What is my home loan eligibility?

Home Loan eligibility of an individual dependent on the Fixed Obligations to Income Ratio (FOIR). Essentially, to determine the loan eligibility of a borrower, the financial institution considers the all loans availed by the borrower, their installment due on that loan and the prospective Equated Monthly Installments (EMIs) that may become due for the loan applied for.

How is Fixed Obligation to Income Ratio derived?

FOIR considers all the monthly fixed obligations of the borrower presently and with the new loan(s). All loan installments paid by the borrower from one’s savings account are considered. Existing loan installments, ongoing credit card payments of a fixed nature (EMIs), etc. are considered. FOIR does not include statutory deductions like Provident Fund, Profession tax and other savings or investments like insurance, recurring deposits, etc. FOIR requirement for a Home Loan ranges between 35% to 40%. Based on the income-earning capacity of the borrower, the financial institutions can moderate the FOIR. To make it easier to understand, let us consider the below example.
Example:

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Mr. A, age 30, works as a Manager in a private company and earns a salary of Rs. 90,000 per month. He lives in a rented accommodation in the Mumbai suburbs. Due to a medical emergency in his extended family, he had taken a Personal Loan and is paying an EMI of Rs. 8,000 on the same. While he holds a Credit Card, the spends are minimal and he ensures that he settles the outstanding in full every month. He has no other fixed monthly obligations.
He wants to buy a home and has applied for a home loan through Finwisely. Based on the above, we have computed his FOIR as below
• 50% of Rs. 90,000 is Rs. 45,000
• Personal Loan EMI is Rs. 8,000
• Income available to service the home loan is Rs. Rs. 37,000
• Hence, the financial institution will offer a home loan wherein the monthly EMI does not exceed Rs. 37,000 per month

At 37,000 per month, Mr. A can afford a 1-BHK in the Mumbai suburbs but his commute to work will increase by ½ hour from his current rental accommodation.
We have advised Mr. A to delay the purchase of the home, settle the Personal Loan completely and then apply for the home loan. This will ensure that he can continue to stay in the same locality with a slightly higher EMI of Rs. 45,000.

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Apart from the value of the loan, the financial institution also considers the age of the applicant and the remaining years that the person will be employable - up to age 60 for a salaried person and ranges between age 65 - 70 for a self-employed individual depending on the institution. The tenure of the loan is decided based on this and can go up to a maximum of 30 years. .

How much can I borrow?

Typically, a financial institution lends up to 80% - 90% of the property value in case if you are buying a home (under construction or ready-to-move-in property) and between 70% - 80 % of the plot value for buying a plot of land and then constructing upon it. The remaining amount of 10% - 30% must be from your sources. Do bear in mind that the higher the loan value taken by you; the monthly loan EMI is proportionately higher. Depending on your financial situation, you can take the loan amount up to the maximum offered by the financial institution or choose to contribute more from your sources.

What is the loan application process?

All financial institutions largely have a standardized process. You can either avail of a pre-approved offer and then decide on the property of your choice or if you have already decided on the property, you can apply for the loan straight away.

I am looking for a property (Pre-approved Loans)

Pre-approved home loans are normally taken when you have not decided on the property yet. It is also a good option as you can negotiate better with the seller. In this case, the documentation required is simple -
• Loan application form
• ITR
• Employment letter
• Current financials - last 3-month salary slip, last 6-months bank statement
Once they have all the documents and complete the assessment, you will be granted the pre-approved loan based on your eligibility. The offer is typically valid for a 6-month period during which you can decide upon the property. Upon selection, you can go back to the financial institution with the remaining documents - • Property documents
• Disbursement documentation
• Co-applicant documents
• Other documents as per the property

I have identified the property

If you have already shortlisted the property of your choice, in addition to the above documents, the financial institution will also ask for the legal documents of the property and the entire chain of agreements for the land or property, before the loan is sanctioned. Upon sanction, the financial institution will provide a sanction letter with the terms of sanction including the sanctioned amount, rate of interest, type of loan (fixed, floating, overdraft, fixed + floating) and loan tenure is mentioned. Once you have made the down payment for the property to the seller (builder or existing owner), and the agreement is made, the financial institution will disperse the remaining amount in full in case of a ready-to-move-in property or stages linked to progress for an under-construction property to the seller directly.

What is Base Rate?

Base rate is the minimum rate set by the Reserve Bank of India below which banks are not allowed to lend to its customers. This was applicable for all loans sanctioned up to March 31, 2016 and has now been replaced with Marginal Cost of funds based Lending Rate (MCLR) with effect from April 1, 2016.
Financial institutions used to charge the borrower at a rate over the base rate. Existing borrowers on the base rate can switch to MCLR after paying a nominal fee to the financial institution.

What is Marginal Cost of funds based Lending Rate?

Marginal Cost of Funds based Lending Rate (MCLR) is the minimum interest rate, below which a bank is not permitted to lend. It has replaced the base rate from April 1, 2016 and considers unique factors like marginal cost of funds instead of the overall cost of funds. The marginal costs include the repo rate, which was not part of the base rate.
While calculating MCLR, banks consider all kinds of interest rates incurred while mobilizing funds and loan tenure. In the case of MCLR, the banks can now levy a tenor premium and effectively charge a higher rate of interest for loans with long-term horizons.
All new borrowers must take loans linked to MCLR now. The MCLR is linked to the repo rate that the Reserve Bank of India monitors and in case the repo rate undergoes an upward or downward change, it has an impact on the MCLR too. The RBI revises the repo rate every quarter and the financial institution also changes the MCLR based on the repo rate. The change in interest rates is passed onto a new borrower immediately, and once a year or at the reset period to an existing borrower.

Which type of home loan rate is better?

Financial institutions offer multiple types of home loans which can be opted by you as per your need and financial position.

Fixed-Rate

In this, the home loan interest rate is fixed for the entire duration of the home loan or a certain number of years. Any changes made to the interest rate are not transferred to you and you remain unaffected by the market scenario. However, the interest rates are higher in this case as compared to a floating rate. Choose this if
1) the current interest rates are already low, and you want to lock in at that rate
2) the market conditions indicate that the rates will go up in future
However, if the rates are likely to go down, you may end up paying a high rate of interest. The other downside is that there is a pre-payment penalty in case of fixed-rate home loans. You can, however, approach your financial institution to reset the rate after a defined period by paying an additional fee.

Floating Rate

In this, the home loan interest rate is linked to the base rate / Marginal Cost based Lending Rate (MCLR) and can change if the interest rate goes up or down. The financial institutions pass on the changes in interest rate to the borrower as and when the MCLR is revised. The rate is changed either in a 6-month or 1-year window. The impact is typically on the tenure and not on the EMI amount. However, you may ask for the EMI amount to be increased or decreased based on your financial position. Usually, the interest rate in floating is lower than the fixed interest rate and the other upside is that there are no pre-payment penalties.
Choose this if
1) You are unsure about the interest rate scenario or future market conditions
2) You expect interest rates to fall in the near term
You can always switch to a fixed rate home loan by paying a nominal fee levied by the financial institution.

Fixed + Floating

In this, the interest rate is fixed for a certain tenure (initial 3-5 years depending on the financial institution).
This is suitable if the present interest rate is low and you want to benefit from it as you are unsure of how the interest rates will move in the future.

Home Loan overdraft facility

In this, the home loan account is linked to a current or savings account. As a borrower, you can deposit any surplus amount available with you in the home loan account. This is considered as a pre-payment towards the home loan. With this, your interest component and loan tenure reduce reduces. You can also withdraw the surplus amount deposited in your home loan account, from your bank anytime. In such a scenario, the outstanding loan amount gets adjusted accordingly.
The interest on the home loan is always calculated on the outstanding principal amount of the loan and any surplus deposited or withdrawn from the home loan account is considered when computing the interest and tenure.
However, the benefit comes at an extra cost; the interest rate on such a loan is typically 20 basis points higher than a conventional home loan.
The home loan overdraft facility is useful for self-employed businessmen with a significant variable income or salaried people who tend to get high bonuses.
One should consider this type of loan only if you have a surplus amount which you do not want to invest elsewhere as you are not expecting to earn more than the home loan interest rate and you also want access to the money as and when needed.

How does my Credit Score impact the Home Loan?

Before sanctioning a home loan, all financial institutions do a credit profile check on the borrower(s). Essentially, this is to check if the borrower has been repaying all past loans/credit card outstanding on time. Credit bureaus like CIBIL capture records from multiple financial institutions on the loans, credit card repayment patterns and outstanding if any.
Each unique person is given a credit score ranging between 300 – 900 depending on the above criteria A high credit score is always better as it means that you are a responsible borrower. For home loans, a credit score of 750+ is considered good and one can negotiate on the home loan interest rate with the financial institution.
A person has a good credit history if all payments are settled within the due dates. It also takes in to account the number of times that one has applied for a loan. Generally, if the number is high, it hurts the credit score.

What are the tax benefits applicable when taking a home loan?

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What documents are required to apply for a home loan?

1. Completed Home Loan Application Form
2. Three passport size photographs of the applicant and co-applicant(s)

3. Identity proof (any one of the below):
• PAN Card
• Passport
• Voter’s ID Card
• Driving License

4. Age proof (any one of the below):
• PAN Card
• Passport
• Birth Certificate
• X Class mark sheet
• Bank Passbook
• Driving License

5. Residence proof (any one of the below):
• Bank Passbook with address
• Voter’s ID
• Ration Card
• Passport
• Utility bills (Telephone Bill, Electricity Bill, Water Bill, Piped Gas Bill)
• LIC Premium Receipt
• Letter from a recognized public authority verifying the customer’s address

6. Income Documents:
For salaried individuals:
• Form 16 / IT returns of past 3 financial years
• Salary certificate (original) from employer
• Payslip of last 2 months
• Increment or promotion letter
• Investment proofs (like fixed deposits, shares, mutual funds, etc.)
• Other liabilities if any to be declared
For self-employed individuals:
• Income Tax Returns (ITR) / Assessment orders of last financial 3 years
• Balance Sheet and Profit & Loss Account Statement of the Company/Firm (duly attested by a C.A.)
• Challans as proof of Advance Income Tax payment
• Business License Details (or any other equivalent document)
• The license of professional practice (Doctors, Consultants, etc.)
• Registration certificate of the establishment (Shops, factories & other establishments)
• Proof of Business Address

7. Property Documents:
• NOC from Society/Builder
• A detailed estimate of the cost of construction of the house
• Registered Sale deed, the allotment letter or stamped agreement of sale with the builder (original document)
• Occupancy certificate (for ready-to-move-in properties)
• Property tax receipts, maintenance bills, and electricity bills
• Receipts of the advance payments made towards the purchase of flat (original document)
• An approved copy of the building plan (key plan/floor plan in case of purchase of flats)
• Original of the land tax paid receipt and possession certificate as issued by the revenue authority
• Payment receipt or bank account statements showing payments made to the builder or seller