How eligibility is calculated in the home loan? (Loan eligibility calculation)

The loan eligibility of the borrower is the minimum of the following two amounts

  • Eligibility calculated as per the income norms of the Bank / FI.

  • Eligibility calculated as a % of the property value / Agreement value as specified by the regulator (RBI)

Salaried cases:

In salaried cases a certain % of the gross / Net salary (as per bank / FI policy) is taken calculating the maximum total EMI a borrower(s) can pay per month. Existing EMI of the borrower(s) is subtracted from the same to calculate the max EMI borrower can pay for the applied home loan.

Example: If a person is drawing a monthly gross salary of Rs.120000/- and already paying EMI of Rs.8000/- for car loan and Rs.5000/- for personal loan then the eligibility calculation will be as follows:

Suppose Bank / FI as per policy and internal norms permits borrower to pay max EMI up to 55% of the gross income then in the above example max permissible total EMI for all the loans will be Rs.63000/- out of this borrower is already paying EMI of Rs.13000/- (Rs.8000/- for car loan and Rs.5000/- for personal loan. Then the max EMI left for home loan will be Rs.50000/- (Rs.63000- Rs.13000/-)

Now it has been decided that the borrower can pay max Rs.50000/- as home loan EMI then borrower has to calculate the loan amount for which at the specified interest rate % and tenure of Loan the the EMI will be Rs.50000/-

This can be done by taking EMI factor for 1 lakh. Say for a loan of 1 lac @ 7.55% for 25 years the EMI will be _________. Hence for Rs.50000/- EMI the loan amount will be _________.

Self-employed cases:

For self-employed borrowers (borrowers engaged in business) calculating the income eligibility is a bit complicated and banks / FIs have their own policy norms to calculate the income. We can’t discuss all the policies and norms used for calculating the income but one common approach adopted by many of the banks / institutions is to calculate the cash profit as reported in the annual financials of the latest years can be taken as base and accordingly the income is calculated.

For self-employed customers while calculating income eligibility following factors are taken in to consideration.

  • Overall business model

  • Business Vintage

  • Top line (Sales) and bottom line (Profit) with trend

  • Credit history of individuals and businesses

  • Banking

  • Reference in the market

As per income norms borrower may be eligible for the higher loan amount but the loan amount will not exceed the maximum % threshold of the AV / MV of the property. Regulators wants that banks can fund maximum certain % of the AV of the property. Here the idea is borrower / purchaser should put their own equity in the property.