You may assume that your salary is enough to make you eligible for a sizeable home loan. But there are many other factors that come into play.
Kalpesh Kapoor, a 32-year-old Pune resident, works as an Information Technology consultant with a multi-national company (MNC). He has a master’s degree and has a net annual salary of Rs 13 lakh (approximately). In November 2019, he had applied for a home loan of Rs 1.2 crore, expecting it to get sanctioned smoothly. But, the financial institution only sanctioned a home loan of Rs 70 lakh (approximately) to Kalpesh.
This was because he had a history of frequently switching jobs. Also, he had gaps (being unemployed) for two to three months a couple of times in his seven years of work experience. Until now, he has changed six jobs. The bank’s representative had stated that his frequent moves meant that his income and the ability to consistently pay the EMIs was strained.
Here are some important factors to note to judge your loan eligibility.
Bank’s calculation methodology
Earlier, some public sector and private banks had indicated to Kalpesh that he could get a home loan of up to 15 times of his net annual income. This got him excited. Then he, applied at public sector bank in November 2019 which was offering repo-rate linked home loan. He submitted the requisite documents such as three months’ salary slips, past employment details, bank statements, last three years’ income tax returns (ITRs), etc. But as mentioned earlier, his loan eligibility was scaled down. The primary reason was inconsistent employment history as discussed above. The other reason that reduced his home loan eligibility was the break-up of net income given in his salary slip. There were some allowances that were excluded as per the bank’s terms.
Kalpesh’s pay-slip from his present employer included the basic salary, house rent allowance (HRA), medical allowance, leave travel allowance (LTA), performance bonus, special allowance, provident fund, food coupons and other allowances. But, financial institutions consider only a few of these components when it comes to net income calculation for deriving home loan eligibility. This is the other reason why loan eligibility reduces.
Shalini Gupta, Co-founder and Chief strategy officer of MyLoanCare.in says, “Financial institutions exclude LTA, medical allowance and food coupons. It’s because these are reimbursement mechanisms which can be claimed only after submitting bills of expenditure. These are not fixed monthly income.” Thus, the net income to calculate home loan eligibility is total income, less (LTA + medical allowance + food coupons).
The cost to company (CTC) will have annual bonus as another component. Different banks have different policies for considering bonus while calculating the home loan eligibility. Sukanya Kumar, Founder and Director of home loan advisory firm, RetailLending.com says, “Some banks consider 50 per cent bonus received in the previous year to calculate home loan eligibility. Whereas, a few banks consider the average of the last two years’ bonus received and take 50 per cent of that amount.” However, in case you changed the job during the financial year, then last year bonus is broadly not considered by the bank in the calculation for loan eligibility.
Age and remaining years of service
When you apply for a home loan, the lender checks for two things, your willingness to repay the loan and your ability to repay it. Home loan eligibility is directly related to the loan tenure. The tenure is based on your age, and your ability to repay within a certain period. For a salaried person, the retirement age of 60 years is taken into account, while for self-employed borrowers, the lenders consider a retirement age of 65 years. So, a borrower in her 40s will have a maximum of 15-20 years to repay the loan. Adhil Shetty, CEO of an online aggregator of financial products BankBazaar.com says, “The situation, wherein years of service are less to repay the loan, can reduce your home loan eligibility since you have to shell out larger monthly instalment closer to retirement.”
Other conditions that reduce home loan eligibility
There are instances of employees taking loans from their employers for education or medical emergency, etc. These loans are not reflected in the credit report, but are mentioned in your pay-slip. Kumar says, “The 'deduction' section in your pay-slip will show the monthly amount payable by you against the loan; this will be captured by the credit evaluator of the bank and reduce your home loan eligibility.”
A higher number of dependents can also reduce home loan eligibility. A lender expects higher monthly expenditure on dependents than a standard nuclear family, reducing the eligible loan amount.