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How Much Will A Bank Lend You?
Posted by Pradeep Sadanapalli | June 14, 2008 | 1,504 views
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Ashish Gupta explains how banks arrive at the home loan amount an applicant is eligible for. Credit appraisal is an important step in determining the eligibility of a home loan borrower for a loan.
A potential borrower has to go through the various stages of a credit appraisal process of the bank. Each bank has its own criteria to satisfy itself of the credit worthiness of the borrower.
The eligibility for a loan that a person applies for depends on his creditworthiness, determined in terms of the norms and standards of the bank. Being a crucial step in the loan process, the borrower needs to be very careful in planning his financing modes. At the same time, the bank too has to be cautious, lest they end up increasing their risk exposure.Different banks employ different objective, subjective, financial and non-financial techniques to evaluate the creditworthiness of the customer. Creditworthiness basically ensures the repayment capacity of the borrower, i.e., whether the borrower is capable of repaying the loan, and on time.
Information is collected on these aspects of the borrower:
- Incomes of applicant and co-applicant
- Age of applicants
- Qualifications, profession and experience
- Additional sources of income
- Past loan record, if any
- Family history
- Employer/business
- Security of tenure
- Tax history
- Assets of applicants and their financing pattern
- Recurring liabilities, other present and future liabilities Investments
The norms differ from bank to bank. Each has certain norms within which the customer needs to fit in to be eligible for a loan. Based on these parameters, the maximum amount eligible is worked out.The broad tools to determine eligibility remain the same for all banks.
SOME METHODS TO ARRIVE AT ELIGIBILITY:
Instalment to income ratio
It is generally expressed as a percentage. This percentage denotes the portion of the customer’s monthly instalment on the home loan taken. Usually, banks use 33.33 percent to 40 percent ratio. It is assumed that in normal circumstances, a person can pay an instalment upto 33.33 to 40 percent of his salary towards a loan.
For example, if the instalment to income ratio considered is 33.33 percent, and the gross income is Rs 30,000 per month, as per the ratio, the applicant is eligible for a loan where the instalment does not exceed Rs 10,000 per month.
Fixed obligation to income ratio
In this calculation, the bank takes into account the instalments of all other loans already availed of by the customer and still due, including the home loan applied for.This ratio includes all the fixed obligations that the borrower is supposed to pay regularly on a monthly basis.The fixed obligations do not include statutory deductions from salary like provident fund, professional tax and deductions for investment like insurance premium, recurring deposit etc.
For example, assume the income is Rs 30,000 per month and the applicant has a car loan instalment or Rs 4,000 per month, a TV loan instalment of Rs 1,000 per month and the proposed housing loan instalment is Rs 10,000 per month. Accordingly, the ratio is 50 percent (i.e. 50 percent of monthly income). The bank may have a standard 40 percent of ratio as the criteria. So the total instalments the person can pay, as per the standard, would be Rs 12,000 per month. As he is already paying Rs 5,000 for the car and TV, he has Rs 7,000 left out.The loan will be calculated taking Rs 7,000 per month as the repayment capacity of the applicant.
Loan to cost ratio
Banks use this ratio to calculate the loan amount that an applicant is eligible for on the basis of the total cost of the property.This sets the upper limit or the maximum loan amount that a person is eligible for irrespective of the loan eligibility under other criteria. The maximum amount of loan eligible is pegged to the cost or value of the property. Even if the eligibility as per the other parameters is higher, the loan amount can’t exceed the cost or value of the property.The ratio varies between 70 to 90 percent of the registered value of the property.
The loan eligibility is computed on the basis of these parameters,which act as a guide to determine the loan amount. Generally, the lowest of the three is taken as the loan amount that the applicant is eligible for.
SOURCES:
Times Of India
Topics: Property Matters |
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