How Do Banks Decide on Your Loan Eligibility?

When you apply for a loan whether it is a personal, housing or mortgage loan, the first and foremost aspect banks look at, is your ability to repay. Although, there are other specific criteria to be fulfilled by every applicant, the following are the basic points or rather calculations based on which your loan eligibility is determined.

It is not all that difficult to understand how these calculations are arrived at, in fact if you are able to work it out on your own then you can find out what will be the maximum loan you can avail, irrespective of which bank you apply to.

1) IIR- Installment to Income Ratio

Banks understand that your loan value should not exceed your repaying capacity. This ratio is 33.33% to 40% of your monthly income. Using the IIR, how much you can borrow as well as repay will be decided by the bank.

For instance if you earn Rs.50,000 per month, then your IIR is Rs.16,500. That is, the maximum emi payable by you is not more than 16,500 per month. This determines your maximum loan amount, and will vary depending on the tenure you choose.

2) FOIR- Fixed Obligations to Income Ratio

This is perhaps the more popular calculation, the banks go by. The Fixed Obligations to Income ratio helps in determining if the applicant has any other loans he is repaying, while he applies for a new loan. Those loans which require more than 6 installments to be paid are the ones considered for FOIR. Let us see how it is done;

For instance, if your income is Rs.75,000 per month, and you have an auto loan running for which you are paying an emi of Rs.5000 and another personal loan of Rs.7500 per month. Considering that 50% of your income can be paid towards your loans,

We have,

50% of 75000 = Rs.37,500

Auto Loan Emi = Rs.5000

Personal Loan Emi= Rs.7500

So, your disposable income for this fresh loan is:

37,500 - 5000 - 7500 = Rs.25,000

Although FOIR is mainly a ratio, you need to look out for the value mentioned above. This will help decide how much you can afford to pay as monthly installment despite paying your other emis.

3) LTC or LTV - Loan to Cost or Loan to Value Ratio

This ratio is most often used for calculating an applicant's ability to repay a housing or a mortgage loan. Here, rather than an applicant's income, the property's value is taken into consideration. Around 60 to 70% of the value of the property is used to determine the maximum borrowable loan amount.

For instance, if the value of your property is Rs.1 Crore. Then the maximum loan amount you can avail based on your property would be Rs. 50 to Rs.60 lakhs. Of course, when it comes to determining your repaying capacity, your income will definitely be considered. The LTV ratio varies depending on whether all the aspects of the property is proper or not. Sometimes, even 80% of value is provided as funding depending on the application.

Most banks consider up to 60% of an individual's income can be paid towards monthly installments. However, it is always advisable to keep this percentage down to 40%. You don't want to seem too credit hungry when you go ahead with applying for a new loan. Every loan you pay or don't pay is recorded, and is made as a part of your credit information report. Your credit score is also based on it, and is one of the key factors for your loan to get approved.

Priya is a financial consultant with RupeeZone, visit http://www.noproblemcash.com/ you will find a whole lot of details on personal loans and how to make yourself eligible for easily availing one.

To check your personal loan eligibility visit  http://www.noproblemcash.com/?c=214594

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Why Do Hard Money Lenders Fail?

This vital pillar of our economy almost vanished when the economy and the housing market tanked about four years ago. Private lenders were left holding large inventories of real estate whose values were eroded by between 30% and 50%. Consider this scenario: A $200,000 mortgage loan balance, originally secured by a property valued at $285,000 (Loan to Value 70% [LTV]), was suddenly under-secured as the securing property value dropped by 40% to $171,000 (Loan to Value 117%). Conventional banks suffered somewhat similar consequences, albeit on a smaller scale. The difference was due to the credit analysis methods that were practiced prior to the collapse of the property market. On one hand, conventional lenders subjected credit applications to more stringent analysis that included borrower's credit history, character, income, collateral, ability to repay, stress testing, terms and economic conditions. On the other hand, Private lenders or hard money lenders, as they are popularly known, were mostly concerned with the value of collateral, paying very little attention to the borrower's ability to repay. This has now changed to a large extent. Many hard money lenders are applying more or less similar credit underwriting standards as the conventional lenders. The only setback for most of the hard money lenders now is lack of prudent underwriting skills. However, the good news is that they can outsource the underwriting role to professional loan underwriters, right here in the United States, at an affordable cost. Remote loan underwriting firms, whose teams consist of highly experienced ex-bankers, are well positioned to provide the most current loan underwriting techniques in the industry.

Here are a few roles that a hard money-lender can outsource to improve delivery times and credit quality:

1. Creating loan package - Application (Fm. 1003), Income, Credit, Asset documents, Policy of Title Insurance and Property Profile Report

2. Gathering and reviewing title information

3. Ordering and reviewing an appraisal

4. Loan underwriting for a private investor

5. Creating final documents and coordinating settlement or closing

Prudent credit underwriting, whether for conventional lending or hard money lending, should follow these simple underwriting guidelines:

1. Know your customer, character and credit history

2. Read the market conditions well

3. Ensure that a borrower has a reasonable stake in the deal

4. Understand borrower's indebtedness and sources of income or losses

5. Obtain adequate and easy - to- sell collateral

6. Test the borrower's ability to repay the loan

7. Impose simple and achievable loan conditions. Be aware of the prevailing environmental and economic conditions.

Franc Jo is a Senior Underwriter at Loans Underwriting LLC, the leading provider of outsourced Credit Underwriting support to lenders and funding solutions consultant to small businesses throughout USA. He may be reached at 3330 Pkwy Suite 324-178 Acworth, GA 30101, Phone 1-800-858-8593, and Website: www.repaircash.com

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