UNDERSTANDING HOME LOAN ELIGIBILITY: 5 KEY FACTORS

Applying for a home loan is a significant financial decision. Lenders consider various factors to determine your eligibility for a loan. Understanding these factors can help increase your chances of approval. Here are five crucial aspects that affect your home loan eligibility:

CREDIT SCORE

Your credit score is a numerical representation of your creditworthiness. It is calculated considering your credit history. The score is usually computed based on your credit account history and repayment behaviour:

• Importance of Credit Score: Lenders use your credit score to assess the risk of lending to you. A high credit score indicates that you are a responsible borrower. This increases the chances of your loan getting approved.
• Credit History: Your credit history includes details of your previous and current credit accounts. So, your previous loans, credit card usage, and repayment patterns are considered. Based on these details, your credit score is calculated. Late payments, defaults, and high credit card balances negatively impact your credit score.
• Improving Your Credit Score: You should pay your bills on time and try to reduce your debt to enhance your score. Also, avoid applying for multiple loans or credit cards in a short period. Regularly check your credit report for errors and rectify them.

INCOME AND EMPLOYMENT STABILITY

Lenders need to ensure that you have a stable and sufficient income to repay the loan. This is done by assessing your income and employment status. Here are some things that the lenders evaluate:

• Income Level: Lenders prefer borrowers who have a steady source of income. This includes salary, business income, or any other regular income. Higher income can increase your loan eligibility chances. 
• Employment Stability: Job stability is crucial. Lenders prefer borrowers who have been with their current employer for a long period. Frequent job changes or employment gaps can have an impact on your loan eligibility.
• Self-employed Applicants: If you own a business, you may have to provide your business' financial statements. Also, you may be asked to submit the latest income tax returns and business continuity proof. Consistent business income can improve your loan eligibility.

DEBT-TO-INCOME (DTI) RATIO

DTI ratio is the percentage of your income that is utilised to pay your debts each month. It helps lenders assess your repayment capacity:

• Calculating DTI: Divide your monthly debt payments by your gross monthly income. Then, multiply the result by 100. This will help you find the DTI ratio. For instance, if your monthly debt repayments amount to ₹30,000 and your income is ₹1,00,000, your DTI ratio is 30%.
• Ideal DTI Ratio: Lenders prefer a DTI ratio of 40% or lower. A higher ratio indicates that a large part of your income is already committed to debt repayment. This can affect your ability to manage additional loan repayments.
• Improving DTI: Pay off existing debts, avoid taking new loans, and increase your income. This will help lower your DTI ratio and improve your loan eligibility.

PROPERTY VALUE

The value of the property you wish to buy plays a vital role in determining your home loan eligibility:

• Evaluation: Lenders conduct a valuation of the property before approving the loan. This helps them determine the loan amount based on the property's current market value.
• Down Payment: A higher down payment can reduce the loan amount. This can lower the risk associated with the loan for the lender. You should ideally make a minimum down payment of at least 10-20% of the property value.
• Location: Properties in prime locations or well-developed areas are considered less risky. This is because the value of such property may be comparatively more than that of homes on the outskirts of a city. So, lenders are likely to approve loans for homes in areas with good infrastructure. Easy connectivity and good amenities also contribute to this.

AGE AND LOAN TENURE

Your age and the tenure of the loan can also affect your home loan eligibility:

• Age of the Applicant: Younger applicants have higher loan eligibility. This is because they have more working years ahead to repay the loan. Lenders may be reluctant to approve long-term loans for applicants nearing retirement.
• Loan Tenure: Loans with a shorter tenure usually carry a lower lending risk. Thus, lenders may be more willing to lend you money if you opt for a shorter loan period. However, longer loan tenures result in lower EMIs. This makes it easier to manage monthly payments.

TIPS TO IMPROVE HOME LOAN ELIGIBILITY

Here are some simple things to keep in mind to improve your home loan eligibility:

• Maintain a Healthy Credit Score: Start by monitoring your credit score regularly. You can do this for free on digital marketplaces like Bajaj Markets. Evaluate the score and assess how you can improve the score. You can make timely bill payments, reduce your debts, and correct errors in your credit report.
• Ensure Stable Employment: Stay with your current employer for a longer period. This shows job stability and a secure source of income. If self-employed, provide thorough documentation of your business income.
• Manage Your Debts: Keep your DTI ratio low by paying off existing debts and avoiding new ones. This demonstrates your ability to manage multiple financial commitments.
• Save for a Higher Down Payment: A larger down payment reduces the loan amount. This can help increase your loan eligibility. It also demonstrates your financial discipline.

Understanding these factors can help you take the necessary steps to improve your loan eligibility. Being well-prepared increases your chances of securing a home loan with favourable terms. With a home loan, get a step closer to owning your dream home.