With so much of confusions about the ups and downs in the market interest rates, competitions, terms and conditions and too much of glossary of financial market. Every Bank/ NBFC and other financial institutions have some or the other way to acquire or retain the customers.
Borrowing a loan is a hazardous task that comes with a detailed procedure of paper work along with too much verification. These procedures vary from profession to profession. The documents, interest rates, loan amount and even the tenor differs from salaried to self employed professionals and self employed non professionals.
Borrowing a loan of any type (secured or unsecured) for salaried professionals is easiest among all because of the documentation and then for self employed professionals and self employed non professionals respectively.
Have you ever given a thought that why it is a cumbersome process for self employed professionals and self employed non professionals?
Yes, you read it right. It is difficult for other professionals to borrow a loan as compared to salaried individuals. This is because of the documents and the cash inflow. The cash inflow in SEP’s and SENP’s is erratic and so the risk of shutting the business is higher. However, it is not an intuitive emotion towards self employed home loan applicants (professionals or non professionals) that conjures up in Bank/NBFC’s. Had it been so, the Banks/NBFC’s or other financial institutions would have not designed the home loan products for self employed applicants.
The question is that when the home loan products are especially designed for self employed professionals then why their loan eligibility is higher when their Loan-to-Value (LTV) is within comfortable levels. This might be little difficult to understand. So let’s read ahead and understand what is LTV and Fixed-Obligation-to-Income-Ratio (FOIR) and how the LTV ratio raises the home loan eligibility of self employed borrowers.
Loan-to-value ratio is a financial tool that gives a clear picture to the Bank/ NBFC of the amount being lent to you depending on the market value of the property. It reflects the percentage of the mortgage property or against which you take a home loan and is expressed in percentage. As the name suggest, LTV ratio is calculated by dividing the home loan amount with the appraised market value of the property. However, the financial institutions fund only 80% of the market value as a loan amount but as per RBI norms 90% LTV is allowed on home loans up to 30 lakhs since 2015.
Fixed-Obligation-to-Income Ratio (FOIR)
FOIR is a financial tool that is being used by the Banks/ NBFC’s to calculate the loan eligibility. During the calculations, the fixed obligations (monthly/ daily expenses) are considered (excluding the installments of all current loans and applied home loan from the eligible income). The authorized deductions are excluded while calculating FOIR and the loan amount to be granted depends on your FOIR rating. As an applicable norm the FOIR ranges between 40-60 percent.
FOIR & LTV Norms for Self Employed People
Low LTV schemes are offered to SEP and SENP home loan borrowers. As per the scheme a comfort is established while calculating the home loan eligibility for SEP’s and SENP’s depending on their LTV percentage.
Higher the home loan amount eligibility, higher the FOIR percentage. But why should you get a benefit of higher FOIR? Why should Bank/ NBFC cross the specified limit of FOIR? (Know more about FOIR)
This can only happen if your LTV is within comfortable levels. The LTV depends on the market value of the property and in case the property value is high than your equity in the property is strong. The property’s equity also increases with time as the borrower make the loan payments on time and/or as the price of the property increases.
Let’s suppose, your LTV is calculated as 60% (maximum can be 80% as per the Bank norms), your FOIR can go up to 100% depending on the judgment of the authorized credit officer. Similarly, if the LTV ranges between 70%-80%, the home loan borrower can easily enjoy the FOIR limit of up to 90%. In short, for SEP’s and SENP’s, lower the LTV; higher the FOIR limit, only if the lender is willing. A low credit score or too many running loans can adversely affect the case.
Special Features of FOIR & LTV
The SEP’s & SENP’s can only avail this scheme.
The scheme can be availed only when the LTV is lower than the specified existing norms.
100% is the highest limit of FOIR.
Banks/ NBFC’s only take a desired deviation in FOIR if the SEP/ SENP home loan borrower meets other eligibility criteria on a satisfactory note.
Always pre-check if the lender you have opted offers a lower LTV or not. It is not necessary that every lender keeps the same margin as mentioned above and keeps higher FOIR based on lower LTV. Still have doubts, call the experts from Mudra Home .