Credit Appraisal is the process followed by banks to determine the borrower’s ability to repay his loan as well as his trust worthiness. A prospective borrower has to go thorough the stages of credit appraisal as practiced by different banks.
The main factor banks will consider is “proof” that shows that the borrower is capable of repaying the loan on time. For this, they will look into your income documents, personal credit history, current assets and liabilities, education, experience etc.
Old generation banks and co-operative banks to certain extent rely upon existing relationship or the previous experience with a client. A common pattern they follow is the sanctioning of a loan amount which will be a fixed multiple of the annual income. However, the new generation banks strictly follow their parameters.
The loan eligibility is usually calculated by applying Fixed Obligations to Income Ratio (FOIR). Most banks restrict FOIR to a maximum 45-50% of monthly income. That means, considering that one needs around 45- 50% of his income for his personal expenses, all fixed obligations including the home loan applied for, should be restricted to a maximum 45-50% of his gross monthly income. The loan amount is sanctioned can be calculated as below:
Loan Eligibility = Gross monthly income * 45-50% – all other obligations / per lakh EMI (EMI calculated on the basis of applied tenure and rate of interest).
For the business class, banks will analyze the financial statements to see how the business has been faring for the past 2-3 years considering the ITRs, Balance Sheets, P & L Accounts (audited and certified).
Banks look into your credit history like existing loan repayments, mishandled accounts or delinquent credit cards. This can be checked through a database of past loans and repayments available with the Credit Bureau of India Ltd (CIBIL). You can learn how to access your CIBIL score from the following link http://www.cibil.com/accesscredit.htm. Cross checking of the income with documents like bank statements or initiating credit verifications is also part of the process.LTV is also a factor in eligibility calculation. Banks finance up to 70-80% of the property value as evaluated by the bank’s evaluator. For those who have not yet decided on the property, there is an option to sanction an in-principle amount, which helps to know the amount a bank would be able to give out.
To increase your loan eligibility the following can be considered:
Clubbing income- Income of your spouse also can be considered if applied jointly.
Increasing Tenure- When EMIs are high, eligibility will become less. The more the tenure is, less the EMI will be. So, opt for a higher tenure. Usually banks offer a maximum of 20-30 years tenure.
Additional Income –Your consistent additional incomes like rental income qualify. Expected rental income from the property purchasing, performance linked pay can be considered to enhance your loan eligibility.
Step-up loans- A step-up loan is a loan wherein an individual pays a lower EMI during the initial years and the same is enhanced periodically on conditions put by the banks. This is made on considering the individual’s expected future salary hikes.
Pre-closure of Existing Loans- Outstanding loans like car loans or personal loans may reduce one’s loan eligibility. As per norms, only existing loans with over 12 unpaid instalments are taken into account while computing home loan eligibility. So, Prepaying the existing loans in full or part will help.
Employer-Bank relationship- A lesser interest rate will naturally increase your eligibility. Check with the banks if there are any schemes running with your employer. Banks usually categorize companies into A,B,C based on company profiles and run different schemes like special interest rates, processing fee waiver etc. People working in MNCs are benefited out of this usually.
Always remember, taking too many loans would restrict your credit worthiness. Also keep your credit score in good shape. Good and steady repayments keep you out of debt traps and will enhance your credit worthiness in future.