Purchasing a home is an exciting milestone in life, but for many, it can seem like a daunting task. Lenders play a crucial role in this process, as they assess various factors to determine a borrower’s eligibility for a home loan.
But how does it work with lenders? How do they process your loan? What factors do they consider before disbursing that amount into your accounts? Here’s a checklist for you to keep your side clean for a favourable outcome. In this beginner’s guide, we will explore the key factors that lenders consider when approving home loans, empowering you with the knowledge to increase your chances of a successful application.
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Good CIBIL Score: The first and foremost factor that lenders assess when approving home loans is the applicant’s credit score and credit history. A credit score is a numerical representation of an individual’s creditworthiness and ranges from 300 to 850, with higher scores indicating lower credit risk. The credit history reflects the individual’s past borrowing and repayment behaviour.
Lenders use the credit score and history to evaluate the applicant’s financial responsibility and ability to handle debt. A good credit score demonstrates a reliable borrower who pays bills on time and manages credit responsibly. On the other hand, a poor credit score or a history of late payments and defaults may raise concerns for the lender. A Cibil score of 750 and above is considered excellent, while a rating between 600 and 700 is also considered good.
Down Payment and Loan-to-Value Ratio (LTV): Lenders prefer candidates who pay a large amount as the down payment while purchasing a home. Paying a substantial down payment at the time of applying for a loan will give lenders confidence in your financial situation.
Financial institutions prefer candidates who have paid at least 20 percent of the total cost of the house as a down payment. One may also get a loan at a lower interest rate in such a case. With that already done, the lender won’t see you as a big liability and may offer you a loan with favourable terms.
Current running loans: Financial institutions prefer loan applicants without an existing loan. The lenders think that the person who doesn’t have a prior liability is more financially sound than the one with running loans. They can pay their EMI on time and with ease.
Age: Lenders prefer applicants who have sufficient working years in their career to repay loans. People in the age bracket of 30–50 years have the best chances of getting a home loan sanctioned.
Job track record: Lenders prefer candidates who haven’t changed many jobs in the last 3-4 years. They think that a person who is not stable in their job may not be regular about repaying the loan.
The longer you work for a company, the better your chances of getting a loan. The track record of the company you are working for is also important. Lenders don’t prefer sanctioning loans to people working for companies with a chequered record.
Income status: Salary is an important factor in availing a home loan. Financial institutions ask for salary slips or bank statements from applicants as they think a candidate with a higher salary bracket won’t be financially stretched out and would not default. Candidates with a lower salary bracket may find it difficult to get a loan.
Occupation: Not just salary, but occupation is also a crucial factor. Lenders prefer candidates with stable jobs and a fixed income. Employees of PSUs and other government institutions get preference since their jobs are the most stable. With an assured fixed income, there are high chances that they won’t default on their payments.
Doctors and employees of blue-chip companies come next on the preference list. Lawyers, engineers, and chartered accountants are next in line.
Self-employed individuals and contractors may find it difficult to avail of a home loan as they don’t have a fixed income and may default on loan repayment.
Credit utilization ratio: This indicates how much of your revolving credit is being used on credit cards at a given time. The more you spend on your credit card, the higher your credit utilization. Lenders prefer home loan applicants with a credit utilization ratio of less than or equal to 30 percent.
To put numbers into perspective, if you have three credit cards with an accumulative limit of ₹300,000 and your outstanding balance is ₹90,000, your credit utilization ratio will be 30 percent. If you are using too much of your credit card limit, lenders may consider you overleveraged and less likely to repay the loan on time.
Debt-to-income ratio: The debt-to-income (DTI) ratio is another essential metric that lenders use to assess a borrower’s financial capacity. This ratio compares your monthly debt obligations, such as credit card payments, student loans, and car loans, to your gross monthly income. Lenders prefer borrowers with a low DTI ratio, typically aiming for 43% or less.
A lower DTI ratio indicates that you have sufficient income to cover your existing debts and the proposed mortgage payment. If your DTI ratio is higher, it might signal to lenders that taking on additional debt in the form of a home loan could strain your financial situation.
-The author is Co-Founder and CEO, BASIC Home loan. Views expressed are personal.
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