Housing affordability has risen sharply over the past two years, with housing rates falling and interest rates on loans falling to their lowest levels. So if you’re considering buying a home, chances are you want to get as much loan as possible. If you are a first-time home buyer, qualifying for a home loan requires some research.
Home loan eligibility is a key reference point for banks or non-bank finance companies (NBFCs) or housing finance companies (HFCs) to determine the maximum loan amount a home loan applicant is authorized to borrow and assess its reliability to repay the loan.
Based on things like credit rating, loan term, repayment capacity, income, etc., lenders make a detailed analysis of a home loan applicant’s eligibility. However, for home loan seekers, it is essential to understand ways to improve home loan eligibility and that is how they can own dream homes.
Improve your CIBIL or credit score
An excellent credit rating always increases home loan eligibility. To achieve this, one must ensure that all loan repayments are made on time. If you pay credit card dues and monthly installments (EMI) on time, your seriousness in settling debt will reflect on your credit score. Any default or delay has a negative impact on your credit score. Maintaining a low credit utilization ratio (CUR) will also help your credit score.
When you apply for a home loan, the bank usually checks your credit score to determine your creditworthiness. There are different bureau credit scores that are used by banks and financial institutions. There is no minimum score for a home loan, but 750 and above is generally considered a good score for home loan approval. A good CIBIL score also results in low interest on home loans.
Opt for solidarity real estate loans
In the event that you have multiple money-earning family members, applying for home loans jointly greatly increases your chances of increasing your home loan eligibility. The best option is to apply for a home loan with your spouse and/or parents.
Co-borrowing not only improves home loan eligibility, but also splits the repayment burden and provides a tax advantage. A co-borrower with a good credit rating increases your EMI affordability, thereby improving your home loan eligibility.
Opt for a longer term
To increase the eligibility for the home loan, one can opt for a longer term home loan. Although a longer-term home loan reduces the amount of EMI, it ends up increasing your total interest payable. You should therefore consider a higher cost of borrowing while opting for a longer repayment period.
Erase your debt
The debt-to-equity ratio is essential for lending institutions to assess a home loan applicant’s mortgage eligibility. Therefore, for an applicant, it makes sense to clear all loan obligations that will positively impact their home loan eligibility. She should increase her credit rating by paying off outstanding debts.
Keep your FOIR below 40%
The ratio of your debts to income is the fixed obligation to income ratio (FOIR) and it is an essential parameter in determining eligibility for a mortgage. Most loan models from financial institutions assume that you need close to 50% of your income for living expenses. Ideally when you opt for a mortgage, try to limit your FOIR to 40% maximum in order to increase the chances of obtaining the loan agreement.
Declare your additional sources of income
Home loan eligibility increases when you declare your additional sources of income. Adding another source of income, such as rental income, part-time activities, etc. can help improve your financial health. So you need to add another source of income as this helps to get a higher loan amount. Additional income will boost the FOIR, thus emphasizing your greater repayment capacity.
Try paying a higher deposit
A financial institution or lender finances a home loan at around 75% to 90% of the value of the property. However, you may have to bear the cost of the remaining amount. The lower the down payment, the higher the value of your loan, and therefore the higher the interest payable. It is therefore always advisable to pay a higher deposit in order to avoid a higher interest payment.
Avoid job change
If you are a salaried person and you plan to apply for a home loan, you must work continuously in an organization for two years. Frequent job changes have an impact on the home loan eligibility amount. Therefore, planning should be done well in advance so that you can demonstrate two years of continuous service in an organization.
Choose the right lender
If you’re new to credit or self-employed, you’ll have a better chance of getting a loan from a housing finance company. Most housing finance companies have developed internal models that help them determine the repayment capacity and creditworthiness of applicants with informal sources of income.
HFCs have developed a niche in this segment with expertise in affordable home loans and are sometimes a better bet. HFCs are also present in micromarkets where banks are not present. For salaried customers with a high credit score, your options will be private or public sector banks. Always go for lenders who have a strong lineage and track record.
Also, lenders generally consider 85% (loan to value) for loans. But if it’s a lender-approved project, or if he has a good relationship with the builder, he can consider up to 90% LTV.
Don’t panic and hurry
It is advisable not to panic or rush to apply for a home loan. You should do proper research and give time before applying for a home loan. You must estimate your budget, calculate your earnings or income, check your CIBIL report for errors, compare loan options, choose between a fixed or variable interest rate and choose the desired interest rates with additional fees minimums before applying for a home loan.
If you follow the steps above to improve and increase your chances of getting a home loan, you can quickly become eligible for a higher loan amount, longer tenure, and better terms. You should begin the process by first improving your credit scores and correcting errors if necessary.
Creditworthiness is an important factor in obtaining home loans. At the same time, continue to reduce your debt ratio and actively save for your down payment to buy your dream home.