Buying a house that you can call your home can easily be counted as a beautiful dream come true. Given the size of this investment, purchasing a home is often easier said than done. As a thumb rule, you need to pay at least 20-30% of the market value of the property from your own pocket as a down payment. Subsequently, you can file a Home Loan application to a bank of your choice, requesting a loan amount equivalent to 70-80% of the market value. The banks will only approve your application if they are assured of your income as well as your repayment capacity. In line with this, banks make sure that your Home Loan EMI (Equated Monthly Instalment) does not exceed half of your household income.
Additional Info: Calculate 30 Lakh Home Loan EMI and Apply Online.
As a rule of thumb, the EMI you pay for a Home Loan should not exceed 40-50% of your total household income minus your obligations towards other debts. Hence, if your income is 1,20,000 and you are paying an EMI of 20,000 towards other loans, ideally your home loan EMI should fall in the range of 40,000 to 50,000. This, however, is how you ought to calculate your expected EMI and thereby your loan amount and the tenure.
While the income of an individual is indicated via his salary slips, his income tax statements or the monthly invoices generated (in case of professionals), there is no full-proof way to determine the expenses, and thus calculate the net income.
It is for this very reason that a concept called Fixed Obligations to Income Ratio (FOIR) was introduced. Most banks rely on calculations for the FOIR to gauge the repayment capacity of the loan applicant. As a rule of thumb, the lenders restrict FOIR to a maximum of 40-50% of the monthly income.
Since it is difficult for banks to estimate the monthly expenses of each borrower individually, they use a pre-determined percentage of one’s ‘net’ income, known as FOIR. Most banks restrict FOIR to a maximum 40-50% of monthly income.
Here, it is evident that the higher the income, the higher can be the EMI, owing to the disposable amount of revenue available.
In a vast majority of cases, your ideal Home Loan amount will be calculated based on 50% of your monthly income. Here, your liabilities will be deducted from the remaining amount, which will then be divided by the per-lakh EMI.
For instance, if you earn 1,00,000 per month and have no underlying financial liability; then the FOIR calculation will be as follows:
50% of 1,00,000 – 0/868 x 1,00,000
Where 868 is the EMI, you will pay per lakh on your loan considering a 20-year tenure along with a 8.5% interest rate. Hence, the maximum amount of loan that you will be eligible for would be 57,61,542.
On the other hand, if your income is the same – 1,00,000, but you are servicing a Personal Loan of 15,000 per month, the calculation would go as under:
50% of 1,00,000 – 15,000/932 x 1,00,000
Here, you will only be eligible for a loan amount of 40,33,079.
In this case, it will prove to be in your interest to pay off your existing Personal Loan, and only then Apply for Home Loan.
Also Check: SBI Home Loan EMI Calculator
A Home Loan usually lasts for as long as 10-20 years and in some cases even more. As can be understood, this is a serious and long-term financial commitment, which needs due deliberation. Hence, it is best if you know the calculations involved, especially the calculation of the interest that you will be required to pay in this regard. Not only will this exercise help you understand the implications of your credit in a more efficient manner, but will also help you make the right calls concerning prepayment, foreclosure as well as availing the entitled Home Loan Tax Benefits.
Your EMI essentially comprises two components – Principal and Interest. At the very beginning of your repayment cycle, the interest forms the more substantial part of your EMI. However, as time progresses, the benefit reduces. Eventually, the principal becomes the more significant part of the monthly instalment.
The EMI for any amount of loan can be calculated using a simple math formula.
EMI = [P x R x (1+R)n] / [(1+R)n – 1]
P ~ Principal
R ~ Monthly Rate of Interest
N ~ Loan Tenure (no. of months)
The lender usually mentions an annual Rate of Interest on Home Loan. For the above formula, you can easily convert the yearly rate to monthly, by dividing it by 12.
We understand that all of this may seem overwhelming to look at. However, with MyMoneyMantra’s EMI calculator, all you need to do is:
Once you key in these details, the EMI Calculator will offer accurate results for:
Besides, a coloured pie-chart will help you understand the proportion of the principal amount as compared to the interest that you will be paying.
If the EMI denoted by the calculator is less than or equal to 50% of your monthly income, then you should consider yourself eligible for the Home Loan. On the other hand, if the EMI exceeds the minimum percentage, you should try decreasing your loan amount, to the limit, where your EMI finally drops down to the maximum limit.
Remember, not only will an exceedingly high loan amount result in an additional financial burden on you and your family, but will also adversely affect your home loan eligibility.
Now that you know how to calculate your Home Loan Eligibility make sure you do so, before you choose to apply for a Home Loan to a trusted bank or online lender, and enjoy the much-deserved peace of mind.
To apply online for Best Home Loan Interest Rates in India, Credit Cards, Secured Loans and Unsecured Loans, visit www.mymoneymantra.com, the leading online lending marketplace that offers financial products from 100+ Banks and NBFCs. We have served 5 million+ happy customers since 1989.