A dream is a combination of a self-defined goal and the efforts to turn it into a reality, and for most, a home loan is a blessing in disguise because it helps manifest what one has envisioned for themselves and their loved ones. Loans have indeed simplified our lives and have enabled several individuals and families to make a lot of ’unachievable’ dreams achievable. A Home Loan is a long-term financial commitment thus understanding the eligibility and assessment criteria used by Banks and Financial Institutions is of paramount importance.

UNDERSTANDING THE TERM - PRIME AUDIENCE CATEGORY

When you apply for a home loan, the Bank or Financial Institution will look at your Prime Audience Category. This process of ascertaining the Prime Audience Category will entail taking into account two factors: Your Credit Profile and the Amount of Loan Required.

Credit Profile

Your Credit Profile is a document that provides the Bank or Financial Institution with information about your credit history. Most Banks or Financial Institutions check the credit history through providers such as CIBIL, Experian or Equifax. The details that shared in this report includes your score, your address, contact details, the number of account numbers you have and your payment history. The reason for a particular score will also be shared in the report. A higher Credit Score increases your chances of getting a loan. Most Banks or Financial Institutions will offer you a loan if you are a Category A customer, that is, if you have a Credit Score between 700 and 750 and above. In case you are curious about your Credit Score, you can visit the CIBIL website and calculate the same by yourself.

Amount of Loan Required

Once the Credit Profile and Credit Score have been analysed, the Bank or Financial Institution will inquire about the amount of home loan required, to check if it fits in the range that can be made available to you.

BASIS OF HOME LOAN AMOUNT CALCULATION – Salaried Borrower:

Now, once the Bank or Financial Institution has information about your Credit Profile and the Loan Amount, they will base their calculations on two other criteria; your Salary and Existing Loan, if any. To understand this better, here are two examples.

Scenario 1:

If you are drawing a salary of Rs. 50,000 a month and require a loan amount of Rs. 20,00,000 for 20 years at the rate of interest of 7%, your EMI would come to around Rs.15,506. In this case, you will be able to pay the amount without overleveraging yourself. The calculation can be done using a home loan calculator, the formula used by the calculator is: EMI = P x r x (1+r) n/((1+r) n-1) Where, P = Loan amount r = Rate of Interest n = Loan Tenure (number of months).

Scenario 2:

• Here your salary, loan amount, tenure and interest rate remain the same as above, but you already have an existing EMI of Rs. 10,000. In this case, the Bank or Financial Institution will respect the previous lender’s commitment first and then offer a loan, after calculating. The basis of the calculations here would involve the Fixed Obligation to Income Ratio (FOIR).
• FOIR: FOIR is derived by taking into account all your fixed monthly obligations that you should be able to meet, without including the Statutory Deductions such as Provident Fund, Investment Deductions or Professional Tax. Depending on the level of your income, rent can also be considered as a fixed obligation.
• To put it simply, FOIR reflects your disposable income that will be used to pay off your old and new debts. Here the amount is 65% and thus the calculation will be – Your next salary of Rs. 50,000 * FOIR (65%) - Rs. 10,000 (Existing Loan EMI). Thus, the highest amount of loan the Bank or Financial Institution can offer you is Rs. 22,500.
• When the amount is smaller, for example, Rs. 40,000 with a pre-existing loan EMI of Rs. 15,000, the officer at the Bank or Financial Institution will make a statement to the effect that the FOIR is not possible. Here it means that you are overleveraged and may also be heading for a debt trap, which may entail more loans and an inability to pay them back in time. If your salary comprises of a larger amount, then most other components remain the same, but the FOIR amount will increase to about 75%.

FOIR BAND CALCULATION

FOIR is calculated as – Sum of Existing Fixed Obligations /Monthly Income * 100. The FOIR band of 65% or 75% is not sacrosanct across every customer. In the case where you have a higher salary, the band may also go higher. If you are a self-employed individual, the FOIR can go significantly higher and can even reach up to 80%, as the basis of the calculations will be different. All these details are furnished in the credit policy of the lender.

PROCUREMENT OF THE CREDIT POLICY

Some Banks or Financial Institutions share the outline of the policy publicly and it can be commonly found on their Disclosure Page. However, to get information about the entire policy and what it enumerates, you would need to get in touch with the concerned officer at the Bank or Financial Institution.

ELIGIBILITY CALCULATION USING AN ONLINE CALCULATOR

When using an online calculator for calculating eligibility for loan, the amount that is shared with you takes into consideration about 65% as the FOIR. The final amount that is displayed, post calculation, is the amount that you are eligible for.

CALCULATIONS BASED ON PROPERTY VALUE

• In the above scenario, we have discussed the home loan assessment and eligibility criteria from the point of view of income. But, we also need to understand it in regards to the value of the property, since the Bank or Financial Institution will take that into consideration too.
• For example, let us assume that the property value is Rs. 10,00,000 and you have applied for a loan of Rs. 20,00,000. The Bank or Financial Institution will obviously not sanction the loan because in case you default, the asset that the Bank or Financial Institution will acquire will be only worth Rs. 10,00,000. This is where the Loan to Value Ratio (LTV) plays a major part.
• Loan to Value Ratio i.e. LTV is a financial ratio that compares the amount of loan required with the value of the asset to be purchased using that amount. It is important for the Bank or Financial Institution to understand this important metric as it assesses the lending risk that they carry by lending that amount to the borrower.
• The formula to calculate the LTV is – Loan Amount/Value of the Asset.

CALCULATING THE MARKET VALUE

The Bank or Financial Institution will now need to understand the market value of the property. To do this, they will seek the help of a valuation agency who will conduct two independent valuations using the following methods:

• Referring to the Approved Project Financial Number (APF), which is a number provided by Banks or Financial Institutions stating that the project has received all the necessary approvals and that a buyer can now invest in the project without any worries.
• Visiting the area where the house is located and finding out the average square foot rate of the home and arriving at the value. Another process that valuators use is to find out the volume of the similar houses sold in the same area for the last 6 months and arrive at a value. Post the valuation, a nicely prepared report stating the valuation is shared with the Bank or Financial Institution.

MARKET VALUE VS AGREEMENT VALUE

Keep in mind that the home loan that the Bank will sanction will be based on the Agreement Value and not the Market Value and that too at 80% of the Agreement Value only.

Scenario

If the Agreement Value of a house is Rs. 35,00,000 and the Market Value is Rs. 36,00,000. The Bank or Financial Institution will fund up to 80% of Rs. 35,00,000, which will be the Loan Against Property (LTV). In this case, the amount will be Rs. 28,00,000. In case you require a larger amount, then after possession you could apply for a Loan Against Property (LAP) Credit. It is advisable to seek both the loans from the same bank so that the documentation process will be smoother.

OTHER CHECKS

• Some Banks or Financial Institutions also conduct a Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) check.
• This check was put into place to curb the fraud by home owners who were seeking loans for the same asset from multiple lenders and then defaulting or fleeing the country. Since all data concerning the home loans on a single property are shared here, Banks and Financial Institutions do an Asset or Debtor Based Search to know the details required.
• As a buyer, you can also conduct a debtor-based search by entering certain personal details and paying a nominal fee.

CHARGES BORNE BY YOU

To be financially prepared while taking a home loan, it is important to understand the charges that need to be borne by you. Let us look at this aspect using an example.

Scenario:

For a Rs. 40,00,000 loan, the Processing Fee will be 5% which amounts to Rs. 20,000. Further which comes the is case, the amount will be Rs. 28,00,000. In case you require a larger amount, then after Stamp Duty, which will be about Rs. 7000, while Rs. 1000 will be charged for the CIBIL report and CERSAI check. Thus, the total cost for the amount shared will come to about Rs. 30,0000 to Rs. 35,000. In order to get a good deal, you could speak to the Bank or Financial Institution and request them to waive off this Processing Fee .

To sum up the process, while applying for a home loan, the bank or financial institution will assess your credibility from two aspects – The EMI that is calculated for the property against the maximum amount that can be sanctioned to you and the Price of the property.

Since a home loan is a considerable amount, the Bank or Financial Institution carries a huge risk. It is for this reason that these checks have been put into place. As a buyer, it is important to understand the home loan process so that you are equipped to ask the right questions, understand the reasons for the amount offered to you and also reap the benefits of any sanctions that are in your favour.