If you are a working professional who receives a salary as the main source of income, it becomes one of the most important factors that influence the home loan amount you are eligible for. Lenders consider your salary to assess your repayment capacity, which is the ability to repay the loan on time and in full.
Your salary plays a significant role in determining the home loan amount you can qualify for in India. Lenders in India, such as banks and financial institutions, use your income as one of the primary factors to assess your eligibility for a home loan.
Also Read: Home Buyers Take Note: What You Must Know Before Booking Under Construction Flat
How Salary Decides Your Loan Amount?
Apart from other criteria and norms of the lending bank, the home loan amount is generally calculated on the basis of your EMI and NMI ratio, where Net Monthly Income (NMI) is the take-home pay after taxes and other payroll deductions. As per the information given on the SBI home loan portal, the EMI/NMI ratio varies in the range of 20% to 70% for different net annual income slabs. The loan amount can be increased by including a co-applicant.
Your salary will determine the maximum home loan amount you are eligible for based on these two ratios. For example, if your NMI is Rs 50,000 and you want to borrow a loan of Rs 80 lakhs, the lender will check your EMI/NMI ratio. If your EMI is within the limit, the lender will then check your LTV ratio. If the LTV ratio is also within the limit, the lender will approve your loan.
LTV stands for “Loan-to-Value” ratio in the context of loans, particularly in the context of mortgage loans for real estate. The LTV ratio is a financial metric that expresses the relationship between the amount of the loan and the appraised value or the purchase price of the asset being financed. In the case of a mortgage loan, this asset is usually a property or a house.
In addition to your salary, lenders also consider other factors when determining your home loan amount, such as your credit score, employment history, and debt obligations.
Here’s how your salary influences the home loan amount:
Loan Eligibility Calculation: Lenders typically use a formula to calculate your loan eligibility, which takes into account your monthly income, existing financial commitments, and the tenure of the loan. The most common formula used is the Fixed Obligation to Income Ratio (FOIR), which determines the maximum EMI you can afford based on your income.
FOIR is typically set at around 50-60% of your monthly income. So, your salary directly impacts the maximum EMI you can pay, which in turn affects the loan amount you are eligible for.
Loan-to-Income Ratio: Lenders also consider the Loan-to-Income Ratio (LTI), which determines the maximum loan amount you can get based on your income. The LTI ratio is usually around 2.5 to 6 times your annual income. For example, if your annual income is Rs 10 lakh, and the lender’s LTI ratio is 4, you may be eligible for a loan of up to Rs 40 lakhs.
Stability of Income: Lenders also assess the stability and consistency of your income. If you have a steady and regular income source, it can enhance your eligibility for a higher loan amount. Irregular income sources or frequent job changes may reduce your eligibility.
Co-borrower’s Income: You can increase your eligibility by including a co-borrower, such as a spouse or family member, who has a stable and sufficient income. Their income is considered in addition to yours when determining eligibility.
Credit Score: While not directly related to your salary, your credit score also plays a crucial role in determining the loan amount and interest rate you qualify for. A higher credit score can enhance your eligibility and help you secure a larger loan amount at a lower interest rate.
Other Financial Obligations: Existing loans, credit card debts, and other financial obligations can reduce your eligibility for a home loan. Lenders will consider your current financial commitments when assessing your ability to repay a home loan.
Home Loan EMI?
EMI is a fixed amount paid by you to the bank on a specific date every month. The EMI’s are fixed when you borrow money from the bank as a loan. EMI’s are used to pay both interest and principal amount of a loan in a way that over a specific number of years, the loan amount is repaid to the bank alongwith interest.