Understanding home loan eligibility

In an increasingly uncertain and financially strapped environment, it is understandable that most people yearn for stability. And the highest symbol of stability is owning a home.

However, buying one’s own home remains a pipe dream for many people. The real estate market is certainly sluggish and looking for customers, but prices are still out of the reach of most first time home buyers. Those who are willing to accumulate their finances and take the plunge are the ones who are scouting for suitable home loans.

But there are many misconceptions related to taking home loans. For one thing, many loan applicants mistakenly believe that they can get a large loan amount if they make a good living. While this may be true to an extent, there is an important element called ‘home loan eligibility’ that is determined by a mix of other factors.

What is home loan eligibility?

Simply put, it is the loan amount one may reasonably expect to get basis their current income, credit history, loan tenure and the rate of interest being sought. When insurers check the applicant’s income, they deduct such categories as LTA (Leave Travel Allowance) and Medical Allowance, and focus on the Basic component of the salary. Hence, if a person’s annual CTC pay is Rs 10,00,000, the insurer will compute the eligibility after deducting the LTA and Medical Allowance, and not on the entire Rs 10,00,000.

You should use a home loan eligibility calculator to find your home loan eligibility. It computes the eligibility basis your age (a lower age = more income earning years, hence a longer loan tenure), current income, any other existing loans, and interest chargeable by the particular financial institution.

Eligibility and home loan calculations

The eligibility is often the first step in the home loan amount calculations. Normally, lending institutions in India may grant a loan amount up to 60 times of the applicant’s net income. Once the paperwork is processed and the property is approved for purchase by the lending institution, the loan amount is disbursed. The home loan EMI is calculated on the basis of the rate of interest, tenure and overall loan amount.

Factors affecting eligibility

Your eligibility is reduced if you have:

• A history of loan defaults
• Multiple unpaid loans – the more loans you have, the lower is your monthly repayment capacity
• Poor credit score
• Lower income than required to get a certain loan amount