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Understanding the calculations involved while computing the home loan eligibility has seldom been easy for individuals. Although not very difficult to understand, it has rarely been explained in an easy to digest form. This note explains how the eligibility for a home loan is determined alongwith the reasons for the same.
An illustration will help in understanding this better.
| Monthly salary slab (Rs) | Percentage of monthly salary considered for making EMI payments (%) |
| 8,000 - 10,000 | 45 |
| 10,000 - 20,000 | 50 |
| 20,000 - 35000 | 55 |
| Above 35,000 | 60 |
Let us suppose an individual is drawing a net salary of Rs 30,000 pm. Some housing finance companies will consider 55 per cent of the net monthly salary as being available for EMI payments. In this example, the amount works out to Rs 16,500 (i.e. 55 per cent of Rs 30,000).
The percentage of the salary available for making EMI payments will differ based on the individual's income. The higher the salary, the higher will be the percentage. This is so because the disposable income, and therefore the amount available for making EMI payments, rises with a higher salary and vice versa.
| Monthly income (Rs) | 30,000 |
| (Assumed) Income available for EMI payments (i.e. 55% of Rs 30,000) (Rs) | 16,500 |
| Rate of interest (%) | 8.00 |
| Tenure (Yrs) | 20 |
| EMI per lakh (Rs) | 836 |
| Home loan eligibility (Rs) | 1,973,000 |
All HFCs have their own EMI table, which lists the monthly EMIs per lakh, for varying tenures and interest rates. Let us suppose that the interest rate in this example is 8.00 per cent and the tenure is 20 years. According to the table, the EMI per Rs 100,000 for the same is Rs 836.
The EMI per Rs 100,000 alongwith the individual's 'income available for making EMI payments' is what determines the home loan eligibility for the individual. The 'disposable' income of Rs 16,500 will now be divided by the EMI per Rs 100,000 figure of Rs 836 to arrive at the individual's home loan eligibility. In this example, the eligibility works out to approximately Rs 1,973,000.
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However, not all HFCs have the same method of calculating the home loan eligibility. But the fundamental nature of calculation remains the same. For example, some HFCs calculate the 'income available for EMI payments' based on an individual's gross salary (and not on his net salary as shown in the illustration above). Some HFCs may also have a different percentage structure than the one shown in the table above for determining the 'income available'. The calculations will also differ in case of self-employed individuals.
Some intangible factors too determine home loan eligibility. Some of them are:
Individual's profession: Most HFCs have a list of 'negative' professions. While this list may not be 'official', individuals coming from any 'negative' profession have to endure a lot of difficulties before being finally granted a loan.
Location of the property: HFCs also have a list of 'negative' areas. If an individual intends to buy a property in such an area, then he may not be granted a loan by the HFC. Similarly, the property also has to fall within the geographical limits as defined by the HFC for it to sanction the home loan.
Individual's personal profile: HFCs also consider details like the number of people financially dependent on the individual, the individual's credit repayment history if any and his savings habits. All these factors help the HFC in deciding the individual's home loan eligibility.
It would therefore hold individuals in good stead to understand the basics of home loan calculations. This will not only help them in determining what part of their income is being considered for the eligibility calculations but also help in zeroing in on an HFC that suits their requirements.
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