With home loans being one of the financial products of very high value, financial institutions look deeply into an applicant before approval. Similarly, the home loan interest rate is also greatly dependent on the financial condition of the applicant, thereby being under strict scrutiny. The following are the main determinants.
- Credit score: Credit or CIBIL score of an individual is one of the most determining factors for a financial institution, not just in deciding interest rate but also that of approval. Anything above 750 is considered a good CIBIL score for a home loan to be approved. When financial institutions find an individual financially credible they levy lower home loan interest rate.
- Debt history: Financial institutions take a look at the credit history of applicants before deciding the rate of interest for a home loan. This can be of two types. Known as a soft and a hard pull, the former is more of a casual glance at credit history. In the case of the latter, a much detailed scanning of credit history is done. Important to note, a hard pull can also adversely affect the credit score.
While past history of loans and credit card usage are not issues, unpaid ones are. Unpaid EMIs and credit history immensely affect the approval as well as the home loan interest rate.
- Income: An applicant’s income is a crucial determinant of the interest rate of a home loan. Along with the income, Fixed Obligations to Income Ratio (FOIR) comes into play. This is the ratio of income with compulsory expenditures of an individual. A ratio of around 50% or less is considered good, therefore attracting cheaper rates. A higher FOIR reduces an individual’s financial credibility. With a higher risk factor, the interest rate rises too.
- Employment status: Lenders check the employment status of applicants to decide the risk factor involved. There are different types of home loan depending on the employment of the applicant. In the case of salaried individuals, working in a public or private sector company or an MNC for more than 3 years is compulsory. In the case of self-employed individuals, a steady source of income for at least 5 years is mandatory.
NBFCs usually have payment slips and account histories as part of the required documents.
- Age of applicant: Age is one of the determining factors in terms of eligibility. The reason behind this is that the number of years left as an earning individual is a major determinant of the risk factor. Individuals early in their careers usually find more economic home loan interest rates for this reason.
- Property Details & LTV ratio: A property acts as a security for the approval of a home loan. Irrespective of whether the loan amount is used for purchase or construction of a house, lenders always make an estimation of the total cost.
Lenders finance only a percentage of the total cost of purchase or finance. The amount in finance can go up to 90%. The ratio between the loan amount and price of a property is known as Loan to Value (LTV) and this is one major determinant of the rate of interest applicable on your loans. Higher LTV leads to more loan amounts along with an increase in the risk factor.
The above also emphasizes why one should research on features that can improve property value.
Noteworthy, there are two types of home loans –
- Fixed – Interest rates that remain constant throughout the tenure.
- Floating – Interest rates that fluctuate depending on market conditions.
The above should provide a comprehensive idea regarding how a financial organization calculates loan interests. Subsequently, this should help to desire applicants to plan suitably. Consequently, choosing a property with rising value should also be prioritized.