The Buyt Desk
Eligibility for loans is calculated on an array of factors and many financial institutes have their own ratios and eligibility values. Here are 3 important ratios.
Getting loan eligibility is the first and crucial step. Banks and other financial institutes scrutinize each and every aspect of the borrower based on RBI and internal guidelines to ensure the eligibility of the loan application. When you apply for a loan (any from personal to home loans), you should go through all the checks that the financial institution does to make sure you will not be in bad debt. The checks are mainly financial and book values, many ratios and numbers are calculated. Only when all the numbers state that you are capable of repaying the loan, the loan is sanctioned. If the numbers say that there are chances that you may not repay the complete loan amount then there will be another round of scrutiny to analyze the risk that banks will take if they sanction your loan. Based on all investigations the loan amount that you are eligible to borrow is incurred.
What parameters are examined for loan approval?
Be it any kind of loan that you apply for, there are a few basic parameters that the bank checks for approving your loan. The banks mainly consider these parameters to analyze the applicant’s preliminary eligibility before moving to the number game.
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Applicant’s CIBIL score
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Applicant’s age on the day of loan application
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Educational qualification of the applicant
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Applicant’s outstanding loans
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Applicant’s work experience to make sure if there is a regular source of income
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Applicant’s income including fixed and variable
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Applicant’s tax payment record
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Applicant’s financial assets and liabilities
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Applicant’s current workplace reputation
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Repayment tenure of applied loan
What are the three important deciding ratios?
After assessing the preliminary parameters, many financial computations happen. Banks get many numbers after calculations. Based on these, the banks decide on eligibility and the loan amount is decided. The three most important ratios that are calculated based on the net income of the applicant to decide his/her loan eligibility for all types of loans are Fixed obligation to income ratio (FOIR), Loan to value ratio (LTV) and Installment income ratio (IIR).
What is Fixed Obligation to Income Ratio?
FOIR is a ratio that is used to evaluate the eligibility of the applicant. Here Fixed Obligation refers to the EMI to be paid by the applicant every month and not the professional tax, Recurring Deposit, PF, LIC premium, charity to trust etc. Fixed Obligation is just the fixed monthly obligations of an applicant without including the statutory deductions. FOIR calculation is
FOIR = (Sum total of all existing obligations / Net monthly salary) * 100
This number denotes the percentage of the monthly income of the applicant which is his or her current living expenditure. And the remaining percentage of the income will be used by the applicant to repay his or her loans (personal loan, home loan, car loan). This number determines the loan amount that the applicant is eligible for. Lower is FOIR, higher is the chance of loan approval.
What is the Loan to Value ratio?
The Loan to Value Ratio is a percentage of the property value that the bank can finance through a loan. LTV is a lending ratio that evaluates the lending risk for the Banks. This is mainly used when a property is mortgaged for loan purchase. Here Value refers to the asset value the applicant is ready to mortgage. LTV calculations is
Loan to Value Ratio = Mortgage amount / Property value
Banks and financial institutes prefer sanctioning home loans to the applicants opting for lower LTV ratios. Lower LTV ratio, lesser is credit risk for banks.
What is the Installment to Income Ratio?
Instalment to Income Ratio is used by banks to assess the loan eligibility of the applicant. This ratio is also very similar to Fixed Obligation to Income Ratio. The applicant is eligible for a loan amount whose monthly instalment does not exceed the IIR percentage of applicants per month salary. IIR calculations are
Installment to Income ratio = (EMI / Net Monthly Salary) * 100
As per the bank’s standard rule, the loan amount is decided such that the applicant’s EMI will be 35-40% of his/her salary. EMI is adjusted such that IIR is around 35-40. And based on this value and loan tenure, the loan amount is figured.
