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Home > Home Loan > Learn > Home Loan Eligibility: Everything You Need to Know

Home Loan Eligibility: Everything You Need to Know

December 17, 2024
5 min read
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Estimated reading time: 5 minutes

The dream of owning a home shouldn’t be derailed by loan eligibility issues. In today’s competitive housing market, securing a home loan isn’t just about finding the perfect property—it’s about positioning yourself as the perfect borrower. Whether you’re a first-time homebuyer or looking to upgrade, this comprehensive guide will show you proven strategies to enhance your home loan eligibility.


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Immediate ActionsMedium Term
Actions
Long Term Actions
Check & Correct Credit ReportSave for Larger Down PaymentMaintain Consistent Employment
Reduce Outstanding DebtBuild Strong Credit HistoryPay Off Major Debts
Reduce Unnecessary ExpensesDiversify Credit MixInvest in Assets

Improve Your Credit Score

What is a Credit Score? A credit score is a number that shows how good you are at paying back money you’ve borrowed. It ranges from 300 to 900. The higher your score, the better your chances of getting a loan with good terms.

In India, banks usually offer the best home loan offer to borrowers with a credit score above 750.

How to Improve It:

  • Pay Bills Promptly: Always pay bills by their due date to avoid negative marks.
  • Reduce Debt: Lower your credit card balances and outstanding loans.
  • Check for Errors: Review your credit report regularly and correct any inaccuracies.

Lower Your Debt-to-Income Ratio (DTI)

What is DTI? Your debt-to-income ratio is the percentage of your monthly income that goes toward paying debts. Lenders prefer a lower DTI (below 36%)because it means you have more money left to pay the loan.

How to Lower It:

  • Pay Off Debts: Start with high-interest ones like credit cards.
  • Avoid New Debt: Don’t take new loans before a home loan.
  • Consolidate Loans: Combine debts for a lower interest rate.

Save for a Larger Down Payment

What is a Down Payment? A down payment is the money you pay upfront when buying a home. It’s usually a percentage of the home’s price.

Banks usually finance 75% to 90% of the property value, while the borrower is responsible for covering the remaining 10% to 25%.

Benefits of a Larger Down Payment:

  • Lower Loan Amount: Borrow less, making approval easier.
  • Better Interest Rates: Qualify for lower rates.
  • More Equity: Start with greater ownership in your home.

How to Save More:

  • Create a Budget: Track spending and boost monthly savings.
  • Open a Savings Account: Use a high-interest account to grow funds.
  • Cut Unnecessary Expenses: Limit dining out and cancel unused subscriptions.

Opt for a Lower Loan-to-Value (LTV) Ratio

What is Loan-to-Value (LTV) Ratio? The loan-to-value ratio is the amount of the loan compared to the value of the home you want to buy. It’s expressed as a percentage. For example, if you’re buying a house worth Rs. 50,00,000 and you want a loan of Rs. 37,50,000 your LTV ratio is 75%.

Why a Lower LTV Ratio Matters:

  • Reduced Lender Risk: Borrow less relative to the home’s value, lowering lender risk.
  • Better Loan Terms: Qualify for improved interest rates and terms.
  • Easier Approval: Higher equity boosts your chances of loan approval.

How to Achieve a Lower LTV Ratio:

  • Increase Your Down Payment: A higher upfront payment reduces your LTV. For example, a 20% down payment lowers your LTV to 80%.
  • Choose a Less Expensive Home: Borrow less by opting for a more affordable property.
  • Make a Larger Loan: Only if it doesn’t worsen your DTI, consider a bigger loan relative to the home’s value.

Maintain Stable Employment

Why It’s Important: Lenders like to see that you have a steady job because it shows you have a reliable source of income.

Tips for Stability:

  • Stay in Your Job: Maintain the same role for at least two years.
  • Avoid Job Hopping: Frequent changes may raise concerns about income reliability.
  • Show Consistent Income: If self-employed, keep thorough records to prove steady earnings.

Increase Your Savings and Assets

Why Savings Help: Having savings shows lenders that you can handle unexpected expenses and still make your loan payments.

How to Boost Savings:

  • Build an Emergency Fund: Save 3-6 months of living expenses.
  • Invest Wisely: Grow savings through stocks, bonds, or other assets.
  • Track Finances: Use tools like apps or spreadsheets to monitor progress.

Consider a Co-Applicant or Guarantor

What is a Co-Applicant? A co-applicant is someone who applies for the loan with you, such as a family member or partner. Their income and credit score are also considered.

Benefits:

  • Higher Income: Combined earnings strengthen your application.
  • Better Credit: A co-applicant with a strong credit score boosts approval odds.
  • Double Tax Benefits: Both applicants can claim tax deductions on home loan interest and principal repayment.

What is a Guarantor? A guarantor is someone who agrees to pay the loan if you can’t. This can make lenders more confident in approving your loan.


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Conclusion

Buying a home is a big step. Getting a home loan can be hard, but we make it easy. Choosing Credit Dharma for your home loan simplifies this process. We offer expert advice and personalized assistance to make everything hassle-free. You’ll receive timely updates on your loan application and disbursement progress.

From the initial application to the final disbursement, we provide comprehensive support. Enjoy clear and honest communication at every stage, with no hidden surprises.


Frequently Asked Questions

How does my income affect home loan eligibility?

A higher income indicates a better capacity to repay, improving your eligibility.

Can I apply for a home loan with existing debts?

Yes, but reducing your debt-to-income ratio before applying is advisable.

How do co-applicants affect home loan eligibility?

Co-applicants can increase the loan amount you are eligible for by adding their income to yours.

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