Buying a dream house is an aspiration most individuals wish to fulfill in the course of their lives. The process involves a huge commitment of time, energy and most importantly the funds. To make an investment at such a large scale, proper research and preparation needs to be done. Home loans are available to help one make such an investment and making the dream of ownership of a house come true for many people. Therefore, one of the most important steps is to understand how credit institutions evaluate your home loan application and what is the homework required to ensure easy access to the loan.
The first thing a lending institution seeks from you is the document detailing the house you are looking to buy. The lending institution requires that the house property you have chosen has all the requisite clearance from the local government. Once that is established, you will be required to furnish proof of income, at least six month’s salary slips, last three years’ income tax returns documents and other details like date of birth, present address, PAN, bank statements among others.
Income to Debt Ratio
Most importantly you are also supposed to declare if you are paying EMIs on any other loan at the time of application. This is one of the deciding factors for your loan application. To understand how a loan application gets reviewed, one can compare by two scenarios.
Two individuals, Ashok Kumar and Manish Sharma apply for home loan of Rs. 30, 00,000 each. Checking their loan status, let’s assume that both of them make the credit score cut off as required by the lending institution for granting a home loan. Typically, this is how the lender will evaluate Ashok’s application:
Let’s assume Ashok’s monthly income is Rs. 1, 00,000. Ashok is already paying back a loan with an EMI of Rs. 20,000 per month. Therefore Ashok’s EMI-to-income ratio will be 20% and a lender will estimate that Ashok’s total borrowing capacity will be Rs. 50,000, which is half of his salary. Hence, the total incremental EMI that Ashok can afford is Rs. 30,000.
It is important to note that as a Rule of Thumb the lender may view your application negatively if your Income to EMI ratio exceeds 50%.
Now let’s view how Manish’s loan application gets evaluated:
Manish’s monthly income is Rs. 2, 00,000, which is the double of what Ashok earns. Manish is already paying back another loan with an EMI of Rs.1, 00,000 per month. Therefore Manish’s current EMI-to-income ratio comes to 50% and the total incremental EMI that Manish can afford will be zero because if this loan of Rs. 30, 00,000 is granted to Manish he will incur another EMI of Rs 30,000 per month putting him way above the acceptable EMI-to-income ratio.
In Manish’s case his loan application is likely to get rejected.
CIBIL Report and Score
To sum up, while a high credit score, strong credit history and high income will help towards a loan approval, they by no means guarantee one. Having manageable debt levels also plays an important role. Lenders are always keen to provide loans and credit cards to disciplined consumers who have a high credit score and a healthy credit history.
The credit score works as a first impression for the lender, the higher the score, the better is your chance of the loan being reviewed and approved. However, one must remember that the decision to lend is solely dependent on the lender and CIBIL does not decide if the loan should be sanctioned or not.
It is crucial for every individual to improve their CIBIL TransUnion score and maintain it in order to ensure that he or she gets credit when needed.
Also it is imperative that an individual checks his CIBIL TransUnion score even before he or she plans to apply for a loan.
The author is Chief Operating Officer, CIBIL