Home loans are the most easily accessible financial supplement to purchase your dream home. To understand how to enhance your eligibility to apply for a home loan, make a simple self-assessment. Here is how banks do it.
Credit Appraisal is the process followed by banks to determine the borrower’s ability to repay his loan as well as his trustworthiness. A prospective borrower has to go through 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.
The loan eligibility is usually calculated by applying Debt Burden Ratio (DBR). Banks restrict to a maximum 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 50% of his gross monthly income.
For the businessmen, banks will analyze the financial statements to see how the business has been faring for the past 2-3 years
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 State Bank of Pakistan and private databases.
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.
Tips to increase your eligibility for home loans
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 years tenure.
- Additional Income –Your consistent additional incomes like rental income qualify.
- Pre-closure of Existing Loans- Outstanding loans like car loans or personal loans may reduce one’s 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 creditworthiness. Also keep your credit score in good shape. Good and steady repayments keep you out of debt traps and will enhance your creditworthiness in future.