Do You Want to check Eligibility for Home Loan ? Check Here for Complete Details

Having one’s own house is something everyone dreams of. But it is a huge investment given the rising price of real estate. However, many financial institutions offer home loans at competitive interest rates that make it easier for you to afford the dream you’ve been harboring. But, every financier lends only 70% to 80% of the total purchase amount. You are required to pay the other 20-30% from your own money as down payment. This poses a major question on whether you can afford your dream house or not.

How do banks calculate your EMI eligibility?

When you apply for a home loan requesting a loan amount equivalent to 70-80% of the market value; the financial institution does some groundwork to check if you are eligible for that loan amount. This is done so that they get an idea of your repayment capacity. So financial institutions make sure that your loan debt does not exceed half of your household income. The key component in this calculation is your salary and EMI.

EMI or equated monthly installment is a fixed amount that you need to pay to the lender every month throughout the tenure or until you complete repaying the loan along with its interest. Purchasing a home means you are dealing with lacks or crores of rupees. So as your loan amount increases; so does your EMI. Banks check whether you can handle the EMI of the loan amount you have availed for so that you can repay it conveniently. For this, they use the following calculation.

Banks calculate your EMI such that it is not more than 40-50% of your income minus your other debts. This means that if your income is Rs.150000 and you are paying a total of Rs.50000 as EMI towards your other loans, then your EMI will not be more than 40-50% of Rs.100000 (i.e., 150000-50000= 100000). Hence, your EMI will be in the range not more than Rs.40000 to Rs.50000.

Additional Read: Plan Your Home Loan EMI in Advance with ICICI Home Loan EMI Calculator

How do banks calculate your net income FOIR?

Your income is indicated on your salary slips, income tax statements or monthly invoices generated. Therefore, we can conclude that there is a full-proof way to determine your income. However, there is no such way of determining your expenses and calculate your net income accordingly. Therefore, the concept of FOIR (Fixed Obligation Income Ratio) was introduced to help banks measure the borrower’s repayment capacity. FOIR is a predetermined percentage of your ‘net’ income that helps the lenders estimate your expenses with ease. FOIR is restricted to not more than 40-50% of your monthly income.

How do banks calculate your loan amount eligibility?

Lenders calculate the home loan amount based on 50% of your monthly income. Your liabilities are deducted from the remaining amount; which is then divided by the per-lakh EMI. Here is some example of FOIR calculation.

Example 1
If you earn Rs.1 lakh per month with have no other financial liabilities, then the FOIR is calculated as:

50% of 100000 – 0/868 * 100000

Here, 868 is the EMI that you will pay per lakh on a loan with a tenure of 20years and an interest rate of 8.5%. therefore. You will be eligible for a loan amount of maximum Rs.5761542.

Example 2
Consider the previous example but assume that you are servicing a car loan of Rs.15000 per month. In such a case the calculation will be as:

50% of 100000 – 15000/932 * 100000

So here you will be eligible for a home loan of not more than Rs.4033079.

How to calculate the EMI eligibility on your own?

The universal formula for calculating the EMI is as follows:

EMI = {P x R x (1+R) n} / {(1+R) n – 1}

P is the loan amount or the principal
R is the monthly rate of interest which is levied on the principal loan amount
N is the repayment period or tenure in months

Financial institutions usually mention an annual rate of interest. You can easily convert the yearly rate to monthly by dividing the above formula by 12.

How can you calculate your home loan eligibility easily?

Now that you know how lenders calculate your eligibility, you can do it yourself. But it is very tedious and time-consuming to keep calculating using the EMI formula until you get the desired loan scheme. The easiest way to calculate it is by using a home loan eligibility calculator ICICI. All you have to do is enter certain parameters affecting the EMI and the results will be displayed within a second. Since loan amount, interest rate, and tenure are the three most important factors impacting EMI, you are required to enter these in the online calculator. Here are the steps to get the results.

Go to ICICI home loan EMI calculator and enter the desired loan amount, interest rate and tenure. You will either have to enter them manually or just drag the pointer till you get your desired value. The results will then be displayed automatically (sometimes you are required to click on the ‘calculate’ or ‘submit’ button of ICICI home loan calculator). The results include your loan EMI, total interest payable, and the total payment (principal and the interest paid). You will also see a colored pie-chart displaying the proportion of the principal loan amount as compared to the interest you will be paying.

You can consider yourself eligible for the home loan if the ICICI home loan EMI calculator denotes an EMI which is equal to or less than 50% of your monthly income. But if the EMI is more than that, then you can adjust the other parameters such that your EMI drops down to the maximum limit. You can do this by either decreasing the loan amount or increasing the tenure.

You know the limitations of every parameter (like loan amount and interest rate) as you now understand how banks calculate your other parameter eligibility. To enter the values accordingly into the ICICI EMI calculator, and keep adjusting them till you feel you get the right EMI or a loan scheme that you can afford conveniently. It is crucial to do the calculations before availing the loan as it is a long term commitment that needs due deliberation.

Author Since: Jan 17, 2019

Anoop Bansal, a professional Chartered Accountant based in the National Capital - Delhi. I have worked for the top-notch Indian and International banking firms for the past 10 years. Currently, I work at blog and a financial consultant for different SMEs in India. Follow me on Facebook, Twitter and Linkedin for more information.

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