Housing loan: what banks look for

The reduction in rate of interest on housing loans and IT benefits on housing loan principal/interest have induced many to buy/construct a house/ flat.

Additionally, the Centre has come out with Pradhan Mantri Awas Yojana, which provides interest subsidy for middle income groups (MIG) on their housing loans.

If you are one of those who is planning to approach the bank for sanction of a housing loan, it is better that you understand various parameters that are  considered by the bank for sanctioning of the loan.

Before sanctioning any loan, the bank assesses the risk of default through its internally developed risk rating mechanism as per the RBI guidelines. This process of risk rating for housing loans is called ‘Credit Score (CS)’. Loan applications which fall above a cut-off CS will only be considered for sanction and others will be rejected.

Let us look at the factors that impact credit score:

1 Employment/profession: A salaried employee, professionals like doctors, engineers and CAs may get a better CS as against a businessman. A government employee is preferred to other salaried employees for continuity of employment.

2  Net-worth: Net-worth (NW) i.e. Total Assets - Total liabilities, will be considered by banks for sanction of loan. Higher NW to loan improves CS.

3 Age: Age is one of the important factors in improving the CS as it has a direct bearing on the repayment of the loan. A middle-aged borrower in the age of 25-35 is most preferred, over a borrower less than 25 years of age. However, both too low and too high age is not preferred.

4  CIBIL: Higher the CIBIL score, higher the CS. Generally a CIBIL score of 750 and above is the most preferred one. You can verify your CIBIL score by obtaining a copy of your CIBIL report (www.cibil.com) before approaching the bank.

5 Residence: CS gets improved if you are residing in a house owned by you/father/father-in-law.  Longer period of stay in the current residence (even rented) may improve CS.

6 FOIR: Fixed Obligation to Income Ratio establishes a relation between the existing EMI plus proposed EMI to net income of the borrower expressed in percentage terms.  Lower percentage means higher CS.

Example: Suppose the salary net of statutory deduction is Rs 25,000, the EMI of the existing loan is Rs 5,000 and the EMI of the proposed housing loan is Rs 10,000.  The FOIR will be (15,000÷25,000)X 100= 60%.

7  Guarantor: In case the CS is not up-to the cut-off level for sanction of loan, it can be improved by providing a guarantor. The proposed guarantor should have income equal to or more than the borrower. The profession, CIBIL Score of guarantor will have its impact on CS.

8  Collaterals: In case the CS is not up-to the cut-off level, the bank may ask for providing collateral(s).  Generally banks prefer liquid securities like FDs, NSCs, Life Insurance Policies as against immoveable properties.

9 Mortgage: Housing loans are sanctioned against mortgage of land/flat. Banks expect that the land/flat be mortgaged to the bank before release of loan. So the property should be free from any prior charge/encumbrance. It should be readily available for creation of mortgage. Any dispute with the property may adversely affect sanction of loan.

10 LTV: Loan to value ratio is considered by the bank while sanctioning the loan. It is the ratio of loan to the value of the property expressed in percentage terms.
 
Example: If the value of the house is Rs 10 lakh and the loan you are requesting for is Rs 7.50 lakh, then LTV is 75%. Lower the LTV, lower will be the risk and higher will be the credit score. If you are able to satisfy the bank on the above parameters, hopefully your loan will be sanctioned without any difficulty.

(The writer is an Assistant Professor- Senior Scale, Manipal University, Bengaluru campus)