How lenders determine your home loan eligibility: 10 factors

Trivia: D B Remedios was the first borrower from the first organised player in the home loan market. He took a ₹30,000 loan at a fixed rate of 10.5% in 1978: an amount less than half of the ₹70,000 that he spent to build his home in Malad, Mumbai. Inarguably, the criteria of home lending four decades ago were quite different from what they are today. It's worth finding out what lenders are now seeking in home buyers before sanctioning a home loan to them.

Let's understand the factors that determine home loan eligibility to navigate the process more effectively and increase the chances of approval.

1. Credit score

   The Consumer Financial Protection Bureau says that credit score is based on information from a buyer's previous credit reports. Using this past behaviour, the score predicts how likely a homebuyer is to repay a loan in time. A higher credit score means that a homebuyer has a good track record of managing and repaying loans. This borrower can get better interest rates and loan terms.

   3 tips to improve or keep up a good credit score: Pay bills on time | Reduce debt | Do not take any other loan before seeking a home loan

2. Age and loan term

   Those in their prime working years and who can repay the loan earlier have a better chance of getting a home loan.

   It's prudent to choose a loan term that aligns with one's financial goals. But, remember, shorter terms may come with lower interest rates but also higher monthly payments.

3. Income

   A consistent and sufficient income assures lenders that the homebuyer can make the monthly loan payments and fulfill other financial obligations comfortably.

   3 documents to submit for this purpose: Pay slips | Tax returns | Bank statements

4. Employment record

   If a borrower has been employed in a steady job or has had a consistent business income for a certain period, this means that the homebuyer is financially stable.

   Maintain consistent employment or business operations for at least two years before applying for a home loan.

5. Existing financial obligations

   Any ongoing financial obligations - like car loans and credit card debts - are counted as additional debt and burdens. These affect home loan eligibility.

   Repay existing loans and do not take new ones before applying for a home loan.

6. Debt-to-income ratio

   The above concept also relates to a factor called the debt-to-income (DTI) ratio - basically the percentage of monthly gross income used for paying loans or debts. Let's say a borrower's DTI ratio is 35%, it means that 35% of their total monthly income is used to pay debt each month. This includes any loan payments, credit card payments, car loans, and other debts.

   A DTI less than 36% is good.

7. Property value and location

   If a property is located in an attractive location with good resale value, there is a better chance of getting a loan. Here, the property's cost works as a collateral for the loan - and the lender's risk is reduced.

   Research neighbourhoods and property values, to invest in a property that is likely to appreciate.

8. Ability to make Down Payment

   When purchasing a house, a down payment is the initial amount of money which is paid by the buyer. This could range between 10 to 20% of the property's value, and would vary on the lender's terms as well as the buyer's financial standing. It is obvious that a higher down payment reduces the loan amount needed, increasing the chances of getting a loan.

   It's recommended to make a down payment of 15%-20% of the cost of a home when availing a home loan.

9. Savings and assets

   Have substantial savings and assets? That's good news for lenders when it comes to home loan eligibility - as it indicates financial stability.

   A healthy savings account indicates that a borrower has a financial cushion to fall back on.

10. Loan type and amount

    The type of loan (such as a fixed-rate or floating interest rate) and the loan amount affect the debt-to-income ratio and overall financial profile. A home loan eligibility calculator can prove helpful in this regard.

    Choosing a loan type and amount as per one's financial situation and goals is key.

    Hence, preparing early on and being aware of these home loan eligibility criteria can help one navigate the home loan process with confidence. Every lender is different, and doing research and homework can help one inch closer to their dream of owning a home.