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Banks prefer EMIs not to exceed 30% of your take-home pay. Here’s why.
How much mortgage can I afford? The question often haunts people who want to buy a home on loan. Other worries relate to the EMIs and the budgets they can afford.
The factors that impact loan amounts and EMIs are listed below; if you are planning on a home loan, this list can guide you in arriving at an acceptable mortgage size.
As per RBI guidelines, lenders can offer loans up to 80% of the property value, though many offer as much as 90%. You will know the required down payment once you shortlist the properties you are interested in.
Lenders may specify a minimum down payment, though experts recommend buyers put up at least 15%-20% of the property value upfront. Of course, you can pay more; whatever you decide will impact your mortgage size.
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Your mortgage will have a bearing on your EMI. Use a home loan calculator to check the EMIs and interest rates for various loan amounts that are approximately the value of your chosen property.
Now study your monthly income and expenses; this should include the current rent, if you are paying any. What you save should be more than your EMI after you have paid your dues for the month. If you find your monthly saving is less than the lowest EMI, you need to make some lifestyle changes. Or else go for a longer tenure (to get smaller EMIs).
Pro tip: Lenders prefer loan EMIs not to exceed 30% of the borrower’s net salary (take-home pay after taxes and dues). Are you meeting this unwritten condition?
If you have prior debts or big purchases, these loans and their EMIs will also impact your home loan affordability (see debt-to-income below). You can boost your paying capacity if you close some existing loans and get some disposable cash to afford a bigger down payment, or pay the home loan EMIs. Once again, lifestyle changes may be required.
Related: What to do if your student loan makes it hard to get a mortgage?
Debt and income
Banks attach no weight to gross income while calculating your ability to repay a home loan; it is your take-home pay after tax and other deductions that indicate how much you can repay.
So, banks try to gauge your paying capacity from your debt-to-income (DTI) ratio; it is the measure of your income that is used for debt repayment and servicing. A low ratio reflects your ability to pay back a debt (that is, your creditworthiness), and assures that you are comfortable financially. A high ratio points to potential inability to pay new EMIs.
For most lenders, a DTI of 40% is the threshold limit for sanctioning loans, including home loans.
The DTI also affects your credit score and credit rating, which is based on your past debts and repayment history. A higher credit rating makes loan approval faster. Incidentally, rejection of any loan applications earlier will hurt your credit score.
A secured loan is a lot less risky for banks than an unsecured one. So if you can produce collateral like land or gold that can be used as security, it will increase your chances of getting a higher loan amount.
Related: What is loan against property?
All the above points are made assuming that you have a stable job. Banks prefer a steady income to an irregular one, even if the latter brings in a higher annual income.
Your age matters too. The more working years you have ahead of you, the greater are your chances of getting a higher loan amount and faster approval. Know your EMI's in-and-out. Are you paying more than you should?