Taking a mortgage – know your credit worth before applying

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Holiday home mortgage
There are a number of parameters upon which the bank judges an individual’s credit worth and sanctions the loan amount accordingly.

After you have decided on a property, it’s time to checkout banks and financial institutions for a loan to pay off the rest of the amount. Prospective homebuyers will be aware that lenders have today tightened their requirements for credit approvals, so homebuyers will now need to evaluate their personal finances, the reasons for their credit problems (if any) and whether they are emotionally and financially ready to become a homeowner. There are a number of parameters upon which the bank judges an individual’s credit worth and sanctions the loan amount accordingly.

Repayment Capacity: All banks will assess your repayment capacity while deciding the home loan eligibility. Repayment capacity is based on your monthly disposable or surplus income, (which in turn is based on factors such as total monthly income/ surplus less monthly expenses) and other factors like spouse’s income, assets, liabilities, stability of income, etc. The main concern of the bank is to make sure that you can comfortably repay the loan on time and ensure end use. The higher the monthly disposable income, higher will be the amount eligible for your loan. Typically a bank assumes that about 55-60 percent of your monthly disposable/ surplus income is available for repayment of loan. However, some banks calculate the income available for EMI payments based on an individual’s gross income and not on his disposable income.

Banks ideally fix an upper age limit for home loan applicants and the amount of the loan depends on the tenure of the loan and the rate of interest. There are also other factors according to which the banks decide how much amount of money can be lent to a homebuyer.

Age of the home buyer: Age is a big decisive factor for the banks when they sanction loans. The maximum tenure of repaying the Home Loan is not more than 20 to 25 years. Thus, if you are more than 50 years of age, then there are chances that the banks will show no interest in your loan application. However, in such cases it is advised that you apply in collaboration with your child so that your credit worth increases.

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Income: Whether you are a businessman or an employee in a company, the banks would require you to submit your income documents. Moreover, the name and status of the company you are associated with, also influences the decision of the banks. Before sanctioning housing loans, banks also try to create a better understanding of your position in the company and the scope of growth for you.

Status of previous loans or repayment history: Your payment history is perhaps 35 percent of your total creditworthiness. So if you are someone who pays your bills on time, and does not have a lot of debt, you have a good credit rating and will have no problem getting a low rate mortgage loan to buy your home. This is perhaps the number one issue on any creditor’s list. A pattern of slow, late, or missed payments will knock down your credit score by several knots. An unblemished payment record can partially offset negatives elsewhere.

Collateral: Assets go a long way to offset lenders’ fear of risk. A property leveraged at 80 percent is less worrisome than one at 95 percent. So if the property value is more your credit worth increases considerably. When a property value is appraised by the bank’s evaluators as less than the purchase price, you have a problem, because banks only lend on loan to value ratios.

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