Three distinct numbers that take the limelight when you apply for a fresh home loan or decide to transfer an existing one to a new lender are loan-to-value ratio, debt-to-income ratio and credit score. They play a decisive role in determining your eligibility to avail a loan and the interest rate at which you may get it. Let’s take a deeper look into how each is crucial.
1) Credit Score: A credit score is a 3-digit number ranging between 300 and 900 and helps the lender understand your credit history. Credit bureaus such as Equifax and Experian calculate your score based on factors such as your debt, payment history and credit utilization ratio.
Credit utilization ratio reflects how much of your credit limit you are using up within a given timeframe. It’s recommended to keep this number within 30%. A higher credit utilization increases your risk profile to lenders and will weaken your chances of getting a good interest rate.
When you apply for a loan, lenders will typically run a “soft inquiry” for your credit score. This does not impact your score. However, a hard enquiry done before you submit the application will have a minimal impact on your credit score. A high credit score indicates to lenders that you are likely to repay your loan on time, encouraging lenders to offer you a loan at a lower interest rate. This, in turn, can save you lakhs of rupees through your loan’s tenure.
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2) Debt-to-Income Ratio: This, simply put, helps the lender assess your repayment capacity for the loan. The lender adds up all your current monthly debts along with the loan amount and divides it by your gross salary.
Example: Let’s say your gross monthly salary is 1 lakh and your total monthly debt is Rs.40,000.
Your DTI = 40,000/1 lakh
i.e. 0.4 or 40%
A high DTI indicates high risk to the lender and may reduce your chances of getting a loan. A DTI of 36% or less is considered good.
3) Loan-to-Value (LTV) ratio: This determines how much of the property value you have paid for as down payment (or your equity in your home) and how much you are borrowing from the lender. At Fincity, you can avail of home loans for LTV ranging up to 90% of the property value. A higher LTV may result in a higher interest rate, depending on who the lender is.
To calculate your LTV, simply deduct your down payment amount from the total property cost, and divide the balance by the property value.
Example: If your property’s cost is 1 crore and your down payment amount is 20 lakhs,
your LTV = (1 crore – 20 lakhs) /1 crore
i.e. 80 lakhs/1 crore = 0.8 or 80%
An LTV of 80% indicates that you would have to borrow 80% of the property’s cost from the lender.
If all of this number talk makes you wonder how much loan you’re eligible for, check it out right away using our Home Loan Eligibility Calculator. And if you still have questions on how these factors affect your score and your ability to get a loan, reach out to a Fincity Home Loan expert for a free consultation at email@example.com.