People avail a home loan from a banking institute or any other financial institute on a fixed or floating interest rate. You are liable to repay the loan amount in the form of EMIs as per the agreed interest rate and within the specified tenure.
As property rates are increasing with each passing day, owning a house in India has become very difficult. Hence, home loans act as a financial bridge to fulfil the dream of owning a home for many families in India.
When you apply for a home loan, your lender will check home loan eligibility of your application and calculate an amount that you can afford. You yourself can calculate your eligibility by using home loan eligibility calculator. The amount you can afford is dependent on factors such as:
- Job profile
- Annual income
- Savings (for a down payment)
- Monthly Debts
- Credit score
- Loan tenure
- Property tax
- Debt-to-income ratio (DTI)
- Applicable interest rates
Hence, before you apply for a home loan, it is recommended that you calculate home loan affordability on your own. Don’t know how to calculate home loan affordability? Well, this article will explain to you just that.
Calculating Home Loan Affordability
Here is a 4-step process that will help you calculate home loan affordability.
1: Calculate the maximum housing expense based on your income
Most of the lenders follow a ‘baseline standard 28/36 rule’ as a home loan affordability rule. According to this rule, you should not be spending more than 28% of your pre-tax income on a home loan payment and the total debt amount should not exceed 36% of your pre-tax income. This is calculated as – Maximum Housing Expense = 28% * Annual Income / 12
For instance, if your annual income is ₹ 9,00,000 per annum then your maximum housing expense should be 28% of 9,00,000/12 which is ₹ 21,000 and total debt amount will be 36% of ₹ 9,00,000/12 which is ₹ 27,000. Hence your housing expenses shouldn’t exceed ₹ 21,000 monthly (₹ 2,52,000 per annum) and your total debt amount shouldn’t exceed ₹ 27,000 monthly (₹ 3,51,000 per annum).
2: Find the Debt to Income (DTI) ratio
Your Debt to Income ratio (DTI) is calculated as Total Monthly Debt Payments / Gross Monthly Income. Thus, your Maximum Monthly Housing Payment = DTI * Monthly Income – Monthly Debt Payments
3: Calculate the maximum loan payments as per expenses
These will include your principal amount, interest rate, insurance and tax amount. The total expense amount is then deducted from your maximum monthly housing payment which was calculated before. This result will help you understand the maximum Principal-Interest (PI) payment as per your expenses.
It is noteworthy that the interest rates on home loans are dependent on the Marginal Cost of Lending Rate (MCLR). All financial institutes offer attractive home loan interest rates to their clients. With fixed interest rates, you will have to pay equal EMIs throughout your repayment tenure. Whereas, with floating interest rates, depending on the market conditions the EMIs tend to change with time.
4: Calculate the maximum home loan price
Maximum Home Loan Price is calculated as [Available Amount – Fixed Costs] / [% Down + Variable Cost]
Lastly, all the obtained results are represented in the form of a sharp graph – wherein the spreadsheet highlights the limiting factors such as income, down payment, taxed, insurance and others.
A Final Thought
We suggest you choose a lender that offers bespoke loan solutions that are best suitable for your needs. With a Bajaj Finserv home loan available on Finserv MARKETS, you can benefit from features like low EMI, minimal documentation, bespoke loan solutions and much more. The loan application is approved almost instantly and the loan amount is credited in your account within 24 hours.
What else do you want? Apply for Bajaj Finserv Home Loan with us, today!
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