Lenders follow a streamlined approach while evaluating a home loan application and approving the loan amount. Instead of directly checking the eligible loan amount, lenders start with the applicant’s affordability and then back-calculate the EMI that can be afforded as per the current circumstances. Let us understand how a lender evaluates an applicant:
- FOIR (Fixed Obligation to Income Ratio): It is the share of the applicant’s monthly income that can be used to repay all EMIs together. Most lenders may allow 50% for an income around ₹50,000. FOIR may vary for different lenders and may increase up to 65% for higher-income applicants.
Maximum new EMI = (Net monthly income × FOIR) − existing EMIs
At ₹50,000 and 50% FOIR, the applicant can be eligible for ₹25,000 a month if they have other obligations.
- Loan size based on the EMI: The bank calculates the loan amount using the interest rate and tenure based on the eligible EMI. A lower interest rate or a longer tenure may help an applicant become eligible for a bigger loan amount for the same EMI.
- Loan-to-Value Ratio (LTV): It is the ratio of the loan amount to the actual value of the property. RBI has capped the eligible loan amount based on the property’s price. For home loans up to ₹30 lakh, a lender can lend up to 90% of the property value. For ₹30–75 lakh, the maximum ratio allowed is up to 80%. The rest has to be paid as the down payment.
A lender, therefore, usually offers a loan up to the lowest of the three values to an applicant.
The Numbers: Loan Amount by Rate and Tenure
For a net income of ₹50,000 and no other existing obligations, an applicant can get a loan of about ₹23 lakh at a 40% EMI limit and ₹28 lakh at 50% EMI limit for 20 years at 8.5% p.a. Refer to the table below for more details.
| Interest rate | Tenure | Loan at ₹20,000 EMI (40%) | Loan at ₹25,000 EMI (50%) |
|---|---|---|---|
| 8.5% | 15 years | ₹20.3 lakh | ₹25.4 lakh |
| 8.5% | 20 years | ₹23.0 lakh | ₹28.8 lakh |
| 8.5% | 30 years | ₹26.0 lakh | ₹32.5 lakh |
| 9.0% | 15 years | ₹19.7 lakh | ₹24.7 lakh |
| 9.0% | 20 years | ₹22.2 lakh | ₹27.8 lakh |
| 9.0% | 30 years | ₹24.9 lakh | ₹31.1 lakh |
| 9.5% | 15 years | ₹19.2 lakh | ₹23.9 lakh |
| 9.5% | 20 years | ₹21.5 lakh | ₹26.8 lakh |
| 9.5% | 30 years | ₹23.8 lakh | ₹29.7 lakh |
The data provided above is illustrative in nature. Check current offers from lenders before you plan around any of them.
A Longer Tenure Can Increase the Loan Amount But May Cost More
Stretching the tenure for the home loan from 20 to 30 years can lower the EMI on the loan, but it may add a significant amount in interest over the loan period. Refer to the illustration below:
| ₹25 lakh at 9% | Monthly EMI | Total interest paid |
|---|---|---|
| 20 years | about ₹22,500 | about ₹29 lakh |
| 30 years | about ₹20,100 | about ₹47 lakh |
The most sensible approach here can be to select the shortest possible tenure whose EMI can be paid without putting extra stress on the finances. Prepaying when one can in the future can help reduce the total payable interest.
What Additional Factors May Impact Your Loan Amount?
Your income and existing obligations may determine the maximum loan amount eligible, but lenders consider some additional factors to sanction the final loan amount:
How To Get a Bigger Home Loan
To be eligible for a higher home loan amount, applicants can take certain steps. Even though these steps may not guarantee an increase in the loan amount, the chances of a higher loan amount increase significantly.
- Adding a co-applicant - A co-applicant with a better credit profile and good income can help improve eligibility for a higher loan amount. Co-applicants and co-owners can also claim tax benefits.
- Increasing the Loan Tenure - A longer tenure reduces the EMI and in turn increases the eligibility for a higher loan amount. It can, however, also increase the total interest outgo.
- Showing Every Income - Include all income including documented rent, incentives, second income source, etc. Cash income, not in bank statements or ITR, may not count.
- Comparing Lenders for Relaxed Terms - Many lenders may offer relaxed loans terms, including FOIR up to 65% of your income. Higher eligibility may help get a higher loan amount.
- Fixing the Credit Score - A higher score may help you get a lower interest rate and eventually a higher loan amount. A lower score may increase the interest rate which in turn may reduce the total sanctioned loan amount.
Understanding How Home Loan Works
Let us have a look at four different home buyer scenarios with the same monthly income of ₹50,000 a month to understand how home loan works.
Priya: Salaried, No Other Loans
Priya took a home loan from a top public sector bank for lower interest rate and her bank set her EMI limit to 40% of the monthly income, i.e., to ₹20,000. She can easily target a home of about ₹25–26 lakh after paying stamp duty and fees with a home loan of about ₹22 lakh.
Rahul: Salaried, with an ₹8,000 Car Loan
With the EMI affordability dropping to ₹12,000, Rahuls’ eligible loan amount reduces to about ₹13 lakh. In case Rahul chooses to close the car loan first, he can get back to the ₹22 lakh eligibility.
Anita and Sameer: A Couple with Two Incomes
Sameer earns ₹50,000 and Anita earns ₹30,000. When combined, their income nears ₹80,000 due to which they can now borrow about ₹36–44 lakh. In this band, they can get LTV of up to 80% of the property and will need about ₹9–11 lakh as down payment.
Imran: Self-employed, Takes Home ₹50,000
Even though Imran takes home ₹50,000, his ITR shows only ₹30,000 a month of average income due to inconsistent paperwork. The bank considers the ITR data for loan sanctioning so his EMI limit reduces to ₹12,000–15,000 and his loan may not be more than ₹13–17 lakh. Filing accurate returns for the next two to three years before applying again can help increase his eligibility for a higher amount.
