Buying a dream house is an aspiration most individuals wish to fulfill in the course of their lives. The process involves a huge commitment of time, energy and, most importantly, funds. To make such a large-scale investment, proper research and preparation needs to be done. Home loans help in making such an investment and, in the process, making the dream of owning a house come true for many. Therefore, it is important to understand how credit institutions evaluate home loan applications and what is required to ensure easy access to the loan.
Documentation
The first thing a lending institution seeks from you is the document detailing the house you are looking to buy. The institution wants to know whether the property you have chosen has all the requisite clearance from the local government. Once that is established, you will be required to furnish proof of income, at least six months' salary slips, last three years' income tax returns documents and other details like date of birth, present address, PAN, bank statements, among others. Make a checklist of the requisite documents and keep their copies ready along with the originals.
Income to Debt Ratio
It is important for you to declare if you are paying EMIs (equated monthly instalments) on any other loan at the time of application. This is one of the deciding factors for your loan application. To understand how a loan application gets reviewed, here are two scenarios.
Two individuals, Ashok Kumar and Manish Sharma, apply for home loan of Rs 30 lakh each. Checking their loan status, let's assume that both make the credit score cut off as required by the lending institution for granting a home loan. Typically, this is how the lender will evaluate Ashok's application:
Let's assume Ashok's monthly income is Rs 1 lakh. He is already paying back a loan with an EMI of Rs 20,000. Therefore his EMI-to-income ratio is 20% and a lender will estimate that Ashok's total borrowing capacity is Rs 50,000, which is half of his salary. Hence, the total incremental EMI that Ashok can afford is Rs 30,000. By using an EMI calculator, you can back calculate that the total amount that will be sanctioned to Ashok at an interest rate of 10% over 20 years will be Rs 30 lakh. Consequently his loan application will be approved, if his documents are deemed acceptable.
It is important to note that as a rule of thumb, the lender may view your application negatively if your income-to-EMI ratio exceeds 50%
Now, let's view how Manish's loan application gets evaluated:
Manish's monthly income is Rs 2 lakh, which is the double of what Ashok earns. Manish is already paying back another loan with an EMI of Rs 1 lakh. Therefore his current EMI-to-income ratio comes to 50% and the total incremental EMI that he can afford is zero because if this loan of Rs 30 lakh is granted, he will incur another EMI of Rs 30,000, putting him way above the acceptable EMI-to-income ratio.
Manish's loan application is likely to get rejected. Therefore, if your current total EMI exceeds your monthly salary by more than 50%, then the chance of getting a loan is less.
Credit Report and Score
To sum up, while a high credit score, strong credit history and high income will help in loan approval, they, by no means, guarantee one. Having manageable debt levels also plays an important role. Lenders are always keen to provide loans and credit cards to disciplined consumers who have a high credit score and a healthy credit history.
The credit score works as a first impression for the lender, the higher the score, the better is your chance of the loan being reviewed and approved. However,
one must remember that the decision to lend is solely dependent on the lender and the credit information agency does not decide if the loan should be sanctioned or not.
It is crucial for every individual to improve their credit score and maintain it to ensure he or she gets credit when needed. One should pay all one's credit card dues and EMIs on time to avoid having a poor credit score and report. Not paying the dues on time can eventually lead to a bad score and your application for a loan stands a high chance of rejection.
Also, it is imperative that an individual checks his credit score even before he or she plans to apply for a loan. It will give the individual enough time to rectify his credit score and history.
(By Harshala Chandorkar, Chief Operating Officer, CIBIL)
Documentation
The first thing a lending institution seeks from you is the document detailing the house you are looking to buy. The institution wants to know whether the property you have chosen has all the requisite clearance from the local government. Once that is established, you will be required to furnish proof of income, at least six months' salary slips, last three years' income tax returns documents and other details like date of birth, present address, PAN, bank statements, among others. Make a checklist of the requisite documents and keep their copies ready along with the originals.
Income to Debt Ratio
It is important for you to declare if you are paying EMIs (equated monthly instalments) on any other loan at the time of application. This is one of the deciding factors for your loan application. To understand how a loan application gets reviewed, here are two scenarios.
Two individuals, Ashok Kumar and Manish Sharma, apply for home loan of Rs 30 lakh each. Checking their loan status, let's assume that both make the credit score cut off as required by the lending institution for granting a home loan. Typically, this is how the lender will evaluate Ashok's application:
Let's assume Ashok's monthly income is Rs 1 lakh. He is already paying back a loan with an EMI of Rs 20,000. Therefore his EMI-to-income ratio is 20% and a lender will estimate that Ashok's total borrowing capacity is Rs 50,000, which is half of his salary. Hence, the total incremental EMI that Ashok can afford is Rs 30,000. By using an EMI calculator, you can back calculate that the total amount that will be sanctioned to Ashok at an interest rate of 10% over 20 years will be Rs 30 lakh. Consequently his loan application will be approved, if his documents are deemed acceptable.
It is important to note that as a rule of thumb, the lender may view your application negatively if your income-to-EMI ratio exceeds 50%
Now, let's view how Manish's loan application gets evaluated:
Manish's monthly income is Rs 2 lakh, which is the double of what Ashok earns. Manish is already paying back another loan with an EMI of Rs 1 lakh. Therefore his current EMI-to-income ratio comes to 50% and the total incremental EMI that he can afford is zero because if this loan of Rs 30 lakh is granted, he will incur another EMI of Rs 30,000, putting him way above the acceptable EMI-to-income ratio.
Manish's loan application is likely to get rejected. Therefore, if your current total EMI exceeds your monthly salary by more than 50%, then the chance of getting a loan is less.
Credit Report and Score
To sum up, while a high credit score, strong credit history and high income will help in loan approval, they, by no means, guarantee one. Having manageable debt levels also plays an important role. Lenders are always keen to provide loans and credit cards to disciplined consumers who have a high credit score and a healthy credit history.
The credit score works as a first impression for the lender, the higher the score, the better is your chance of the loan being reviewed and approved. However,
one must remember that the decision to lend is solely dependent on the lender and the credit information agency does not decide if the loan should be sanctioned or not.
It is crucial for every individual to improve their credit score and maintain it to ensure he or she gets credit when needed. One should pay all one's credit card dues and EMIs on time to avoid having a poor credit score and report. Not paying the dues on time can eventually lead to a bad score and your application for a loan stands a high chance of rejection.
Also, it is imperative that an individual checks his credit score even before he or she plans to apply for a loan. It will give the individual enough time to rectify his credit score and history.
(By Harshala Chandorkar, Chief Operating Officer, CIBIL)
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