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Factors that Affect Home Loan Eligibility

studio18 Last Updated:August 04, 2023 15:38:14 IST

Those applying for a loan must know that every lender has strict home loan eligibility criteria. Lenders set these eligibility requirements to help them assess home loan candidates and their repayment capacity as well as the terms and conditions that they can be offered on their loan. Home loan borrowers must qualify for their lender’s home loan eligibility requirements if they wish to be considered for a home loan in India. Low home eligibility leads to home loan applications getting rejected or a borrower being offered a loan on unfavourable loan terms and conditions, such as a high home loan rate of interest and shorter loan tenor, both of which add up to the burden and stress of loan repayment. In this article, we walk our readers through the various factors that affect home loan eligibility.

Top 7 Factors that Affect Home Loan Eligibility 

1. Credit Score 

A borrower’s credit score is a three-digit number between 300 and 900 that reflects their creditworthiness and repayment capacity. Credit information agencies calculate a borrower’s credit score based on factors, such as their past repayment history, their credit utilization ratio and dependency on credit, etc. Borrowers who have a clean repayment record and a low credit utilization ratio, are not excessively dependent on credit and in general, have a responsible attitude towards it and have a high credit score. A high credit score enhances an applicant’s home loan eligibility and chances of getting approved for a loan as well as availing it of highly beneficial loan terms and conditions, such as low home loan interest rates, a long and flexible loan repayment tenor, and a sizeable loan sanction to help them buy their dream home.

2. Fixed Obligation-to-Income Ratio (FOIR) 

The fixed obligation-to-income ratio tells lenders what percentage of a borrower’s total income is going towards repaying debt or fixed obligations, such as EMIs and credit card bills. When the FOIR is too high or a considerable portion of an applicant’s total income is already going towards covering debt, lenders know that the applicant would not have much money left at the end of the month to pay their EMIs. Therefore, they see a high risk in lending money to the applicant, and thus, borrowers with a high FOIR have low home loan eligibility. In general, lenders do not lend money to borrowers whose FOIR is above 40%.

3. Income 

An applicant’s income also determines their home loan eligibility. Borrowers who have a stable income are less likely to default on loan repayment and therefore, are more likely to get approved for a loan quickly. On the other hand, borrowers with an unstable income either find their home loan application getting rejected or get offered high-interest rates and low home loan sanctions, and other unfavourable terms and conditions on their loan. If you have low home loan eligibility due to an unstable or low income, you can enhance your home loan eligibility by either disclosing all the additional sources of income in your loan application or adding a co-borrower who has an excellent credit score and a stable income.

4. Age 

Age also affects a person’s home loan eligibility. Young borrowers in their 20s and 30s who are just starting their careers have higher home loan eligibility for the simple reason that these applicants are young and are more likely to get more promotions and pay hikes than someone in their late 40s or early 50s. Thus, lenders are far more keen to sanction home loans to young borrowers than someone older.

5. Job Stability 

An applicant’s job status also affects their home loan eligibility. Home loan applicants with a stable job and therefore, a stable income are far less likely to default on loan payment than someone with an unstable job or a business that often registers highs and lows in terms of profit and revenue. It is thus that applicants planning to apply for a home loan are advised to maintain job stability by not switching jobs often.

6. Down Payment or the LTV Ratio 

LTV ratio or loan-to-value ratio refers to the percentage of a property’s total value that has been sanctioned as a loan. When home loan applicants pay a higher down payment and avail of a low loan amount, the LTV ratio goes down and so does the risk involved for the lender. For this same reason, home loan eligibility increases in the case of low LTV ratio loans. While a lender may sanction you a loan even if you opt to pay a minimum down payment, your chances of getting approved and availing of the loan on beneficial loan terms and conditions will certainly increase if you choose to pay a higher down payment. So, if you plan to apply for a home loan in the near future, start saving up.

7. Quality of the Collateral 

Since home loans are secured in nature, the quality of the collateral matters and affects home loan eligibility too. Homes located in central locations and having all the necessary amenities enhance an applicant’s home loan eligibility since their resale value is quite high. When a borrower pledges a high resale value collateral, the lender knows that they can always sell the collateral and recover the loan money if ever the borrower defaults on loan repayment. On the other hand, homes located on the outskirts of old properties in bad condition have low home loan eligibility.

Final Words 

It is important to develop an understanding of the factors that affect home loan eligibility as doing so allows home loan applicants to enhance their chances of getting approved for a loan and avail of the loan on beneficial loan terms and conditions.

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