Home-loan eligibility: how banks size your loan
Lenders size your loan on two things: how much you can repay each month, and how much they will lend against the home. Here is how each one works, in plain terms.
Updated
Two questions a lender asks
Before a bank quotes you a loan it answers two questions. First, how much can you comfortably repay each month, given your income and existing obligations. Second, how much is it willing to lend against this particular property. Your sanctioned amount is the lower of what those two answers allow.
FOIR: your repayment capacity
Lenders cap the share of your income that can go to loan repayments. This is the fixed obligations to income ratio, or FOIR. As a common rule of thumb, total EMIs are held to roughly half of net monthly income. Take that ceiling, subtract the EMIs you already pay, and what remains is the room for a new home-loan instalment.
That monthly room is then converted into a loan amount using your interest rate and tenure. A longer tenure lets a given monthly capacity support a larger loan, because each instalment stretches further, though you pay more interest overall.
LTV: how much against the home
Separately, lenders cap how much they will advance as a share of the property value. This is the loan-to-value ratio, or LTV. Indicatively, a larger share is available on smaller loans and a smaller share on larger ones, which is why you are always expected to bring a down payment. The gap between price and loan is money you fund yourself, on top of stamp duty and registration.
What lifts or lowers your number
- A clean credit score and history widen both eligibility and the rate you are offered.
- Clearing or consolidating existing EMIs frees up FOIR room immediately.
- A co-applicant with income can raise the repayment capacity the loan is sized on.
- A larger down payment lowers the loan needed, which can ease approval even when eligibility is tight.