Bangalore Real Estate Trends

A credit appraisal for a home loan is an important part of a loan eligibility evaluation process. The appraisal is undertaken by a bank. Each bank has set its own parameters and standards for evaluating the credit worth of a potential borrower. The eligibility for a loan that a person can avail of depends on his creditworthiness.

A bank evaluates the repayment capacity of a borrower considering factors such as income, age, qualifications, experience, employer, nature of business (if self-employed ), security of tenure, tax history, assets owned,additional sources of income,other loan obligations,investments etc.

Based on the parameters of the bank,the maximum loan eligibility is worked out. The final loan amount sanctioned by the bank is according to the loan-to-value (LTV) norms, instalment-to-income ratio (IIR) norms and the fixed obligation to income ratio (FOIR) norms laid down by the bank.

IIR

This ratio is used to calculate the loan eligibility of a borrower and is generally expressed as a percentage.This percentage denotes a portion of the borrower's monthly installment on the home loan taken.The percentage may vary from 33.33 to 40.
For example assume the IIR is fixed at 40 percent.Now,if the gross income is Rs 1 lakh per month,according to the given IIR ratio,the borrower is eligible for a loan where the installment does not exceed Rs 40,000 per month (i.e.40 percent of the gross monthly income ).

LTV

Banks also use this ratio to calculate the loan amount that a person is eligible for on the total cost of the property.There is an upper limit on the maximum loan amount that a person is eligible for irrespective of the loan eligibility norms.The maximum amount of loan is pegged to the cost or value of the property.

The loan eligibility according to the other parameters may be higher,yet the loan amount can't exceed the cost or value of the property.The ratio varies between 70 and 90 percent of the registered value of the property.

FOIR

A bank takes into account the installments of all other loans previously availed of by the borrower,including the home loan applied for.This ratio includes all the fixed obligations that the borrower is supposed to pay regularly on a monthly basis.The fixed obligations do not include statutory deductions from salary such as Provident Fund,professional tax and deductions for investments such as insurance.

For example, assume a borrower has an income of Rs 1 lakh per month. If he has a car loan installment of Rs 10,000 and a personal loan installment of Rs 2,000 per month,and a proposed housing loan installment of Rs 20,000 per month,the FOIR is 32 percent,the eligibility is Rs 32,000 - all loan installments divided by the monthly income.

The bank may have a standard 30 percent of FOIR.So the total installments the person can pay,as per the bank's FOIR standard,would be Rs 30,000 per month.As he is already paying Rs 12,000 towards the car and personal loans,he has Rs 18,000 left,and the loan will be calculated taking Rs 18,000 per month as the housing loan repayment capacity.Accordingly,the housing loan amount is reduced.

Generally,the lowest of these three parameters is the amount of loan that a borrower is eligible for.

_{Source: Time Property Dt: 6-8-10}