What is my Home Loan Eligibility?
A lender needs ‘proof’ to believe that you are capable of making repayments on your loan. For this it will take a thorough look not just as your income statements, but also your assets and liabilities, your credit history to see how you handle repayments on credit cards and other existing loans, your education and work experience to see how qualified you are to meet your professional and financial goals and whether you can really afford a large debt burden like a home loan.
The standard method banks use to assess your home loan eligibility is the application of FOIR (fixed obligation to income ratio) of a borrower. This is an important calculation for the bank for this is the way to understand what your other obligations are as a borrower. To calculate the FOIR the lender takes into consideration all the other monthly instalments a borrower is paying including the home loan that he has applied for. However, the statutory deductions from your salary like provident fund, insurance premium payments are not taken into consideration in this calculation.
Consider an example:
* Income of a prospective borrower is Rs 50,000 per month
* He pays a car loan EMI of Rs 8000 per month
* He has just bought a gadget and pays an EMI of Rs 2000 per month for the same
* His proposed housing loan installment is Rs 15000 per month
* When all his loan installments are divided by his monthly income the FOIR is 50% or Rs 25,000
* Most lenders restrict the FOIR limit to a maximum of 50% of one’s monthly income. In other words, it means that if one needs around 50% of his income to meet his personal expenses, the other half is committed towards fulfilling his fixed obligations including the home loan
Pros and Cons of Floating rate Home Loan :-
The benefits of opting for a floating rate of interest :
The one clear benefit that a floating interest on a home loan has been that it is cheaper than a fixed rate by at least 2 to 2.5%. Even if there were to be a case where a floating rate exceeds a fixed rate of interest it will only be for some period of your entire loan tenure as interest rates a cyclical in nature. Needless to say, floating interest rates bring in a lot of savings for the borrower when the interest rates soften in the market.
The drawbacks of opting for a floating rate of interest :
The drawback of such rates is the impact they have on your monthly outgo as EMI. Given the uneven nature of floating rates, either your EMI may shoot up one fine month throwing your monthly budget out of gear or you may end up repaying substantially higher due to an increase in your loan tenure (EMI remains same). However, if you think that this aspect does not bother you, going in for a floating interest rate does indeed make sense.
Pros and Cons of Fixed rate Home Loan :-
Benefits of opting for a fixed interest rate :
Your EMI remains the same irrespective of the conditions prevailing in the market It is a great option for those who are good at budgeting and do not want their monthly outgo to go haywire because of market conditions. Gives the borrower a sense of security and peace of mind.
Drawbacks of opting for a fixed interest rate :
The major disadvantage of a fixed rate of interest is that it is at least 1-2.5% higher than a floating rate of interest. The other disadvantage of such a loan is that if the interest rates decrease significantly, a borrower who has opted for a fixed rate of interest does not get any advantage. As a borrower, you must also cross check with your bank whether you are allowed to fix your interest rate for the entire loan tenure or only for a few years. If you perceive that the interest rate cycle will be on the rise for the next few years, it’s a good idea to be locked under the regime of a fixed interest rate on your home loan.