With the financial year entering its last quarter, it is now time to prepare yourself for the annual appraisal. If you have been working as per the expectations of your manager, you can be in for a long-awaited salary hike. If you have already started preparing plans regarding various expenses you will undertake once you get this raise, then stop for a moment.
You can use this opportunity to realise your dream of becoming a homeowner. Why now? Well, as you are a salaried employee, your monthly salary is the biggest factor that impacts your Home Loan Eligibility.
How is your salary assessed for Home Loan
To determine your eligibility for a Home Loan, lenders bifurcate your salary into different components such as:
- Basic Salary
- House Rent Allowance (HRA)
- Leave Travel Allowance (LTA)
- Dearness Allowance
- Medical Allowance
- Other Allowances
Now, as the allowances like medical allowance and leave travel allowance are meant for specific expenses, they will not be taken into consideration. So, the lender will consider remaining components and allowances to calculate your salary for a Home Loan.
Like every other loan, when it comes to a Home Loan, the lender’s decision depends on the repayment capacity of the borrower. One of the best methods to assess the loan repayment capacity of a salaried individual is the monthly salary. To determine your Home Loan eligibility, lenders calculate your debt-to-income ratio.
DTI ratio signifies the percentage of your monthly income that goes towards repayment of debts. Usually, lenders prefer having a debt-to-income ratio of less than 50% because of two reasons i.e.
- You have to take care of your other monthly household expenses also, so you can not pay the entire salary towards loan repayments.
- Higher debt-to-income ratio means higher exposure to credit, which is a matter of concern for the lenders.
So, when your salary is hiked, it automatically reduces your debt-to-income ratio as well as your exposure to credit, thereby increasing your loan eligibility.
How salary impacts Home Loan eligibility
Your salary is one of the single most important factors that is considered by the lenders while determining your loan eligibility as well as various other important parameters associated with a Home Loan.
- Maximum Amount: The lender will follow a simple formula to calculate your eligibility, i.e., they will multiply your monthly salary with a factor. This factor can go up to 60 i.e., you can get up to 60 times your monthly salary as a Home Loan.
For instance, if your monthly salary is Rs. 1 Lakh, you will be eligible to apply for a Home Loan up to Rs.60 Lakhs. Though, it is pertinent to mention here that this factor will vary across lenders.
- Repayment Tenor: While the maximum repayment tenor for a Home Loan can go up to 30 years, your salary also has a role to play here, albeit indirectly. As you know, higher is your salary; higher is the Home Loan amount that you are eligible for.
The lender will calculate your EMI payment capacity based on your salary. So, with an increased salary, the lender will be willing to offer you a longer repayment tenor for your Home Loan. Though, it must be noted that most lenders want the Home Loan repayment to be completed by the retirement age of the applicant.
- Interest rates: Home Loan Interest Rates offered by lenders are directly linked to your credit profile. If your salary has undergone an increase recently, you have more income to spare. This reduces the risk of default, and consequently, you can avail the benefit of lower Home Loan rates from the lenders. Most lenders already offer concessional interest rates for salaried applicants, as regular monthly income reduces the chances of non-payment.
- Processing time: Usually, in the case of salaried applicants, the processing time taken for Home Loan application is lesser as compared to self-employed applicants. This is due to the fact that all the information that is required by the lenders is readily available through bank statements, salary slips, and Form 16. Moreover, if you have recently earned a salary hike, then any doubts of the lenders will be dissuaded, and the processing time for your Home Loan application will be reduced.
- Debt-to-income ratio: As discussed earlier, an increase in your salary will automatically reduce your debt-to-income ratio, thereby increasing your Home Loan eligibility. This will allow you the flexibility of opting for a higher loan amount, which can help you purchase the home that you have always desired but were not able to afford. But you must be cautious considering that your home expenses and other commitments will also increase with time. So, you need to strike a balance between your present requirements and future commitments.
- Other expenses: Most lenders offer lower processing charges against Home Loans to their salaried customers. This is possible due to the fact that the time taken for processing the documents for salaried applicants is lower. So, with a better salary package and a stable employment history, you can enjoy the benefits of lower processing charges when you apply for a home loan.
Now that you know the profound impact that your salary can have on your Home Loan eligibility, you need to work harder to get that increment you have been waiting for.
Also Read: 12 Factors Banks Consider before Approving Home Loan in India
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