How to Increase your Loan Eligibility?

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When considering your loan application, lenders evaluate a number of variables. Your income, income, age, remaining working age, LTV ratio, property attributes, and current loan payback responsibilities are the most important. If you don’t meet the lender’s cut-off, your loan application may be denied.

Due to the country’s economic uncertainties, banks and non-banking financial institutions (NBFCs) have tightened lending standards. Business owners’ cash flow has dried up, and many people have suffered salary cutbacks and layoffs. Lenders are also concerned about the possibility of a rise in non-performing assets (NPAs). A moratorium has been chosen by many debtors who are unable to service their loans.

1. Check your Credit Score

A credit score is a number that indicates your creditworthiness and credit behaviour. A higher credit score means you are less likely to default and will repay your future obligations on time. 

Credit Information Bureau India Limited or CIBIL is the credit information company that is engaged in maintaining the records of credit-related activities like credit cards and loans of individuals and companies. Lenders favour borrowers with a CIBIL score of above 750. 

Having a credit score upwards of 750 improves your chances of getting loan approval, and that too at a low interest rate.

2. Opt for Longer Repayment Tenure

Opting for longer loan tenure will reduce your EMI, which in turn will increase your loan eligibility due to higher EMI affordability. However, opting for unnecessarily longer tenure can increase the overall interest cost of your home loan. Hence, those planning to avail home loans should use online home loan EMI calculators to find out their optimum loan repayment tenure on the basis of their repayment capacity and contributions to crucial financial goals. Borrowers can later on make prepayments to reduce their interest cost whenever they have surplus funds in the future.

3. Add another Source of Income

By adding any other source of income can also help. Another source of income includes rental income, part-time business, rent from equipment or machinery, etc. Additional source of income gives an advantage of securing higher loan amount, as it improves your financial health.

4. Verify If a Lender Provides Step-Up Loans

Banks provide loans with reduced EMIs in the beginning years and progressively increase the EMI when you begin repaying the loan. It is usually targeted at younger borrowers. As the borrower advances in their profession and earns more money, the lender raises the EMI.

A step-up loan has a larger interest outlay than a loan with a fixed EMI. Only use step-up EMI if you are certain about your future earnings potential.

5. Keep your Debt-To-Income Ratio Low

The debt-to-income ratio is the percentage of income going towards debt or loan repayment. It must be lower than 40% to apply for a new personal loan successfully. If a higher percentage of your income is utilized towards debt repayment, it signals that you have more debt for the income you have. It goes on to show that you are unequipped to take any new obligation.

So, you must keep your debt-to-income ratio low. Also, defer from unnecessary borrowing as it can impact your credit score if you fail to repay.

6. Avoid more than one Loan Application at a time

Going for more than one loan application with multiple lenders at a time is the wrong strategy. Many people apply for loans with various lenders to get loan approval from one of the lenders. This may work against the borrower.

It gets difficult for you to get a personal loan when you apply for it at multiple places. Multiple hard inquiries at a time reduce your credit score. Also, it gives the lender the impression that you need numerous loans to meet your financial requirements.

You should maintain a gap of at least six months between loan applications. It increases the likelihood of your loan application getting approved.

7. Clear Existing Dues

Earlier, if an applicant had an ongoing loan, which was about to end in six months, lenders would not consider its equated monthly instalment (EMI) when looking at the eligibility. Now, they do.

Lenders look at a parameter called fixed obligation to income ratio (FOIR). Under FOIR, a lender considers the applicant’s fixed obligations such as current EMIs to determine eligibility. If a lender would give a loan to someone with a FOIR of up to 60% of their net salary, now they have reduced it. If you have the last few EMIs left to pay in an ongoing personal or consumer durable loan, prepay it before applying for a new loan.

8. Open account with the chosen Lender

If you have finalized the lender and wish to plan to apply within a year or before, you can start the relationship with the lender by opening a bank account well before applying for any loan. By doing this you will be given preference by the chosen lender, if you apply for any loan in near future.

9. Reduce your Debt-to-Income Ratio

Before you apply for a personal loan, ensure that you pay off your existing debts and credit card bills to reduce your debt-to-income ratio. Your current debts and credit card due amounts may pose you as a credit-hungry borrower and make it challenging to get another loan. Ideally, the total amount of EMIs you are paying at present should not be more than 30-40% of your monthly income. If it is more than that, pay it off before making a new loan application.

10. Include all your Income Sources

Lenders also look at your income to measure your repayment capacity. Therefore, while filling up the online loan application form, you must mention not only your regular salary but all your income sources, including any rental income, part-time income, or anything else. Doing this will prove to the lender that you are earning enough to make timely repayments.

11. Take a Joint Loan

One of the easier ways to increase the chances of getting a home loan is to apply for the loan with your spouse jointly. Some banks allow relatives such as father, mother, son, or daughter as co-applicant if they are working. A co-applicant could help in increasing your loan eligibility.

12. Go to a Bank that has a Mortgage Guarantor Partnership

Home loans given through a partnership with a mortgage guarantee business have less stringent qualifying requirements. “To offer lending products, a mortgage guarantee company partners with lenders. The qualifying criteria and other loan procedures are worked up by both partners. Because a mortgage guarantor can take on more risk than a bank, the loan products that lenders provide in collaboration with them have fewer requirements. In such cases, a borrower might obtain a loan amount that is 20-30% greater.

13. Open an account with your preferred lender

If, after exploring various lenders and comparing the benefits offered by them you have decided on a lender, it is a good idea to open an account with them. This should be done at least one year before applying for a home loan as you will have enough time to build a relationship with the lender. A good relationship with the lender will increase your eligibility for a home loan.

14. Pay off your loans on time

Paying your payments on time will help you establish a strong credit score, which can improve your home loan eligibility. Additionally, you should have savings and assets, which may help you, qualify for a house loan.

15. Keep Your FOIR Below 40%

The ratio of your debts to income is the Fixed Obligation to Income Ratio (FOIR) and it is a critical parameter for determining one’s home loan eligibility. Most financial institutions’ lending models assume that you need close to 50% of your income for spending on your living expenses. Ideally when opting for a home loan, try to limit your FOIR to up to 40% in order to increase the chances of getting the loan approval.