Banks/HFC use credit appraisal for loan applications

Whenever the customer applies for a housing loan he has to complete the credit appraisal process. Each bank / Housing Finance Company (HFC) has its own criteria and standards to assess the credit worthiness of the customer to be eligible for loan application.

Various stern financial and non-financial tools and techniques are used by the Banks / HFCs to assess the credit worthiness of the customer. In this whole process, the repayment capacity of the customer is established, mainly based on Income, Age, Qualifications, Experience, Employer, Nature of business (if self-employed), Security of tenure, Taxation history, Assets owned, Alternative /additional sources of income, Other loan obligations, Investments, Other present and future liabilities.

The maximum loan eligibility is worked out according to these parameters. The final loan amount sanctioned by the bank is accordance to the LTV norms, IIR norms and the FOIR norms as laid down by the Bank /HFC.

LTV / LCR: LTV stands for the Loan to Value ratio. LCR stands for the Loan to Cost ratio.
By using these norms Banks / HFCs calculates the ratio of the loan amount that a person is eligible for on the total cost of the property.

However, there is an upper limit on the maximum loan amount that a person is eligible for, for the purpose of housing irrespective of the loan eligibility. The maximum amount of loan eligible is attached to the cost / value of the property. The loan eligibility as per the other parameters might be higher but the loan amount cannot exceed the cost / value of the property. (The ratio varies between 70 to 90 percent of the registered value of the property)

FOIR: This stands for Fixed Obligation to Income Ratio. In FOIR calculation, the Bank / HFC takes into account the installments of all other loans previously availed of by the customer, including the home loan applied for. In other words, this ratio includes all the fixed obligations that the customer is supposed to pay regularly on a monthly basis. The Fixed Obligations however, do not include statutory deductions from the salary like Provident Fund, Professional Tax and deductions for investment like Voluntary Provident Fund, Insurance Premiums, Recurring deposits etc.

For example: Income -Rs 50,000 p.m.
Car loan installment: Rs 8,000 pm
Fridge loan installment: Rs 2,000 pm
Proposed housing loan installment: Rs 15,000 pm

Accordingly, the FOIR is 50 percent i.e. Rs 25,000. (All loan installments divided by the monthly income). The bank / HFC may have a standard of 30 percent of FOIR. In this case, the total installments the person can pay as per the bank's FOIR standard would be Rs 15,000 per month. As the borrower is already paying Rs 10,000 pm for car and fridge, he has Rs 5,000 left and the loan would be calculated taking Rs 5,000 per month as the housing loan repayment capacity of the customer. Accordingly the housing loan amount will get reduced.

IIR: This stands for Installment to Income Ratio. This is used to calculate the loan eligibility of the customer. It is generally expressed as a percentage. This percentage denotes the portion of the customer's monthly installment on the Home Loan taken. As a rule of thumb, the banks use 33.33 % to 40 % ratio.

For Example: IIR is 40%
Gross Income is Rs. 60,000/- per month

As per the IIR ratio, the customer is eligible for a loan where the installment does not exceed Rs. 24,000/-per month (40% multiplied by Gross Monthly Income)