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Factors that lenders consider for home loan applications

March 2, 2022

Factors that lenders consider for home loan applications

Have you applied for a home loan, or are planning to apply for one? Most young Indians apply for a home loan while buying a home. Banks and financial institutions sanction home loans according to certain terms and conditions. Lenders evaluate home loan applications according to very stringent norms.

Age: Your home loan eligibility is estimated for a certain period called “tenure”. You tenure is based on your age, and your ability to pay it off in a certain period.

Qualification and Experience: If you are a salaried employee, you must have at least two to three years of work experience to be eligible for a home loan. Similarly, if you are a self-employed individual, your company must have been operational for a couple of years, with sufficient cash profits and revenues. Tax returns must have also been filed in the company’s name.

Income: Your income highly influences the amount of money banks and financial institutions are willing to lend you. Higher your income, greater the amount of money banks are willing to lend you.

Dependents: Your income should be high enough to support your dependents, and take on the extra burden of a paying off a home loan at the same time. Lenders calculate the Fixed-Obligation-to-Income Ratio (FOIR), which eliminates a part of your income used to support family member/dependents.

Credit and Payment History: Your credit and payment history gives the lender a picture of how you handled your liabilities in the past, and of how capable you are of repaying the loan. A credit score is assigned based on your credit history.

Types of Credit in Use: If you have too many loans running, the probability of the bank sanctioning your home loan will be lower. This indicates that the applicant’s appetite for debt is too high. Lenders calculate the Debt-Service-Coverage-Ratio (DSCR) to ascertain the ratio of your total current debt to your total current income.

Down Payment/ Margin Money: The lender funds only the 80 per cent of the market value of the property called (LTV) i.e. Loan-to-Value Ratio (90 per cent in case of home loans below Rs.30 Lakhs). The borrower must arrange the 20 per cent (or 10 per cent as the case may be) of the market value of the property.

Paperwork: Now, lenders will want recent pay stubs and information to verify other aspects of your applications, such as savings and retirement accounts. The bank’s underwriting department also may reach out to you to clarify any discrepancies or gaps.

Prior Living Arrangements: They will want to know whether you have had a mortgage before or if you rented. If you were a renter, they will want to know the contact information for your previous landlord. If you had a mortgage, they will look at your payment history closely.

How many recent credit applications you’ve made: Some lenders see applying for several new credit cards at once as a sign that you may be in financial trouble. Many do not, however, worry about recent applications for mortgages, car, or student loans.

Available collateral: In some cases, a lender will allow you to use property you own, such as a car or home, to secure a loan. It’s important to remember, however, that if you use collateral to get a loan, if you do not make your required payments the lender can take your home or car as payment on the loan.

Your price range: Your lender isn’t likely to issue a mortgage for a home you can’t afford. Figure out your debt-to-income ratio to get an idea of how much you can afford to pay on a monthly basis.

Honesty: If you lie, hide, or try to alter information to increase your chances of getting a loan, you risk being charged with fraud and may never find a lender who will work with you again. “Full disclosure” should be your mantra. If you’re not quite up to par in any of these areas, before applying for loan, take some time to get your finances in better shape. Pay down credit card balances, make all your payments on time, and cut your expenses if possible.

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