How banks calculate loan eligibility

The amount of loan you are eligible for depends on your income. In case you are a salaried employee, the bank will ask you for your net income. You are eligible for a loan up to 60 times of your net income per month

The bank will then look at existing loan commitments and subtract the amount of EMI from your net available income before calculating your eligibility.

Consider this to be you monthly salary and assume you have no existing loans, your net available income is Rs 1,00,000, you should get Rs 1,00,000 x 60 = Rs 60,00,000 as loan. A point to note however, is that banks do not include Leave Travel Allowance (LTA) and Medical Allowance while calculating your disposable income. So your net available income reduces to Rs 1,00,000 – Rs (9500 2200) = Rs 88300 Your loan eligibility therefore = 88,300 x 60 = Rs 52,98,000

So what if you the loan amount your are eligible for is insufficient? How do you increase your loan eligibility?

Longer Tenure:

The eligibility is calculated on the basis of repayment capacity of the applicant on a monthly basis. By increasing the tenure the EMI per Lakh of loan reduces and hence the applicant can now borrow more number of Lakhs with the same monthly repayment capacity. However increasing the tenure implies that one will ultimately end up repaying more as interest will be levied on a longer duration.

Combining Incomes:

When it is apparent that the income of the individual is inadequate to get him a loan that he requires to buy a house then it is advisable to combine the incomes of other family members which will have a positive impact on his repayment capacity. In such cases the acceptable combining of incomes income include that of spouse, father, mother or children. The net increase in eligible amount can be many folds in such scenarios.

Clear Other Outstanding loans:

Other outstanding loan liabilities of an individual drastically reduce his loan eligibility as the EMIs being paid towards those loans are deducted from the monthly repayment capacity. Thus repaying these loans from other sources will greatly move up the total amount for home loan. However this is only possible if the outstanding amount is within the reach of the individual. Up to 15 – 18 remaining EMIs is considered repayable under normal circumstances.

Include all perks:

While applying one can include the various perks that the employer provides in addition to the basic salary as net income. This will have a positive impact on the repayment capacity thus increasing the eligible amount for home loan. These perks may include performance linked bonus or additional pay for overtime etc.

Opt for Step Up Loan:

These are loan products that take into account the increase in incomes of individual over the period of loan repayment. This kind of a home loan has lower EMI in the initial stages which is increased in a step wise manner as the income of the borrower increases with time. Thus the total amount eligible is now calculated on the basis of a higher income that the current earnings which can increase the amount substantially. This a smart move for young professional who want to invest in properties right from the beginning of their earning career.