There are quite a few ways to increase your home loan eligibility. Any one or a combination of these methods can help you improve your overall home loan eligibility significantly.
1. Clear your existing loans
If you are already repaying your older loans, then this may impact your eligibility for a new loan as lenders assess your eligibility for a loan on the basis of your debt-to-income ratio.
The debt-to-income ratio refers to the percentage of your total monthly income that goes to paying your monthly debts such as EMI’s towards car loan, personal loan if any, etc.
Amit Prakash, Principal Partner, Square Capital, a Gurugram-based online lending broker said, “You can improve your debt-to-income ratio only by prepaying all existing loans before applying for a home loan. You can also check and improve your CIBIL score by repaying unnecessary debt and making repayments on time.”
Hence, home loan aspirants should ideally repay their existing loans and close all previous loan accounts by taking the loan closure or ‘no-dues’ certificate from a lender. After this, they should make sure that their CIBIL score gets updated.
2. Improve your CIBIL score
The simplest way to improve your credit score is to be regular with your loan and credit card payments. According to Adhil Shetty, CEO, Bankbazaar.com, these are the ways you can improve your credit score:
- Always pay your EMIs and credit card dues in full and on time.
- Keep a low CUR (credit utilisation ratio) of around 20-30 percent of your card’s spending limit.
- Avoid defaults and loan settlements as these can damage your credit score.
- Don’t apply for too many credit products at once because each application leads to a new credit score check which reduces your score.
- The age of your credit line has a positive impact on your credit score so owning a credit card or any loan for the long term reflects positively upon your timely repayments.
- Check for errors in your credit report which may sometimes be the reason behind your low score.
Hence, if you find any dispute, do not apply for a home loan until all points get rectified or are cleared from your end,” Shetty said.
3. Take joint loans
One of the most widely used ways to increase the chances of getting a home loan is to jointly apply with one’s spouse or a co-applicant. This substantially increases eligibility and even comes with added benefits.
Shetty said that the ideal co-applicants for a home loan are spouses. This arrangement carries fewer complications compared to those that may arise from joint-borrowing with a parent, child, or by siblings. “If your spouse can co-borrow the home loan and split the repayment burden, then both of you can share the tax benefits as mentioned under the income tax laws.”
Also Read: 4 important tax benefits of buying a house jointly
4. Go for a step-up home loan
Generally, home loans are long-term in nature and are difficult to obtain post-retirement in case of salaried professionals. Therefore, it can be easier for individuals who are in their 30s or 40s to get a higher loan sanctioned as compared to those in their 50s. But, the problem here is that initially most young professionals struggle to pay EMIs.
Here, taking a step-up home loan can help them to an extent. A step-up home loan is one where the EMIs for the initial few years are lower than those in the later years in keeping with expected increase in income of the borrower.
Satyam Kumar, CEO & Co-Founder, LoanTap, a Pune-based FinTech company, said that for early or mid-career professionals, who want a home loan and do not have high disposable income, step-up home loan can be a good option to consider. Despite carrying higher interest rate than a normal home loan, the EMI structure of a step-up home loan may enable them to shoulder the loan EMIs in the initial few years. “However, you must know that the lender will have a stringent check on your profession and future prospect to determine eligibility,” he added.
“You can go for a step-up home loan as this option helps in scaling up home loan eligibility by up to 20 percent. In a step-up home loan, the EMI is lower in the first few years and goes up in later years in sync with the increase in your overall income,” said Prakash.
Why loan eligibility will go up for step up home loan? As EMIs in initial years are lower in a step-up home loan, even a borrower with limited income may be able to meet the FOIR ratio required to take the loan. If the EMIs had all been equal, the borrower may not have been able to meet the required FOIR ratio due to his lower income level in the initial years. FOIR is fixed obligation (total fixed outgo per month) to income (per month) ratio of a borrower which ideally should be less than 40 percent, i.e., ideally the loan EMIs plus other fixed outgo should not exceed 40 percent of the borrower’s income on a monthly basis.
5. Opt for a longer tenure
One can consider choosing a longer home loan tenure (although the interest outgo is also more in this case). Shetty said, “You can enhance the loan tenure but try and avoid getting into a situation where you have to repay your loan over a longer tenure because this can significantly increase your cost of borrowing.”
For example, if you take a loan of Rs 50 lakh at 9 percent for 20 years, the EMI will be Rs 44,986 per month, with a total interest payable Rs 57.96 lakh. Similarly, if the same loan is taken over 25 years, the EMI will fall to Rs 41,960 per month, but the total interest will go up to Rs 75.87 lakh. Hence, this would be, overall, costlier by a whopping Rs 17.91 lakh (in terms of total interest payable).
In above case, as the EMI for longer tenure loan is lower, even those with lower income levels may be able to qualify for it in terms of FOIR requirement.
6. Additional source of income
If you are getting some additional income, say rental income or business income, then that can also help increase your home loan eligibility. Therefore, if you have a second home, rent it out and include that income in your monthly cash inflows.
Kumar said lenders check the ratio of borrower’s fixed obligations to their income. “Therefore, other factors remaining same, if you own a second house and that house is rented out, the additional income received will get added to your total income and will make the ratio (FOIR) more favourable for you,” he said.