Factors that affect your home loan eligibility
Finding a new home is an exciting experience for all. Whether the process is overwhelming or pleasant simply rests on getting things in order to ensure a smooth transition. One of the main steps in that process is being aware of the factors which makes you eligible for a home loan.
Your income and the pay back capacity are central to making you eligible for availing a home loan. Basic criteria which leading financial institutions look for are:
Repayment ability: Your income should be sufficient enough to cover the monthly payments of mortgage and should also cover your other monthly expenses. Financial institutions use debt-to-income ratio (DTI) to figure if you qualify. The thumb rule is, DTI to be 36% or less.
Likelihood of loan repayment: The underwriter in charge looks into your credit score history and your payment history and arrive at your likelihood of payments in the future. It always pays to have a good credit score.
Value of the house: The lender, based on professional appraisal, looks at the value of the house you are intending to buy and checks if it meets or exceeds the purchase price. They check if this fits in their loan-to-value (LTV) guideline. Most institutions prefer to have this ratio be 80-95%. Note that higher the value of the house and lesser the loan amount, your LTV ratio is less.
Down payment: The source and the amount of money allocated for down payment is an important eligibility criteria. If the down payment amount is lesser than 20%, the financial institution might need you to take take up private mortgage insurance (PMI), you might also be required to set aside a few month’s repayment as reserve payments. These reserve payments are in case of emergencies or unforeseen events. Qualifying for PMI increases your monthly mortgage amount.
Your home loan’s approval rests on having healthy credit history, sufficient income and repayment ability and a comfortable down payment amount. External factors like the value of the house also pays a role in getting your home loan approved.
You can enhance your home loan eligibility by adding an earning member as a co-applicant, availing a structured repayment plan, ensuring a steady income flow, regular savings and investment, repaying ongoing loans and short term debts, furnishing details of your additional income sources, keeping a record of your variable salary component and taking actions to rectify errors (if any) on your credit score.