How Do Banks Decide On The Amount Of Home Loan To Be Sanctioned?

17 Aug 2016 in Finance

A Home Loan is the ultimate financing choice to own your dream home. In addition to offering liquidity, a Home Loan gives you tax benefits as well. Once you have chosen a home (under construction project, a ready to move in or a resale property), you should get straight to finding a suitable lender to avail of a Home Loan from.

But how do you know if your application will get the nod from the lender?

First of all, you have to verify your eligibility for Home Loan. You can access a Home Loan eligibility calculator on the internet. Once you key in your income details, loan tenure, and interest rate, the online calculator determines your Home Loan eligibility. You can then apply to a bank or financial institution for a Home Loan. Normally, most banks offer upto 80% of the property value as Home Loan.

The following parameters determine whether or not your Home Loan will be sanctioned by your lender.

Financial Stability

Only if you have a steady employment and regular income, will a lender consider offering you a Home Loan. If you satisfy the eligibility criteria, then you can avail a Home Loan 60 times your monthly net income. For the purpose of calculating the net income, allowances like LTA and medical are excluded.

Your income levels determine your repayment capacity. If your income is good enough to honour your EMI commitments, the bank will approve the Home Loan, subject to 80% of the value of the property. Higher the income, greater will be the chances of your loan being approved.

Credit Score

Your credit score not only impacts your eligibility for a Home Loan, but also impacts the amount you can borrow. If you have a high credit score, then banks are ready to offer you a Home Loan as per your requirements. However, while an average credit score is enough to help you get a loan, the amount that you can borrow will reduce accordingly.

Your credit score is based on the credit information report with the CIBIL. This report contains all particulars relating to the loans taken, EMI repayments, prepayments and outstanding loans. Reasons for low credit scores include default in payment of EMIs, overdue credit card bills, and multiple loans against your name, which ultimately leads to lowering of your credit score, and having an adverse effect on your creditworthiness.

There is a widespread practice among borrowers to apply for a loan at multiple banks. This practice can be detrimental to your financial interests as it would reveal your liquidity crunch and banks would be wary of sanctioning a Home Loan to a person who is credit hungry. Rejection of your loan application affects your credit score and your ability to finance loans at a later date.

Outstanding Liabilities

The quantum of loan that can be disbursed is dependent on your outstanding liabilities. If at the time of applying for the Home Loan, you have a high proportion of liabilities against your monthly income, then the bank will decide to reduce your Home Loan amount till they reach a number that lets you comfortably pay off the EMI.

Value of the Property

The Home Loan is decided on the basis of the value of the property you choose to buy. The bank first calculates its risk exposure, in case you default in the loan repayment. This risk exposure is measured against the property value, because the house is essentially the collateral against the loan. If the property value is high, then the bank will be open to approving a higher loan amount.

Home Loan Balance Transfer

Home Loan balance transfer is the transfer of the outstanding loan balance to a new lender who charges lower interest rates. In case you’re at risk of defaulting on your loan repayments due to high EMI, you can scout for a lender who offers Home Loans at a lower interest rate. Once you find the right offer, you can apply for a transfer by notifying the existing lender and having the property documents transferred in favour of the new lender.

In the case of the loan transfer, the outstanding balance is considered as a fresh loan. The lending bank conducts eligibility checks and reviews the repayment history on the original loan before it decides on what percentage of the outstanding balance can be offered to the borrower as a Home Loan.

To sum up, banks review your income levels, credit score, repayment history and outstanding liabilities to decide on the quantum of the Home Loan that can be made available to the borrower Just because you’re technically eligible for a high amount, doesn’t necessarily mean that you can borrow the same amount. A voluminous loan entails higher cash flow as EMI; inability to repay these high EMIs can result in you defaulting, significantly affecting your credit score.