All lenders Banks/NBFCs/HFCs have stringent criteria to determine the eligibility and the creditworthiness of the loan applicants. The Repayment of a loan is one such important measure that determines whether a loan applicant is eligible or not eligible for a loan. Before approving a loan to the applicant the lender thoroughly checks his CIBIL history, income details validated by the documents, employment details, financial stability, assets, liabilities & other obligations to ascertain the funding risks and the timely repayment of his loan EMIs. Any loan defaults in the repayments may add to the NPAs of lenders and hence the lenders have rigorous multifaceted loan checks before it is finally disbursed.
The following are the two common & popular parameters for determining the loan eligibility of the applicant in secured loans such as home loans, mortgage loans, commercial loans & industrial loans, home loan top-ups, etc.
- Loan-To-Value (LTV)
The lower figure of the two i.e., LTV and FOIR will be the applicant’s final loan eligibility.
FOIR full form in banking is Fixed Obligation to Income Ratio. Also referred to as the debt-to-income ratio in the mortgage industry, it is always expressed in percentage. The loan eligibility using the parameter FOIR, is a percentage of the per month net income of the applicant. FOIR is a true reflection of your disposable income and hence is also an indicator of your repayment capacity.
The FOIR is derived by considering the applicant’s per month income and his fixed monthly outgo excluding the statutory deductions of provident fund, investment deductions such as SIPs, FDs, RDs & professional tax. The formula is the FOIR formula for calculating the FOIR in banking.
FOIR = (Sum of all monthly obligations / Net income per month) * 100
Monthly Obligations include fixed per month EMIs towards the existing loans (such as personal loan, car loan, gold loan, consumer loans, loan against property, etc.) including the EMI of the proposed loan, card bills, per month rent outgo, and other fixed expenses.
Let’s understand with an example
Say, 32 years old Mr. Vallabh has to apply for a housing loan in Mumbai. He is drawing a net salary of Rs.80,000/- pm and has the following obligations
Personal Loan (PL) EMI – Rs15,000/- pm
Mortgage Loan EMI – Rs.35,000/- pm
Car Loan EMI – Rs.12,000/- pm
Now when he applies for a home loan his loan is rejected. Previously he has been approved for a loan thrice and has been timely making the repayments of the loan. Then why is Mr. Vallabh’s home loan rejected? Let us understand the reasons for his home loan rejection.
All active financial obligations of Mr. Vallabh are Rs.62,000/- pm. i.e., 15000 + 35000 + 12000. Now let’s calculate his FOIR % with the help of the FOIR ratio formula.
Vallabh’s home loan FOIR calculation (%) = (62000/80000) * 100 = 775%, which is too high. Since his FOIR is more than the average FOIR requirement of 50%-60% his home loan application was rejected.
Additional Read: How to manage your multiple loan repayments.
Lender’s FOIR Percentage Requirement
The FOIR ratio for calculating the loan eligibility of the applicant differs from lender to lender and also varies from case to case. However, the standard FOIR percentage for most of the lenders- Banks/NBFCs/HFCs ranges from 40% – 60% of the net per month income. At times the lender’s FOIR percentage which is case-specific can be as high as 265%-100% of the applicant’s net monthly income. ICICI Bank which is one of the top home loan mortgage lenders in India considers maximum FOIR for calculating the home loan eligibility of its applicants. The maximum FOIR in home loan with ICICI Bank is 65%-70% for salaried applicants while for self-employed & professionals the FOIR for home loan can be as high as 100% of their net incomes.Click to know how to apply for an online home loan with ICICI Bank, home loan top-up with ICICI Bank & loan against property with ICICI Bank.
Additionally, the FOIR ratio also varies based on the type of loan applied for. The FOIR for unsecured loans i.e. FOIR for personal loans& FOIR for business loans will have strict FOIR criteria as compared to the secured loans because the secured loans are backed by the pledge of the asset i.e., the property. The government-sponsored loan schemes on the other hand will have a lenient FOIR criterion, such as the FOIR calculation for home loans in the government’s PMAY affordable housing loan scheme. Given below are the FOIR percentage in India for the type of loan products.
- FOIR percentage in home loan – 40% to 100%.
- FOIR percentage in mortgage loan – 60% to 70%.
- FOIR percentage in commercial loan – 60% to 70%.
- FOIR percentage in industrial property loan – 60% to 70%.
- FOIR percentage in personal loan – 40% to 55%.
- FOIR percentage in business loan – 40% to 55%.
Additional Read: Everything you must know before applying for a home loan.
What Does the High & Low FOIR Ratio Indicates?
Generally, the lenders try to fix the maximum FOIR of the applicant’s monthly income to 50% mainly because they think 50% of his per month will be his expenses while in the rest 50% he will be able to service the loan EMIs. This means that the fixed expenses including the EMIs of the proposed loan should be restricted to half of the income of the applicant. When an applicant has a higher FOIR, it simply means he has many existing obligations and therefore has higher chances of loan rejections. While on the other hand lower FOIR means the applicant has fewer existing obligations which indicate his better repayment capacity and therefore secure him a higher chance of loan approvals.
How to Improve Loan Eligibility for Higher FOIR
The applicants who have high existing obligations and thus have higher FOIR exposure may follow one or more of the following techniques to improve their loan approvals.
- Apply for a home loan / apply for a mortgage loan with a working co-applicant. Know the benefits of applying for joint home loans.
- Pay off your other loans. Find the 10 easy ways to repay your loan faster.
- Close your unsecured loans such as personal loans, business loans which eat the majority of your secured loan eligibility.
- Pay off your credit card liability & overdue.
- Reveal your additional income from another source If any.
- Apply for a home loan with longer repayment tenures.
- Make the lender count your salary hike or the increase in the net profit.
Remember, every time you apply for a loan with a lender, the lender pulls your CIBIL report to track your repayment history. These inquiries both the soft pull as well as hard pull get registered and are reflected on your credit report and affect your CIBIL scores. Your CIBIL scores may reduce if there are too many such inquiries. Hence it is advised to calculate your FOIR in loan using the fixed obligation to income ratio formula mentioned above before you apply for a loan. Also with the help of Loanfasttrack EMI calculator check the loan EMIs that you can easily afford to pay.
Additional Read: How to apply for a home loan with bad CIBIL scores.
Current Home Loan Interest Rates Of The Leading Banks
|Bank Name||Home Loan Rate Of Interest||Home Loan Processing Fees||Loan Tenure|
|ICICI Bank||6.80% p.a. onwards||0.30% of the loan amount + applicable GST||Up-to 30 years|
|Limited period offers with ICICI Bank||Zero processing fees (PF) for cases above Rs.1 crore. Applicable GST on the PF to be paid by the borrower.||CLICK.|
|HDFC Bank.||6.700% p.a. onwards||Up-to 0.50% – up-to 1.50% of the loan amount + applicable GST||Up-to 30 years|
|Limited period offers with HDFC Bank||Rs.5,900/- + GST (For Salaried)||CLICK.|
|Canara Bank||6.90% p.a. onwards.||Rs.10,000/- + applicable GST||Up-to 30 years|
|Click to get the complete chart|
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