How to calculate home loan eligibility based on your monthly income Buying Guide

Dreaming of owning your own home is common, but understanding how much money you can borrow can be challenging or confusing. Your monthly income plays a crucial role in determining your home loan eligibility. In this article, we'll break down the process in simple terms, helping you navigate through the complexities of home loan calculations.   

Understanding Home Loan Eligibility

As a general rule of thumb, it’s necessary for you to contribute at least 20-30% of the total cost of the property from your personal funds as an initial down payment. Following this, you have the option to approach a bank that you prefer and apply for a home loan that amounts to about 70-80% of the market value of the property. The bank will consider approving your loan request only if they are convinced of your steady income and your ability to repay the loan.

In accordance with these considerations, banks ensure that the monthly installment for repaying the home loan, known as the Equated Monthly Installment (EMI), does not surpass half of your total net monthly income.  

How to Calculate Home Loan Eligibility:

To determine your home loan eligibility, financial institutions primarily consider your monthly income, existing financial obligations, and credit history. Here's a simplified formula:

Loan Eligibility = (50% - 60% of Monthly Income) / EMI per Lakh

Let's break it down with an example:

For instance, if you earn 1,00,000 per month and have no underlying financial liability; then the 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.

How is EMI on Loan Calculated?

As per most of the banks & financial institutions, your monthly loan EMIs cannot be more than 50-55% of what you earn after taxes, and this shouldn’t include any other loans you're paying off. Different banks might have different rules, but usually, they won't let your home loan monthly EMI be more than 60% of what you actually get in your paycheck.

If you already have other existing loan EMIs, they'll be taken into account when figuring out how much you can borrow for a home loan.

For example, if you earn 1 lakh rupees and already pay 20,000 rupees for another loan, the calculation will be based on what you have left after paying that loan, which is 80,000 rupees.

Your eligibility for a home loan will then be calculated based on how much you can afford to pay each month, which is usually up to 50% of what you have left after paying other loans.

So, your home loan eligibility will be calculated based on your affordable monthly EMI that will be a maximum of (net salary x 50%) i,e, Rs. 40,000.

How does EMI calculation help in planning the home purchase?

Understanding how to calculate your Home Loan EMI helps you see exactly how much you'll pay each month. This knowledge guides you in making smart decisions about your monthly expenses related to the housing loan. It also helps you figure out how much loan you can get and understand the costs you need to cover yourself. So, knowing your EMI is essential for figuring out if you're eligible for a home loan and accordingly helps you plan your journey to buy a home.

Several factors that influence your home loan eligibility:

1. Monthly Income: A higher income typically translates to a higher loan eligibility.

2. Credit Score: A good credit score reflects financial discipline and enhances eligibility.

3. Existing Financial Obligations: EMIs on existing loans reduce the amount you can allocate towards a home loan.

4. Age: Younger individuals may have higher eligibility as they have more years of earning ahead.

5. Employment Stability: Consistent employment history enhances trustworthiness.

6. Property Value: The value of the property you intend to purchase affects eligibility.

Tips to Increase Home Loan Eligibility:

1. Increase Income: Consider additional income sources or professional growth opportunities.

2. Improve Credit Score: Pay bills on time and keep credit utilization low.

3. Reduce Financial Obligations: Clear existing debts or opt for lower EMIs.

4. Add Co-applicants: Including a co-applicant with a stable income can increase eligibility.

5. Choose Longer Tenure: Opting for a longer tenure reduces EMIs, increasing eligibility.

6. Maintain a stable employment record: A stable employment record is reflective of your ability to repay the loan over the repayment period

Final Takeaway:

Understanding your home loan eligibility empowers you to make informed decisions when buying your dream home. By considering factors like monthly income, existing obligations, and credit history, you can estimate how much you can borrow. Remember to explore various lenders and their offerings to find the best fit for your financial needs. With careful planning and financial discipline, owning your own home can become a reality.