One of the problems of being an Investment Advisor is that even friends bring up money topics while casual discussions. Recently, I was talking to a friend who is planning to buy his first house.
Though he can very well go ahead and purchase it without taking a home loan, he still wants to take the home loan route as he feels that interest rates are pretty low at this time.
Related Reading – Should you purchase a house due to low home loan rates?
Now he hasn’t been much of a loan or credit guy and was not sure whether his loan application will be approved or not. He wanted to know what decides the home loan approval process and how can he improve the chances of his home loan approval?
I thought this would be a good topic for a short discussion.
Here are a few points about how you can potentially increase the chances of your home loan approval:
1 – Try to clear your existing loans first
If you have other loans like personal loans, car loans, etc., it’s best to try and clear them off first before applying for a home loan. Most lenders follow an unwritten rule that they are only willing to give a loan that would result in a maximum of 50% of the income being used for EMI servicing.
While calculating the home loan eligibility, the lenders will deduct all the existing total EMIs from your monthly income to determine a suitable amount for loan sanctioning. So let’s say your income is Rs 1 lakh, then you will only get loans that total up to an EMI of 50% of the income, i.e. Rs 50,000.
Now if you already have a personal loan EMI of Rs 15,000 and a car loan EMI of Rs 12,000, then you have already exhausted Rs 27,000 of the total Rs 50,000 theoretical limit.
So you will only get a home loan where the EMI is up to Rs 23,000 – and that means you will not get a large enough home loan.
So before you apply for a home loan, make sure to pay off some of your loans and improve your debt-to-income ratio (or loan-to-income ratio). And when you do that, make sure to take your No-Dues Certificates to ensure that loan closure also gets updated in your credit (score) history.
2 – Go for a Lower Loan-To-Value (LTV) Ratio
Generally, lenders expect you to bring in atleast 20% of the value of the property as a down payment. So they will give you up to 80% as a loan. This 80% is the LTV Ratio. The lenders can even set a lower LTV ratio for some borrowers based on their risk assessment of these loan applicants.
By making a higher down payment, you will reduce the loan amount and this in turn, reduces the credit risk for the lender as well. So a lower LTV for your loan increases the possibility of your home loan approval, that too quickly and at times, at lower interest rates.
What else? When you take a smaller home loan, you obviously pay smaller EMI and have lower interest costs. For example. If you want to buy a house of Rs 50 lakh, then you need to make a minimum down payment of 20%, i.e. Rs 10 lakh. In that case, your LTV will be 80% and your home loan will be Rs 40 lakh.
For a 20-year loan tenure, your EMI will be Rs 33,458 per month (at 8% p.a.) and total interest will be Rs 40.3 lakh. But if you make a larger down payment of Rs 20 lakh, then your loan will reduce to Rs 30 lakh, your EMI will come down to Rs 25,093 and the total interest outgo will be Rs 30.2 lakh.
That’s substantial savings over a period of 20 years. But beware – don’t try to make a very large downpayment, i.e. don’t use all savings for downpayment to reduce the home loan and thereby compromising your emergency fund or investments for other important financial goals.
3 – Check EMI Affordability before applying for Home Loan
As mentioned earlier, your EMIs must be a maximum of up to 40-50% of your monthly income. Hence, it is very important for you to identify the optimum home loan EMI before submitting your loan application.
Suppose you earn Rs 1 lakh. But you apply for a Rs 75 lakh home loan at 8% for 20 years. In that case, your EMI will be Rs 62-63,000 that is more than 60% of your monthly income. So the lender is bound to reject your loan application. It’s best to use a Home Loan EMI calculator to find out your suitable EMI and then apply for an appropriate home loan amount.
4 – Go for Longer Loan Tenure
Let’s take a small example again. Suppose you want to take a loan of Rs 50 lakh. For 15-year tenure (at 8%), the EMI is Rs 47,783. But for a 30-year tenure, the EMI is only Rs 36,688.
Opting for a longer tenure reduces your EMI and that increases your loan eligibility due to higher EMI affordability. But that does come at a cost of higher interest outgo. On the contrary, short loan tenure can save you money in the long run. So you got to balance between the two.
5 – Improve your Credit Score
Any discussion of loans is not complete without credit scores. Irrespective of the fact that a home loan is a secured loan (mortgage), the lenders will only lend when they are more or less sure about the creditworthiness of the borrower and are ensured about his ability to repay the loan in full and on time. And this is established only by your credit score (or CIBIL score).
Before applying for a home loan, do check your credit score once. If it’s good (above 750), the chances of home loan approval are good. If it’s very good (like more than 800), you might even get lower interest rates and other favorable terms. In case your score is not great, at least now you would know about it and can take corrective actions to improve your credit score.
This can be done by always paying your existing EMIs and credit card dues in full and on time. Make sure to keep your Credit Utilization Ratio around 20-30%, etc.
6 – Go for Joint Home Loan
Yes. That is also one way to increase the chances of home loan approval. Why? Because adding a co-applicant who has a good income and a good credit score improves the overall creditworthiness of your home loan application. And that increases the chances of approval a lot as it reduces the credit risk for the lender. Apart from improving the chances of loan approval, adding a co-applicant also increases your eligibility for a bigger home loan.
Here are some useful FAQs on Home Loans made available by the RBI on its website.
So that’s it about how you can increase home loan approval chances in India (2021). It’s not difficult at all as you would have seen in our discussion above. You just need to be aware of the factors that are at play when lenders decide whether to approve your home loan or not.