How Banks really calculate your Home Loan Eligibility

How Banks really calculate your Home Loan Eligibility

A very friendly executive from your Bank has just promised you a Home Loan, based on your salary and other facts, probably you have an account with the Bank or maybe it was just a cold call. You are happy, you've been promised an amount you require at competitive interest rates, already dreaming about that dream home, are we?

Wait right there, I suggest you the read this article before someone has a chance to spoil that Dream Home of yours…

Scenario

• You have a monthly in-hand (take home) salary as Rs 50,000 and you are looking for a home loan of about Rs 30 lakh.
• Your gross monthly income might be much more than Rs 50,000 per month but that does not matter while calculating the net income.
• You don't have any other loan like car or personal loan on your name.
• Bank rules say that you are eligible to get 60 times your monthly net income as loan.

Well, all sounds good till the time you are talking to your bank executive or an agent over phone for your eligibility. They ask you for your net income, you answer Rs 50,000 per month and they immediately say that you are eligible for a loan that is 60 times your monthly net income, that is, Rs 30 lakh. You are excited that everything is going as per your expectations and think you will get the amount you were looking for.

But things change dramatically when you have actually applied for loan by submitting your documents along with salary slips and have paid the loan processing fees. The bank will call you and evaluate your loan eligibility once again and this time it will come out to be much less than what was communicated to you over phone.

You start wondering about what has changed? You salary slips still show the same Rs 50,000 as net income and you don't have any other loan. Then how come the eligibility has come down?

Is the bank not interested in giving out that much loan or the rule of 60 times your net income is just a marketing gimmick?

The CATCH in calculating your NET INCOME.

The catch could be anything from a bank's marketing strategy to attract customers or your low credit score. But most of the times, it is your salary components, which play a spoilsport.

You might be getting a net income of Rs 50,000 per month, but there are some components that may not qualify for adding to your home loan eligibility.

Normally, a salary is a total of following components:

• Basic salary
• HRA (House rent allowance)
• LTA (Leave travel allowance)
• Medical allowance
• Performance bonus
• Conveyance allowance
• Special allowance: It could have different names in different companies like city compensatory allowance etc.
• Food coupons
• PF (provident fund) shown as a deduction in salary slip
• Any other allowance

A normal income slip (one-month) in our example might look like this

Now, the components, which most banks do NOT consider while calculating your net income, are LTA and medical allowances.

So, even though your salary slips show Rs 50,000 as net income, bank will NOT consider LTA and medical allowance as money which would be available to you for spending on loans, that is, they believe that you will actually spend these LTA and medical allowances on the activities which they are paid for.

Hence, what bank will do is, they will deduct this amount from your payslip and arrive at your net income as follows:

Now, if you calculate your eligibility will be equal to Rs 27, 15,000 (45,250 X 60)

Which is lower than earlier eligibility by about 10 per cent, that is, Rs 2, 85,000?

Now, if you had planned your finances keeping in mind that you would get a loan of Rs 30 lakh by your bank and manage other money yourself, you now would need to pool in Rs 2, 85,000 more.

Use Moneyfinder to avoid all these hassles, Visit us on www.moneyfinder.in or call us on 91 8355 955 000.

Disclaimer - All information in this article is sourced from various websites. This article is compiled by team at Moneyfinder and any content is not owned by us. This information is true as on 28th January 2013.

What to do if you're refused Loans or Credit cards

Refused credit? Don't panic.

Credit of any sort - from Home loans to personal loans and credit cards - has never been handed out freely.

You have to show lenders that you are in control of your finances and are likely to make repayments on time and in full. If you do, you have a much better chance of getting the deals you need.If you are among the people who have been refused credit recently or if you are thinking of applying for credit soon, don't panic. Take action instead.

A good place to start is your credit report from CIBIL, which lists your borrowings and how well you're managing your repayments. It gives you a snapshot of your credit history, what credit accounts you've had in the last few years and how you have coped. Your credit report can also help you to see where you could cut back and whether you could close some accounts altogether. You can see your credit report for INR 470 with CIBIL.

Lenders check it when they decide whether to make you an offer and what terms - such as interest rates - to set. It's crucial that your credit report is up to date and accurately reflects your circumstances, because a better credit history makes you more likely to get a better deal.

For more help, take a look at these top tips.

§         Manage your money. Pay your bills and make repayments on cards, loans and your EMI’s on time. You'll only rack up worse debts, incur penalties and damage your credit rating otherwise.

§          Look at your credit report regularly so you can monitor your progress. Make sure that every entry is correct. A single error could result in a rejected application.

§          Talk to your lenders if you're worried about your debts. They could help you to work out a schedule of repayments you can afford or arrange a temporary payment holiday.

§          Review your spending, set a budget and stick to it. Try to find the best deals on loans, mortgages and credit cards.

§         Don't try to borrow your way out of trouble. You could rack up debts you can't manage and that will mean being rejected for credit you really need in the future.

§         Investigate rolling up several debts into a single, cheaper package, such as a bank loan. There are plenty of financial comparison sites with EMI Calculators that can help you to identify the best option.

§          Look for ways to supplement your income. For example, you could take in a Paying Guest, sell off unwanted electronics or furniture or get a part-time job in the evenings or at weekends.

§         Make sure your partner (husband/wife) doesn't have financial problems. If you have a joint account or have applied for loan with a partner, you will be linked on your credit report. This is known as a financial association and a lender's response to your application may be affected by both credit histories. So get your partner to check his or her credit report, too. If you are no longer financially connected, make sure you get the link broken so that any problems your ex might have don't affect you.

Moneyfinder can help you compare and obtain all kinds of loans, credit cards and Insurance, get in touch with us on 91 8355 955 000 or write to us at info@moneyfinder.in.

Disclaimer - All information in this article is sourced from various websites. This article is compiled by team at Moneyfinder and any content is not owned by us. This information is true as on 08th January 2013.

4 Mistakes Small Businesses should Avoid When Applying for a Bank Loan.

4 Mistakes Small Businesses should Avoid When Applying for a Bank Loan.

Getting a loan from a bank is no cakewalk these days, particularly for small businesses. So, we asked those banks, which make it their business to lend to small business, how entrepreneurs can increase their chances of securing loans.

At Moneyfinder, we get scores of applications for small business loans ranging from INR 2 lakhs to INR 5 crores, so we decided to jot this small list of 'what small business should be aware of' while applying for that so essential loan. Here, we share the top four mistakes business owners make when applying for a loan -- and how to avoid them.

Mistake #1: Underestimating the value of personal credit and Credit History (CIBIL Score). Banks look at your personal credit history (credit cards, EMI payments and personal bills via CIBIL) to get a sense of your track record with financial responsibilities, “If a business owner hasn’t shown the diligence in managing their personal credit, there is potentially a stronger likelihood that they will take the same approach to their business credit,” .

Mistake #2: Applying for the wrong type of loan. One of the most notable pitfalls We see is small business owners using credit intended for a short period of time for a long-term purchase, or vice versa. “They will use the wrong type of credit product for the wrong type of purpose,” .For example, if you buy a piece of machinery with a loan that was intended to fill a short-term need like employee payroll, then you risk being saddled with a loan that you can’t get out from under.

Mistake #3: Expecting a loan without collateral or a plan to pay it back. A banker won’t approve a loan that he doesn't think has a chance of getting paid back. So be sure to detail in your business plan how you are going to make the revenue to pay the loan back or any collateral you have to back it up. Also, be sure to explain why the loan is critical for your business. “Make sure there is a solid business plan as to what they are planning to do with their business and how the financing will support the mission for the company.”

Mistake #4: Waiting too long to approach a banker. Small business banking is about relationships. There's a much better chance bankers will lend you money when you need it, if they already know who you are and what your business is. Not only will you develop that face-to-face relationship, but you will also have the opportunity go get your business financials organized and in shape with a banker’s eye in mind.

For all small business loans, please get in touch with us, write to us at info@moneyfinder.in or call us on 91 8355 955 000.

Disclaimer - All information in this article is sourced from various websites. This article is compiled by team at Moneyfinder and any content is not owned by us. This information is true as on 08th January 2013.

How to Improve your Credit History

A CREDIT SCORE is a measure of how diligently you make payments relevant to loans, credit cards, telephone bills, insurance premiums, rent cheques and so on. 

Credit Information Bureau (India) Limited (CIBIL), which collects your credit information from banks will soon be keeping your credit scores on the basis of your bill payments too. CIBIL scores will range between 300 and 900, and a number of the above aspects will go into making that score. However, the most significant of these are repayment of loans and credit cards – these factors will determine your loan eligibility and whether a loan can be granted to you in the first place or not.

Your credit history, other than your income, is the single most important tool used by a Loan provider to evaluate your application for any loan or credit card application. Naturally, it’s important that you understand your Credit Information Report (CREDIT REPORT) and what it takes to maintain a credit history, so that is viewed favorably by Loan providers. A good credit history can be maintained by following these 7 simple rules:

• Rule 1: Always pay your bills on time. Late payments are viewed negatively by Loan providers and may affect the chances of your loan getting approved.
• Rule 2: Keep your balances low. While the balances on your loans will only reduce over time as payments are made, you must be diligent about making timely payments on your credit cards. Also, you should control your utilization. For example, if you have used Rs. 90,000 out of a credit limit of Rs. 1,00,000, this may be viewed negatively by  a Loan provider. It’s always prudent to not use too much credit. 
• Rule 3: Maintain a healthy mix of credit. Your credit history should contain a mix of a home loan, auto loan and a couple of credit cards. A high number of just credit cards may affect the chances of a loan approval. Why is it so, you may wonder. Although a credit card offers easy access to finance, it’s also by far the most expensive form of credit. More the number of credit cards with high utilization, larger are the payments resulting from its high rate of interest.
• Rule 4: Apply for new credit in moderation. If you have made many applications for loans, or have recently been sanctioned new credit facilities, a Loan provider is likely to view your application with caution. This ‘Credit Hungry’ behaviour indicates your debt burden is likely to, or has increased and you are less capable of honouring any additional debt.
• Rule 5: Think twice before closing credit card accounts. While, using credit cards may negatively impact your credit history, unused credit cards actually imply that you are financially secure. This makes Loan providers view your application more favourably.
• Rule 6: Monitor your co-signed and joint accounts monthly.  In co-signed or jointly held accounts, you are held equally liable for missed payments. This is extremely important because your joint holder’s negligence could affect your ability to access credit when you need it.
• Rule 7: Review your credit history frequently throughout the year. Unpleasant surprises in the form of rejected loan applications can be avoided by ensuring that your CREDIT REPORT accurately reflects your current financial status. So reviewing your credit history 3-4 times each year is imperative.

Though these general rules are important to keep in mind, each loan provider has its own policies to sanction a loan to an applicant.

It is important to note that your CIBIL TransUnion Score will begin to rise as you improve your credit history.
Disclaimer - All information in this article is sourced from various websites. This article is compiled by team at Moneyfinder and any content is not owned by us. This information is true as on 04th January 2013.

Use EMI's to help you reduce your tax liability

Use EMI's to help you reduce your tax liability

If you have taken a loan either for the purpose of buying a house or a car or any other purpose, you are required to pay equated monthly installments (EMIs) that comprise of principal and interest. You might be surprised to know that sometimes your EMIs are eligible for tax deduction and home loans EMIs fall under this category. The EMIs on home loans are tax deductible under the Income Tax Act, 1961.

However there are certain conditions in relation to the home loan that make the EMIs eligible for tax deduction.

Split the EMI

One of the most important aspects to be noticed by the tax payer is that the EMI should be broken into two parts - principal and interest. It should be practiced because both interest and principal amount are permitted for tax deduction under different sections of the Income Tax Act. Interest paid on a housing loan is allowed for deduction under Section 24 of the Income Tax Act and the installments paid are entitled for deduction under Section 80 C. The tax benefits for annual interest and home loan principal repayments are Rs 1.5 lakh and Rs1 lakh respectively. Hence it would be better if the tax payer know the amount that come under interest and principal separately.

Deduction on interest paid

You can claim a deduction for the interest paid on a housing loan, loans taken for repair, renewal or reconstruction of an existing property. Such deduction is available on an accrual basis. In fact interest paid on a fresh loan taken to repay another existing loan is also allowed for tax sops. However if a third loan is taken to refinance the second loan, tax rebate on interest payments will not be permitted.

Deduction on the principal repayment

Deduction for the principal is allowed together with the amount paid for stamp duty, registration fee and other expenses related to the transfer of the purchased property. However the repayment of the borrowed capital is deductible only if it is from Central Government, State Government, any bank that includes co-operative bank, LIC or NHB, a public sector company or co-operative providing housing finance, or where the employer is an authority or a Board or a Corporation or a public company or a public sector company or university or co-operative society.

House Ready for Use

A tax payer should know that if the house is under construction or is not yet ready for use, one is not eligible for deduction either on principal or interest. Only if the construction is completed within three years from the end of the financial year in which the capital is borrowed, interest deduction will be allowed. Moreover to avail the tax benefit, the owner cannot sell the property for five years from the end of the financial year in which the possession was taken.

House given on rent

If you are serving the EMI of a property that you have let out then the entire interest irrespective of the maximum limit of Rs 1.5 lakh is deductible under Section 24 but the benefits of principal deduction cannot be availed by you. Moreover the rent earned through this property is added to your taxable income.

Joint ownership and Joint loans

If the property is jointly acquired by a couple and they become co-applicants for the loan then they can individually claim the tax benefit of Rs 1.5 lakh each. This is a wise option as it increases the tax free income for the family. However it should be remembered that the joint ownership of the property is a necessity to avail this benefit.

The tax deduction on home loan is a factor that is attracting majority of the people to buy houses despite of the property prices soaring high.

Disclaimer - All information in this article is sourced from various websites. This article is compiled by team at Moneyfinder and any content is not owned by us. This information is true as on 02nd January 2013.

How to increase your Home Loan Eligibility

How to increase your Home Loan Eligibility

Home loans are the most easily accessible financial products to buy your dream home. To understand how to better your eligibility to apply for a home loan, make a simple self-assessment. Here is how banks do it.

The main factor banks will consider is “proof” that shows that the borrower is capable of repaying the loan on time. For this, they will look into your income documents, personal credit history, current assets and liabilities, education, experience etc.

Old generation banks and co-operative banks to certain extent rely upon existing relationship or the previous experience with a client. A common pattern they follow is the sanctioning of a loan amount which will be a fixed multiple of the annual income. However, the new generation banks strictly follow their parameters.

The loan eligibility is usually calculated by applying Fixed Obligations to Income Ratio (FOIR). Most banks restrict FOIR to a maximum 45-50 per cent of monthly income.

That means, considering that one needs around 45- 50 per cent of his income for his personal expenses, all fixed obligations including the home loan applied for, should be restricted to a maximum 45-50 per cent of his gross monthly income. The loan amount is sanctioned can be calculated as in the box above.

Loan To Value is also a factor in eligibility calculation. Banks finance up to around 80 per cent of the property value as evaluated by the bank’s evaluator.

For those who have not yet decided on the property, there is an option to sanction an in-principle amount, which helps to know the amount a bank would be able to give out.

To increase your loan eligibility the following can be considered:

Clubbing income- Income of your spouse also can be considered if applied jointly.

Increasing Tenure- When EMIs are high, eligibility will become less. The more the tenure is, less the EMI will be. So, opt for a higher tenure. Usually banks offer a maximum of 20-30 years tenure.

Additional Income -Your consistent additional incomes like rental income qualify. Expected rental income from the property purchasing, performance linked pay can be considered to enhance your loan eligibility.

Step-up loans- A step-up loan is a loan wherein an individual pays a lower EMI during the initial years and the same is enhanced periodically on conditions put by the banks. This is made on considering the individual’s expected future salary hikes.

Pre-closure of existing loans- Outstanding loans like car loans or personal loans may reduce one’s loan eligibility. As per norms, only existing loans with over 12 unpaid instalments are taken into account while computing home loan eligibility. So, prepaying the existing loans in full or part will help.

Employer-Bank relationship- A lesser interest rate will naturally increase your eligibility. Check with the banks if there are any schemes running with your employer. Banks usually categorize companies into A, B, C based on company profiles and run different schemes like special interest rates, processing fee waiver etc. People working in MNCs are benefited out of this usually.

 Disclaimer - All information in this article is sourced from various websites. This article is compiled by team at Moneyfinder and any content is not owned by us. This information is true as on 02nd January 2013.

OBC cuts interest rate on home loans by 0.1%

State-owned Oriental Bank of Commerce (OBC) today reduced interest rate on home loans of up to Rs 30 lakh by 0.1%.

As a new year gift to customers, home loans will now be available 10.40% with an EMI of as low as Rs 937 per lakh, OBC said in a statement.

The base rate or the minimum lending rate of the bank is also 10.40%.

Besides, the bank has also slashed margin for home loans above Rs 20 lakh to 20%, it added.

For loans below Rs 20 lakh, margin will be 15%.On the deposit side, the bank has waived off penalty on premature withdrawal on its fixed deposit schemes for all maturities.Yesterday, private sector HDFC Bank slashed its benchmark lending rates by 0.1%.

The base rate the bank was reduced to 9.7% from 9.8%. At the same time, the benchmark prime lending rate (BPLR) of the country’s second largest private bank was also slashed by similar margin to 18.20%.

Disclaimer - All information in this article is sourced from http://www.business-standard.com. This article is sourced by team at Moneyfinder and any content is not owned by us. This information is true as on 02nd January 2013.