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How can I calculate my Loan Eligibility?

Before you take a home loan or even go out looking for the house of your dreams, it is very important for you to know what you can afford, so that there are no disappointments later. In order to do so you must be clear about the concept of how lenders decide your loan eligibility. The following are the nitty-gritties of the same.

You may have heard lenders telling you that you are eligible to get a loan of up to 60 times your net monthly salary. Now, if you do not have any other major debts to clear such as a personal loan or an auto loan to worry about and your take home salary is Rs. 55,000 you may be feeling glad about the fact that you are eligible for a loan of up to Rs. 33 lakhs (Rs.55,000 x 60). But unfortunately the calculation parameters that lenders use are not so simple.

If you are unaware, you will see things changing rather drastically when you are called for an evaluation after you have finished submitting all the relevant documents. This is because there are certain components of your salary that are not taken into consideration while calculating your loan eligibility. To understand this better let us take a look at what are the components of your salary:

  • Your basic salary
  • House Rent Allowance (HRA)
  • Conveyance allowance
  • Leave travel allowance (LTA)
  • Your medical allowance
  • Performance bonus
  • Special allowance (depending upon the position you hold in your company)
  • Food coupons
  • Provident Fund
  • Other allowances (once again depending upon the privileges you are entitled to at your position)

 Now, you may be getting a take home salary of Rs. 55,000 by adding all these components, but what you may not be aware of is that the lenders do not consider things such as medical allowances or LTA into consideration while calculating your loan eligibility based upon your net income. Let us take into a consideration a sample salary slip of a company:

 

EARNINGS

AMT

DEDUCTIONS

AMT

Basic Salary

15,000

PF

1,800

HRA

7,550

Tax component

1,250

Conveyance

1,300

 

 

LTA

3,000

 

 

Medical Allowance

1,200

 

 

Special Allowance

30,000

 

 

TOTAL

58,050

 

3,050

NET PAY (according to your calculation)

55,000 (58,050-3,050)

 

While taking into consideration your net income, a prospective lender will leave out the following components:

LTA

3,000

Medical Allowance

1,200

Your net pay (according to the lender’s calculation)

50,800

 

The lender will now calculate your loan eligibility on (50,800 x 60). So, instead of being eligible for Rs, 33, 00,000, you are now eligible for Rs 30, 48,000. If you had continued with your assumptions of your net income in mind, you would have had to cough up a higher down payment would throw your entire budget haywire! To avoid such mishaps, it’s best to keep in mind the basic things about the calculation of your loan eligibility.

However, make a note that most banks would restrict your EMI to 40-50% of your net monthly income. This means, your loan amount will equal to an amount whose EMIs that do not exceed 50% of your net monthly income. In banking terms, The FOIR (Fixed Obligations to Income Ratio) should not exceed 40-50%. FOIR includes all your existing liabilities along with the home loan you have applied for.