A lender needs ‘proof’ to believe that you are capable of making repayments on your loan. For this it will take a thorough look not just as your income statements, but also your assets and liabilities, your credit history to see how you handle repayments on credit cards and other existing loans, your education and work experience to see how qualified you are to meet your professional and financial goals and whether you can really afford a large debt burden like a home loan.
The standard method banks use to assess your home loan eligibility is the application of FOIR (fixed obligation to income ratio) of a borrower. This is an important calculation for the bank for this is the way to understand what your other obligations are as a borrower. To calculate the FOIR the lender takes into consideration all the other monthly instalments a borrower is paying including the home loan that he has applied for. However, the statutory deductions from your salary like provident fund, insurance premium payments are not taken into consideration in this calculation.
Consider an example:
Income of a prospective borrower is Rs 50,000 per month
He pays a car loan EMI of Rs 8000 per month
He has just bought a gadget and pays an EMI of Rs 2000 per month for the same
His proposed housing loan installment is Rs 15000 per month
When all his loan installments are divided by his monthly income the FOIR is 50% or Rs 25,000
Most lenders restrict the FOIR limit to a maximum of 50% of one’s monthly income. In other words, it means that if one needs around 50% of his income to meet his personal expenses, the other half is committed towards fulfilling his fixed obligations including the home loan.