A credit appraisal is an important part of determining the eligibility for a home loan, and the quantum of the loan. A prospective borrower has to go thorough the various stages of the credit appraisal process of the bank. Each bank has its own criteria to satisfy itself on the credit worthiness of the borrower. The eligibility for the loan that a person can get depends on his credit worthiness, determined in terms of the norms and standards to the bank. Being a crucial step in the loan process, a borrower needs to be careful in planning his financing modes. The credit worthiness, basically, assures the repayment capacity of the borrower whether the borrower is capable of repaying the loan and dues on time.
Broadly, the information collected is on these aspects:
Incomes of the applicant and co-applicant Age of applicants qualifications family details nature of profession experience employer security of tenure tax history assets owned and their financing patterns additional sources of income past loan record, if any recurring liabilities investments other present and expected liabilities
The norms differ from bank to bank. Each has certain norms within which a prospective borrower needs to fit to be eligible of the loan. Based on these parameters, the maximum amount eligible is worked out.
A bank applies the installment-to-income ratio(IIR). This helps in finding the loan eligibility of the applicant. It is generally expressed as a percentage. This percentage denotes a portion of the monthly instalment on the home loan taken. Usually, the banks fix 33.33% to 40% as the ratio. It is assumed that in normal circumstances, a person can pay an instalment up to 33.33% to 40% of his salary. For example; Assume the IIR is 33.33% and the gross income is Rs. 30,000 per month. According to the IIR ratio, the applicant is eligible for a loan where the instalment does not exceed Rs 10,000 per month.
Banks also calculated the eligibility based on the fixed obligation to income ratio (FOIR). Here, a bank takes into account the instalments of all other loans already availed of by the applicant and still due, including the home loan applied for. This ratio includes all the fixed obligations that a borrower is supposed to meet regularly on a monthly basis.
The fixed obligations do not include statutory deductions from the salary such as Provident Fund, professional tax and deductions for investments such as insurance or a recurring deposit.
For example, assume the income is Rs.30, 000 per month, there is a car loan instalment of Rs. 4,000 a TV loan instalment of Rs 1,000 and the proposed housing loan instalment is Rs 10,000.
Accordingly; the FOIR is 50 percent - -50 percent of the monthly income. The bank may have a standard of 40 percent of FOIR. So, the total installments the person can pay, as per the bank’s FOIR standard is Rs. 12,000 per month. As he is already paying Rs. 5,000 towards the car and TV loans, he has Rs 7,000 left and the loan eligibility is taken as Rs 7000 per month as the basis of housing loan repayment capacity of the customer. Thus, a backward calculation of the repayment capacity is made to find out the amount to be given as loan.
A bank also computers eligibility on the basis of a loan-to-cost ratio (LCR). This ratio is used to calculate the loan amount that an applicant is eligible for on the basis of the total cost of the property. This sets the upper limit or the maximum loan amount that a person is eligible for irrespective of the loan eligibility under other criteria. The maximum amount of loan eligible is pegged to the cost or value of the property.
While the loan eligibility as per the other parameters may be higher, the loan amount can’t exceed the cost or value of the property. The ratio varies between 70 to 90 percent of the registered value of the property. Loan eligibility is computed on the basis of these parameters that act as a guide to determine the loan amount. Generally, the lowest of these is taken as the loan amount that the applicant is eligible.
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