An unexpected silver lining of the current pandemic is the reduction of home loan interest rates. Coupled with the low real estate prices, now is a good time for new homebuyers to finally take the plunge and go for a home loan to purchase their dream home.
If you’re looking to take advantage of the low home loan rate scenario by taking a home loan in the coming months, we must urge you to hurry up. Market experts predict that home prices would increase in the post-Covid-19-world, as people realise the importance of having a place to call their own to relax and stay safe with their family. Also, with offices announcing permanent work-from-home and schools happening online, families are looking to expand their living spaces. So, there is bound to be an increase in demand for homes in prime residential areas.
How is home loan eligibility determined?
When it comes to home loans, you can choose a bank or HFC (Housing Finance Company). Irrespective of the lender you choose, your home loan eligibility will determine whether you’re eligible for a home loan and the amount you can receive from the lender.
Some of the common factors that impact home loan eligibility include:
- Income and repayment capacity of the borrower(s)
Lenders prefer borrowers who have a steady and stable income. So, you can expect the lender to ask for details of your income levels.
- If you’re a salaried employee, you will have to provide payslips/paystub, bank account statements, employment details,
- Self-employed individuals will have to furnish details of their business income and other sources of income.
*Home Loan Eligibility Improvement Tips – If your spouse is an earning member, you can add him/her to your home loan application to increase the overall income levels, increasing eligibility and the loan amount.
- Age of the borrower(s)
Since home loans are of a long tenure, around 20 to 30 years, most lenders prefer young borrowers in their prime earning years. Some lenders have cut-off age limits beyond which the loan application will not be approved. Most lenders prefer borrowers to complete the home loan repayment before the time they retire.
- The credit score of the applicant(s)
Your credit score helps to determine creditworthiness. Lenders prefer borrowers with a high credit score, generally above 750+. Having a high credit score indicates that you’re responsible for credit payments and repay them on time. Besides improving your eligibility chances, having a high credit score also fetches you lower interest rates.
- Other existing loans taken by the borrower(s)
Your other ongoing loans like a personal loan, car loan or two-wheeler loan also impact your home loan eligibility. Lenders require you to provide information regarding your other existing liabilities – i.e., your other loan EMIs. Banks do not sanction loans if the EMI is more than 40 – 50% of your take-home pay.
Let’s explain this with an example.
Let’s say your monthly income is Rs. 50,000, but your net-take-home-pay is Rs. 42,000 after all deductions. Then, lenders see that your total loan EMIs (including the EMI for the home loan you are about to take) doesn’t exceed 50% of your take-home pay. In this case, your EMIs should not exceed Rs. 21,000.
*Home Loan Eligibility Improvement Tips – We recommend that you keep the home loan EMI less than 35% of your net-take-home-pay when you have other ongoing loans like a car loan, personal loan, etc. If you don’t have any other loans, you can go for a home loan EMI of up to 50%.
Several online home loan eligibility calculators help you determine your loan eligibility and the maximum amount of loan you can avail of. If you’re falling short of any of the eligibility requirements, here are some smart tips to enhance home loan eligibility:
7 Best Ways to Increase Home Loan Eligibility
#1: Maintain a Credit Score of 750+
A high credit score indicates a high repayment capacity. It improves your creditworthiness, making you a preferred borrower. Additionally, a high credit score also helps you land a lower interest rate. Before you apply for a home loan (or any loan), it’s essential that you check your credit score regularly. If it falls below 750, take the right steps to enhance your credit score to avoid home loan rejections.
#2: Take a Joint Home Loan
You can improve your home loan eligibility by including an earning co-applicant who has a good credit score. Including a co-applicant also increases the loan amount you can borrow. However, note that you can include only immediate family members like – spouse, child, sibling or parent – as co-applicants. It’s not possible to have friends and other acquaintances as co-applicants.
- Joint Home Loan with Working Wife – If your wife is also an earning member, including her in the home loan application increases the loan amount and tenure. Additionally, most lenders offer concessional interest rates for a home loan with woman applicants. To include your wife in the home loan application, the primary condition is that she has to be a registered co-owner of the property.
- Joint Home Loan with Non-Working Wife – If your wife is a non-earning member, then including her in the application will not increase the loan amount. Yet, there are other benefits like lower stamp duty and concessional interest rates. The condition here is the same as above – your wife should be registered as a co-owner of the property.
- Joint Home Loan with Father – In the case of a joint home loan application with your father, the tenure of the loan will be based on your father’s retirement age. So, if your father is nearing retirement age, this is not a smart move as it can reduce the overall tenure of the loan. Note that a joint home loan with a father is permitted only if the applicant is the only son. If he has more than one son, then the property ownership is assumed to be divided among all sons equally. Daughters can take home loans with fathers, provided the daughter solely holds the ownership of the property.
- Joint Home Loan with Mother – If your mother is an earning member, including her in the home loan application will help you enjoy lower interest rates applicable for women applicants. Similarly, it can also help in increasing the overall loan amount since your mother’s income is also considered during loan eligibility.
#3: Repay all your Debts on Time
Repaying your existing liabilities like personal loan EMIs and car loan EMIs on time helps you improve your credit ratings and credit track record, enhancing home loan eligibility.
#4: Offer a Larger Down payment
Home loans are NOT sanctioned for 100% of the property value. Generally, you can get home loans ranging from 80% to 90% of the property value. The rest (known as the down payment) has to be borne out of pocket. By increasing the down payment value from the mandatory 10% to 20%, you can enhance home loan eligibility. This brings down the loan amount, which reduces the risk borne by the lender, which in turn improves your eligibility.
#5: Opt for a Home Loan with your Preferred Lender
Ideally, you should compare and evaluate home loan lenders at least one year before taking a home loan. During this one year, build a good relationship with the lender. Open a savings account, or invest in an FD with the lender. This gives the lender sufficient time to understand your financial habits, thereby increasing your chances of eligibility when you apply for a home loan.
#6: Show Proof of Additional Income Sources
Your eligibility for a home loan is increased significantly if you can furnish proof of additional sources of income. Having sufficient savings and investments also works in your favour as it indicates a higher repayment capacity.
#7: Go for a Longer Tenure
A long tenure lowers your EMIs, which reduces your financial strain. Since the EMI is lower, you’re likely to repay it on time. However, keep in mind that lower EMIs increases the overall interest you pay during the loan tenure.
Wrapping Up
A home is the biggest financial asset that we own in our lives. A home loan is the easiest way to make your home dreams come true. If your chances for home loan sanction is lacking, use the tips here to enhance your eligibility. Use a home loan eligibility calculator to determine where you stand and take the proper steps to improve it before applying for the loan.
