While applying for a home loan one must bear in mind that there are several other factors besides the income which are taken into account while deciding the eligible amount for home loan to an individual. Thus while deciding on a property to buy the prospective customer must keep in mind the amount that he can obtain from the banks as a home loan depending upon his income and repayment capacity.
The primary consideration in calculating the amount an individual is eligible for is the annual income. The monthly income and the expenses are compared and the remaining portion is considered as the repayment capacity which is the basis for EMI computation and then reverse calculations are used to arrive at the final figure one is eligible for.
For example if a person earns Rs. 20000 per month and his essential monthly expenses are Rs. 15000 then his monthly repayment ability is Rs. 5000 at an average interest a rate of 9% the monthly installment on a loan Rs. 100000 will be Rs. 900 for a tenure of 20 years. Now the Home loan eligibility in lakhs is approximately equal to the amount available for loan repayment divided by loan installment per lakh for the selected tenure. In this case this amount would be 5000/900 x 1 Lakh = Rs. 5.5 Lakhs.
There are several additional factors which the banks must consider while determining the actual amount that the applicant is eligible for.
Suppose in the above example the house purchased gets Rs. 2000 per month as rental which increases the repayment capacity of the individual. Thus the eligibility will now be Rs. (5000+2000)/900 x 1 Lakh = Rs. 7.7 Lakhs.
The exact essential expenses of the borrower are difficult to estimate so a fixed percentage of income is considered as not available for loan payment. This percentage varies as per income bracket as the banks believe that those who are in higher brackets of income can spare a greater percentage towards repayment of the home loan. Thus the eligibility figure for them also increases accordingly. For high earning individuals the repayment capacity may even be taken as 60% of their salary thus increasing their eligibility substantially.
The Tenure Factor
Another factor that comes into play is the tenure of repayment, which affects the amount one is eligible for. For longer tenures the EMIs per Lakh of amount borrowed becomes lesser and thus the individual can pay for higher loans. Thus the eligibility for a 20 year loan tenure of an individual will be higher than a 10 year tenure for the same individual.
In certain cases additional factors such as income from other sources and expected increase in earnings are also factored into deciding the total amount eligible for. However if the applicant has other loan repayment liabilities at the time of applying for a home loan his net eligibility shall reduce as per the amount outstanding as other loans and the EMIs being paid towards those loans.