Purchasing a home is a significant milestone in anyone's life. Today the avg. home loan amount in 2023 is approx. 25 lakhs and the median home prices in major Indian cities have increased by nearly 20% in the last five years. So, securing the right home loan is crucial to making that dream a reality. But one of the most common questions homeowners ask is: "What is the maximum amount I can get for a home loan?" This blog will explain that, talking about what affects how much you can borrow, how to get the most out of it, and what to think about for your finances.
The maximum home loan amount you can get affected by several key reasons:
Lenders check if you can pay back the loan by looking at your income. They consider your salary, bonuses, rental money, and other earnings. Lenders usually say your monthly mortgage payment shouldn't be more than 40-50% of what you earn each month after taxes.
Your credit score is a critical factor in determining your loan eligibility. A higher credit score not only increases your chances of getting approved but also can result in lower interest rates. Most lenders prefer a credit score of 750 or above.
FOIR means Fixed Obligation to Income Ratio. It's a way for lenders to check if you can pay back a loan. FOIR shows what part of your income goes to things like loan EMIs and other fixed payments each month.
To calculate FOIR, add up all your fixed monthly payments. Then, divide that total by your gross monthly income (how much you earn before taxes). Multiply the result by 100 to get the percentage.
For example, if you pay ₹30,000 in fixed payments each month and earn ₹1,00,000 before taxes, your FOIR would be 30%. It means 30% of your income goes to fixed payments. Lenders look at FOIR to decide if you can manage loan payments along with your other expenses.
Mathematically, FOIR can be expressed as:
FOIR= Total Fixed Monthly Obligations / Gross monthly Income *100
For example, if a borrower has fixed monthly obligations totaling ₹30,000 and a gross monthly income of ₹1,00,000, the FOIR would be:
FOIR= 30,000/ 1,00,000 *100= 30%
In this situation, the FOIR is 30%, which means 30% of the borrower's monthly income goes to fixed payments. Lenders usually have a highest FOIR limit. If your FOIR is too high, they might not want to give you a loan. They do this to make sure you can handle repaying the loan along with your other costs.
The Loan-to-Value Ratio (LTV) is a measure used by lenders to assess the risk of a loan by comparing the amount of the loan to the appraised value of the property being purchased or refinanced.
In simple terms, it shows how much of the property's value is being financed through the loan.
Reserve Bank of India (RBI) guidelines stipulate that the LTV ratio should not exceed 90% for home loans up to ₹30 lakh, 80% for loans above ₹30 lakh and up to ₹75 lakh, and 75% for loans above ₹75 lakh. The formula is:
LTV Ratio=Loan AmountAppraised Value of Property×100\text{LTV Ratio} = \frac{\text{Loan Amount}}{\text{Appraised Value of Property}} \times 100LTV Ratio=Appraised Value of PropertyLoan Amount×100
For example, if you're taking out a loan of ₹80,000 to buy a house that's valued at ₹1,00,000, the LTV ratio would be 80%.
Lenders use the LTV ratio to determine the risk level of a loan. Generally, a lower LTV ratio indicates less risk for the lender, as it means the borrower has more equity in the property.
Putting more money down at the start means you'll have to borrow less, which can make the loan better for you. For instance, it's often a good idea to put down at least 20% of the total cost to make the loan easier to handle.
Franklin D. Roosevelt said "Real estate cannot be lost or stolen, nor can it be carried away. Managed with reasonable care, it is about the safest investment in the world."
Your employment history and stability refer to your work experience and how long you've been in your job. Lenders look at this to see if you have a steady income and if you're likely to keep your job.
If you've been working in the same job for a while or you have a history of steady employment, lenders might be more confident that you'll be able to pay back your loan.
But if you've changed jobs frequently or have gaps in your employment, lenders might see that as risky because they might worry you won't have a stable income to make your loan payments.
How long you take to pay back the loan, like 15 years or 30 years, can change how much you can borrow. If you choose a longer loan term, you might be able to borrow more money, but you'll end up paying more in interest over time.
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Figuring out how much you can borrow for a home loan depends on a few things. Your income, credit score, FOIR, LTV ratio, and down payment all play a part. You can use online tools, talk to lenders, and look at these factors to see how much you can borrow.
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| Interest Rate | Interest Rate |
|---|---|
| Topic | Summary |
| Maximum Home Loan Amount | Determining your maximum home loan amount involves considering several factors: income, credit score, Fixed Obligation to Income Ratio (FOIR), Loan-to-Value Ratio (LTV), down payment, employment history, and loan term. |
| Income | Lenders assess your income, including salary, bonuses, and other earnings, to ensure you can afford the loan. They typically recommend that your monthly mortgage payment not exceed 40-50% of your monthly income after taxes. |
| Credit Score | A higher credit score enhances loan approval chances and may lead to lower interest rates. Lenders generally prefer a credit score of 750 or above. |
| Fixed Obligation to Income Ratio | FOIR indicates the portion of your income dedicated to fixed payments, including loan EMIs. Lenders calculate FOIR by dividing total fixed monthly obligations by gross monthly income, typically aiming for a maximum FOIR to manage repayment risks. |
| Loan-to-Value Ratio | LTV ratio compares the loan amount to the appraised value of the property. Lenders use this ratio to evaluate loan risk, with lower ratios suggesting less risk due to higher property equity. |
| Down Payment | Making a larger down payment reduces the amount borrowed, potentially easing loan terms. A common recommendation is to put down at least 20% of the property's total cost. |
| Employment History and Stability | Lenders assess your work experience and job stability to gauge your ability to repay the loan. Consistent employment history indicates reliability in making payments, whereas frequent job changes or employment gaps might raise concerns about income stability. |
| Loan Term | The loan term, such as 15 or 30 years, affects the borrowing amount and interest paid over time. Opting for a longer loan term may increase borrowing capacity but result in higher overall interest payments. |
| Calculate Your Maximum Home Loan | Utilize online tools or consult with lenders to determine your maximum home loan amount based on factors like income, credit score, FOIR, LTV ratio, down payment, employment history, and loan term. |
| Conclusion | Assessing your maximum home loan involves evaluating various factors such as income, credit score, FOIR, LTV ratio, down payment, employment history, and loan term. By considering these elements, you can determine an appropriate borrowing amount, either through online tools or discussions with lenders. |
A credit score of 750 or above is considered ideal for securing the best home loan rates in India.
A 20% down payment is recommended to avoid high interest rates and reduce the loan burden.
While a lower FOIR is preferred, some lenders may approve loans with higher FOIR, especially if other factors like credit score and down payment are strong.
Higher income increases your borrowing capacity as lenders prefer that your monthly mortgage payment does not exceed 40-50% of your net monthly income.
Loan-to-Value ratio (LTV) compares the loan amount to the appraised value of the property. A lower LTV ratio is preferred as it indicates less risk to the lender.
Home loans in India include options like Home Purchase Loan, Home Construction Loan, Home Improvement Loan, Home Extension Loan, Home Conversion Loan, and Land Purchase Loan.
Interest rates for home loans vary depending on the lender and market conditions. It's best to check with lenders for the latest rates but generally it starts from 8.35% p.a
The maximum loan amount is usually up to 80%-90% of the property's value, subject to eligibility criteria and lender policies.
Eligibility criteria usually include factors like income, age, credit score, employment stability, and property value.
Required documents include Property document (Sales deed, Information about construction cost, Bank account statement) ID proof (PAN Card, Aadhar Card, passport, Driving License), Address Proof (Electricity Bill), Income Proof (Salary Slip, Last 3 months bank statement, Trade License, GST Registration)
Yes, borrowers can avail tax benefits on both principal and interest repayments under Sections 80C and 24 of the Income Tax Act, respectively.
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