  • Age between 24-60 years for salaried professionals and between 24-65 years for self-employed applicants.
  • CIBIL score of 750 and above.
  • Stable employment for a minimum of 2 years for salaried applicants and at least 5 years of total income for self-employment applicants.

However, this is not what you need to only go by on paper. The entire process for home loan eligibility measures and maps various parameters prior to approval, sanctioning and disbursal of the home loan. Firstly, stability of employment or income is what the bank will look for first. Salaried professionals should have worked at their jobs for a minimum of 2 years as mentioned while self-employed applicants should have been earning for at least 5 years. Additionally, meeting the age criteria is very important.

Naturally, it goes without saying that the earlier you apply for a home loan, the longer will be your tenor. This will lead to lower EMIs and a more manageable home loan. You may even get a lower rate of interest at a younger age if you meet the other eligibility criteria. However, those who are on the other side of 45 or 50 may have to pay higher EMIs due to lower loan tenors and high rates of interest.

Additionally, the CIBIL score and credit history will also be assessed by the bank or financial institution before considering your home loan application. Having a CIBIL score of 750 or more will boost your chances of getting your home loan sanctioned. A clean credit history where you have repaid EMIs and other dues on time for your credit cards, personal loans and other debts will naturally work in your favour. Those with high outstanding dues, a higher proportion of debt in comparison to income, defaults/cheque bounces and a higher percentage of unsecured debt as compared to secured debt may have lower CIBIL scores. This may lead to the home loan application being rejected.

If your CIBIL score is lower than 750, you should take a little time and bring it up to this threshold before applying for your home loan. Try and clear outstanding debts as much as possible, particularly the unsecured high interest debts like credit card dues and personal loans. Repay EMIs in a timely manner and check for any mistakes in your credit report which you can get corrected thereafter. These steps will help you bump up your credit score. If you have a good credit store, you can actually negotiate with the financial institution for a lower rate of interest as well.

Know that the lender will allocate a maximum of 40-50% as the acceptable monthly EMI on your net income every month. As a result, your home loan eligibility, i.e. the amount you’re eligible for, will be worked out accordingly. For example, suppose you earn Rs. 50,000 a month (net) and repay Rs. 10,000 as a personal loan EMI. Thus, the lender will consider Rs. 25,000 (50%) of your net salary as your EMI payment threshold. The eligible EMI amount for the home loan that you can pay in this scenario is Rs. 15,000 (Rs. 25,000 – Rs. 10,000 which is already paid as the personal loan EMI). The home loan amount will be worked out likewise.

It helps if you’re working at a company or firm which is reputed and well-known with a good turnover. Employees at top companies may find it slightly easier to get home loans. Of course, your entire financial situation will be closely assessed by the lender including your income, debt, obligations, dependents and so on. This will be a key factor with regard to ensuring whether you get the home loan approved or not. One way to increase eligibility is to have a co-applicant, ideally your spouse who is also the co-owner. This way, you can go for a higher loan amount and both owners can get equal tax benefits on the home loan.

How lenders work out eligible loan amounts

When the financial institution ultimately starts processing the home loan application, there are several parameters that are taken into account. The net income for an applicant is the total of the Basic salary, House rent allowance or HRA, special allowance, performance bonus, conveyance allowance, medical allowance, leave travel allowance or LTA, PF, food allowance and so on. However, calculation of the net income by the lender does not cover all of these aspects.

Medical allowances and LTA are kept out by most lenders while working out net income. The lender will be working out your income through your bank statements and salary slips. Thereafter, the company will find out how much you save, assuming 30% of net income as savings. In case there are existing debts or loan EMIs to pay, these will be deducted from your income. As per the saving amount ascertained by the lender, a back calculation is done to find out the loan amount that the applicant will be eligible for.

Necessary Documents for Home Loans

In case of salaried professionals, the following documents may be required for home loan applications:

  • Application form and photograph
  • Proof of age, residence and identity
  • Bank statements for last 6 months
  • Salary slips for last 3-6 months
  • Cheque for processing fee
  • Form 16/ITR

For self-employed applicants, the following documents may be required:

  • Application form with photograph
  • Age, identity and address proof
  • Bank statements for last 6 months
  • Processing fee cheque
  • Salary slips for last 3-6 months
  • Proof of business and educational qualification certificates
  • ITR for last 3 years with income computation
  • Audited Balance Sheet for last 3 years (CA certified) and Profit & Loss Account

For self-employed non-professional applicants, here are the documents needed for home loan applications:

  • Application form with photograph
  • Age, identity and address proof
  • Bank statements for last 6 months
  • Processing fee cheque
  • Salary slips for last 3-6 months
  • Proof of business and educational qualification certificates
  • Business Profile
  • ITR for last 3 years with income computation
  • Audited Balance Sheet for last 3 years (CA certified) and Profit & Loss Account
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