5 ways to increase to your home loan eligibility

This article was written by Personalfn for Business India, and was carried in its December 5, 2005 issue with the title, "The roof above your head".

Home loan interest rates have inched up in the last few months. This in turn, has affected the loan eligibility for home loan borrowers. Loan eligibility is inversely related to rates. As interest rates rise, loan eligibility becomes stiffer. In such a scenario, some home loan borrowers might have to re-evaluate their options (in terms of loan amount) on account of the new eligibility criteria. We present 5 ways by which individuals can enhance their home loan eligibility. 

1) Increasing the loan tenure
One very elementary method of enhancing the home loan eligibility is by opting for a higher tenure. This is so because the EMI (Equated Monthly Instalment) per lakh, which an individual has to pay, starts to decline as the tenure increases. The reason being that other factors like interest rate as well as the principal amount remain the same, despite the higher tenure. What changes though, is the net interest outgo, which rises with a rise in tenure. And since the individual is paying a lower EMI now, his ‘ability to pay’ and therefore his loan eligibility, automatically increase. 

2) Repaying other outstanding loans
Individuals with outstanding loans like car loans or personal loans may face a problem with loan eligibility; the same might adversely affect their home loan eligibility. Industry standards suggest that existing loans with over 12 unpaid instalments are taken into account while computing the home loan borrower’s eligibility. In such a scenario, individuals have the option of prepaying in part/full their existing loans. This will ensure that their eligibility for the home loan purpose is unaffected. 

For example, if the home loan seeker has an outstanding personal loan, where 16 EMIs remain to be paid, then he can prepay the same and approach the HFC with a clean slate. Alternately, he also has the option of prepaying 5 EMIs thereby ensuring that the existing loan liability doesn’t impact his eligibility for the home loan. 

3) Clubbing of incomes
Another way of increasing loan eligibility is by way of clubbing incomes of spouse/father/mother/son. An illustration will help in understanding things better. 

Suppose an individual’s loan eligibility, based on his income, works out to approximately Rs 1,000,000 for a given set of criteria. But the individual wants a loan worth Rs 2,000,000. Assume that this individual’s spouse too is earning a similar annual income. In such a case, the individual can club his spouse’s income alongwith his own income and then opt for a home loan. The eligibility in this case, will be calculated on the clubbed income of both husband and wife- thereby enhancing the individual’s eligibility to the extent of the spouse’s income. In our example, the eligibility will now stand doubled at Rs 2,000,000 from Rs 1,000,000 earlier. 

4) Step-up loan
Individuals can also opt for step-up loans and enhance their loan eligibility. Simply put, a step-up loan is a loan wherein an individual pays a lower EMI during the initial years and the same is enhanced during the rest of the loan tenure. For example, a Rs 1,000,000 home loan at 7.5% for a 20-Yr tenure would imply paying an EMI of Rs 6,760 the first 2 years and Rs 8,340 for the remaining tenure. HFCs usually consider the lower EMI of the initial years to calculate his loan eligibility. The initial lower EMI helps increase the individual’s ‘capacity to borrow’. 

5) Perks
Salaried individuals must ensure that variable sources of income like performance-linked pay among others are taken into consideration while computing their income. This in turn will imply that the loan amounts they are eligible for, stand enhanced as well. 

As can be seen, there are many ways to increase loan eligibility. However, individuals need to keep in mind that increasing the eligibility can have an impact on their financial planning. For example, if an individual decides to prepay an existing personal loan for the sake of becoming eligible for a higher loan amount, he might be faced with a cash crunch. Hence a detailed scrutiny of one’s financial standing is warranted before opting for an inflated home loan. 

The examples in this note should only be treated as illustrations. Individuals need to work out solutions best suited for their profile after speaking to their home loan consultant and only then consider acting on the options discussed.

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