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Home Loan Eligibility Value – What is Your True Worth

Yesterday while watching TV, a commercial caught my attention. The commercial was by Aditya Birla Finance Home Loans – Know Your True Worth. The advertisement emphasized how you should find your true worth as a borrower for property purchase. In layman terms, home loan eligibility value should reflect the true worth of an individual. It helps the borrower to buy the dream house of his/her choice. Take a look at the commercial below:

https://www.youtube.com/watch?v=rzq89PNXkRM

In the past, I have shared a couple of posts on home loan eligibility value. In one post, How Home Loan Eligibility is Fixed, I shared the factors that can influence your home loan eligibility value. The million dollar question is: Whether these factors reflect the true worth of a borrower in terms of home loan eligibility value.

The Aditya Birla Finance Home Loans video delivers this message. A successful and reputed businessman is renting a home in a remote location. His residence is far from his new factory. His mother insists that he should buy his own house. In other words, there is a mismatch between his professional success and true worth in terms of owning a property. He is worthy enough to own a property near his factory in a better location. Maybe he is unable to avail a home loan as he is a self-employed businessman.

To substantiate the claim in the ad, I personally checked my home loan eligibility value on the website: www.trueworth.co.in. Quite interestingly, it also considers additional yearly income to calculate home loan eligibility value. This section considers the yearly bonus or any other recurring variable income that is generally ignored by other home loan providers. Normally, for a salaried individual a home loan provider only consider net take home salary to fix home loan eligibility. Hence, self-employed professional/businessman finds it difficult to avail home loan. In my case, on comparison with other home loan providers, the home loan eligibility value calculated by Aditya Birla Finance Home Loans was much higher. Therefore, it might be beneficial for potential borrowers who are looking for higher home loan eligibility value. Just to clarify that LTV or Loan to Value ratio will remain same as per industry norm. You may be eligible for higher home loan value based on income criterion but loan value cannot exceed 80% of the property value. LTV is 90% for the property value of upto Rs 30L and 75% if the property value is more than Rs 75L.

Why do we need a Home Loan?

For many borrowers, the property is the single biggest purchase they make during a lifetime. A friend of mine, staying on a rent is a firm believer in financing his property from his savings. Frankly, it is impossible. The rate of savings cannot outpace the property appreciation after adjusting rent. The reason being, the property is an appreciating and productive asset. In India, due to financial illiteracy, many people fail to calculate the opportunity cost. For example, rent is an opportunity cost. My friend is willing to pay rent but not willing to pay the home loan interest. A rough calculation shows that it is financially beneficial to avail a home loan for self-occupation compared to staying in a rented accommodation. I purchased my house 10 years ago and foreclosed a home loan 3 years back. My friend is still staying on a rent.

Secondly, a home loan EMI is a direct or indirect forced savings. It helps in long-term asset creation. If my income is Rs 100 and disposable income is Rs 90 (after adjusting rent) then I will tend to spend more with more disposable income in hand. On the other, if I pay an EMI of Rs 60 then I will tend to spend less from balance Rs 40. It may look difficult but practically possible. You may ask anyone who has availed home loan :)

Compromise on Property Purchase

One of the key reasons for not buying a property is that people would not like to compromise on their dream home. For example, I am planning to buy a 3BHK depending on my requirement. My existing home loan eligibility value permits me to purchase only 2BHK. It is a very common scenario. Here the true worth of an individual plays a crucial role. Besides apartment size, some borrowers would not like to compromise on the location/area. For example, one of my clients was looking for a 2BHK in Navi Mumbai area. His preference was Ulwe but based on his home loan eligibility value his choice was restricted to Taloja.

Banks fixed his home loan eligibility value at Rs 40L i.e. he could only purchase property worth max 50L which includes stamp duty and registration charges. The banks refused to consider his variable salary that was a considerable amount. Therefore, he dropped the idea of property purchase. He was working as Sales Manager in FMCG and 40% of salary was variable income. Because of this anomaly, the home loan eligibility value was low. Practically speaking Rs 40L home loan was not reflecting his true worth. This is one of the examples and I can quote numerous such examples. Based on my interaction with clients, I can understand how they feel and feel a connection with the true worth advertisement campaign. If an individual is declaring the variable/misc. income in his income tax return then there is no reason to exclude it for home loan purpose.

Higher Home Loan Eligibility Value

In my post, Tips to Increase Home Loan Eligibility Amount, I shared some of the tips to increase home loan eligibility. The first suggestion for a salaried individual was to tweak the salary structure. In short, I suggested reducing variable income and increasing fixed component. Though this tweaking will increase the home loan eligibility value but at the same time, it will increase tax outflow. Therefore, it is catch 22 situations for a borrower. Many of my readers wrote to me asking whether it is feasible to increase home loan eligibility value without increasing tax outflow. In such a scenario, potential borrowers can explore a home loan option from home loan providers like Aditya Birla Finance Home Loans. It is especially beneficial for borrowers with high variable or miscellaneous income at regular/fixed intervals. The only precondition is that such income should be reflected in your ITR and bank statement :).

There is one more category of borrowers who work part time and earn additional income. For example, one of my friends who is a Chartered Accountant works full time for an organization. During the weekend, he works for some small companies. He religiously pays tax on his additional income and income is pretty stable in nature. Therefore, this additional income can be included in his salary income to fix home loan eligibility value.

Correlation between Property Value and Home Loan Eligibility Value

Typically, home loan eligibility value is fixed purely based on the individual parameters like income, age, job, CIBIL score, no of dependents etc. Banks do check property value but it is just to ensure that home loan eligibility value should not exceed property value. Now, what if the property value is much higher compared to the home loan eligibility value. Under normal circumstance, higher property value does not impact the home loan eligibility value of a borrower. In my opinion, it is incorrect approach. In this regard, I would like to quote a best practice from private lending. The loan amount is directly proportional to the value of the collateral. In the case of a home loan, the property is collateral. The Higher property value should mean higher home loan eligibility value. In other words, the true worth of an individual being a property owner should be HIGH. Some of the Home loan providers do consider property value for home loan eligibility value. Therefore, borrowers may clarify this point from home loan provider before signing on the dotted line.

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Avtar Patwar
Avtar Patwar
8 years ago

Dear Sir,
I m new to blog. Sorry I don’t know where to start discussion. But Sir I want to discuss a matter. Sir my mother in law is a senior citizen. She has no other family member except my wife and me. She took a home loan of from 750000 ICICI bank in 2006 under floating rate of interest for ten years of tenure. In 2012 due to interest rate hike they increased tenure. Last week I went to bank to check the the balance amount. I was shocked bank is charging 14.35 rate of interest on principal amount and still rs 266000 is pending. I asked for the loan schedule.In previous years also interest rate was much higher than base rate. I requested them to adjust the money paid by mother in law due to excessive rate of interest against principal amount. But Bank manager has refused to do so. Bank has never informed my mother in law to decrease the rate of interest by paying any fee or any method. Please help us. What should we do?

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Avtar Patwar

It seems your Mother in Law’s Home Loan is still linked to BPLR/RPLR of the bank. As a first step your MIL should request the bank to link home loan to Base Rate/MCLR of the bank. Once the home loan is linked to Base Rate or MCLR, your MIL can pay conversion fees to reduce home loan interest to the % currently offered to the new borrowers.

Unfortunately, any change will be prospective in nature and any retrospective adjustment/refund is not possible. It is the responsibility of a borrower to keep a tab on interest rates.

Nitin Bhatia
Nitin Bhatia
8 years ago

The posts are generic in nature and decision may vary from city to city. For example, in Delhi the rental value is very low but property prices are high therefore in majority cases, it makes financial sense to stay on rent. On the other hand, in Mumbai the rent is almost 2-3 times compared to similar value property in Delhi. Therefore, it makes sense to buy property in Mumbai.

You can do your calculations and decide accordingly. There is NO UNIVERSAL rule in this regard.

Barbarika
Barbarika
8 years ago

Getting a big loan is always a problem. When I bought a small flat worth 50 lakhs 10 years ago, I had a decent income of 1 lakhs take home. However I had zero savings. Hence I could not put up the 20% down payment.

I knew I could pay nearly 80k a month as EMI since my wife was also in a good job and our expenses were minimal. I applied for the home loan 40 lakhs and 2 personal loans of 5 lakhs each.

All 3 banks checked my CIBIL score and found no other liabilities. All 3 loans got approved. We bought the house.

I paid much more EMI per month for all loans than the minimum required. Personal loans got closed with 3 years. I diverted those EMI towards house loan. Within 10 years house was fully loan free.

sangeeta
sangeeta
8 years ago

Hello Sir,

I am not able to take any loan from Bank only because of my CIBIL score is not good. due to icici bank credit cards payment is still pending.

but all mistake is ICICI banks not my and today my cibil score is bad.

I want your help , how can I improve my cibil score and eligible for any kind of LOAN.

Please help me .

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  sangeeta

For general suggestions you can go through my posts on CIBIL Score. For personalized consultation, you may click on following link
https://www.nitinbhatia.in/cibil-score-query/

vippy4626
vippy4626
8 years ago

hello sir
iam planning to take home loan of 30 lac from sbi with my father as a joint borrower..we both are govt employees but only doubt is that i have service of only 1 year till date and in probation also…i want to know that if it really causes problems or not…if it does then are there any relaxations or deviations in sbi…
thanks in advance

Bipan Aulakh
Bipan Aulakh
8 years ago

hello sir
i have applied for home loan from sbi with my father as joint applicant..we both are govt employees..but only problem is that i have service of only 1 year and tax return of 1 year and probation period is 2 years…so i want to know if it is really a problem or bank can give me a relaxation or deviation in this regard…i have submitted all the documents to them with legal and valuation including…now they will verify my places etc…so iam worried if they reject this in later stages by giving this probation period excuse because they havnt said anything clear regarding this.please help me
thanks in advance

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Bipan Aulakh

You have not mentioned, who is purchasing the property.

Bipan Aulakh
Bipan Aulakh
7 years ago
Reply to  Nitin Bhatia

sir we are constructing house on plot owned by me…we are taking home loan for construction of house…plot is already registered on my name

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Bipan Aulakh

If your father is willing to become a co-applicant/guarantor then you can get a loan but it all depends on the risk assessment of a bank. To play safe, you can apply with HFC instead of bank.

Nitin Bhatia
Nitin Bhatia
7 years ago

1. In my opinion, you should hold your purchase till the builder arranges EC and other documents as demanded by SBI.

2. It depends on the scope of future appreciation of existing property.

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