What is the Home Loan Credit Appraisal Process?

When someone applies for a home loan or a credit, the lender or the bank investigates to know whether it is safe to grant the applicant the loan or not. They want to know the applicant’s credit worthiness. They want to be sure that once the applicant takes the loan, they will be able to return the principal amount as well as the interest accrued upon the amount within the agreed-upon tenure. The entire process of this investigation is called the “home loan credit appraisal process”.

How does the lender assess your credit worthiness during the credit appraisal process?

Giving a loan is a commercial undertaking for the lender, whether it is a bank or home finance company. They will be taking a big risk by parting with a huge amount of money putting their trust in the applicant. But this trust needs to be gained through verifiable information. It is not a word-of-mouth affair. They want to make sure that giving the applicant a home loan is financially viable.

Therefore, all banks, non-banking financial corporations and housing finance companies have their individual procedures that they carry out before approving a home loan application.

The creditworthiness of the applicant decides whether they’re going to get the loan or not.

The lender would want to know the following details from the applicant:

1. Fixed obligation to income ratio (FOIR)

This is used to assess the borrower’s ability to repay a home loan. The borrower may have some fixed monthly obligations such as existing EMIs, rent, or other debts. These need to be deducted from the monthly income before deciding whether the borrower will have enough money to pay the home loan EMIs.

For example, if the applicant’s total fixed monthly income is Rs. 1,00,000 and their fixed monthly obligations are Rs. 50,000, then the FOIR is 50%. If this ratio is lower than the benchmark set by the lender, the application may be approved.

2. Installment to income ratio (IIR)

In many instances this is also called debt-to-income ratio. This assessment considers your probable EMI (for the home loan you are currently applying) and your monthly income. How much money you can safely take away from your monthly income to pay your equated monthly installments can have a bearing on the approval of your home loan application.

3. Loan to cost ratio

This is to decide how much loan an applicant can take. This depends on the cost of the house. Based on the outcome of the credit appraisal process, the candidate can get anywhere between 70%-90% of the value of the property.

What individual factors are evaluated during a credit appraisal process?

The credit appraisal process deliberates upon multiple factors before it can be decided whether the home loan should be approved or not. A broad range of factors include

• Age
• Current and future income prospects
• Work experience
• Repayment ability
• Existing and past loans
• Fixed monthly expenses
• Nature of employment
• Probability of future liabilities
• Credit record
• Owned assets
• Tax history
• Spending patterns
• Financial habits
• Bank balance

Age can be a big factor, especially when income and current financial obligations don’t compensate for an older age. Depending on the individual evaluator, the applicant’s current and future income prospects can decide how much home loan the applicant gets from the lender.

Existing loan can help the credit appraisal processor decide the applicant’s present liabilities and how they’re going to affect the applicant’s ability to repay their loan. The past loans and how they paid them gives an insight into their track record. The loan paying pattern also goes into the applicant’s credit record.

Owned assets can be used as collateral.

Similarly, the positive nature of other factors in totality can help in getting the home loan faster.

What different documents are needed for the home loan credit appraisal process?

Although a significant amount of data for the home loan credit appraisal process is automatically available these days, to complete the process, the applicant may need to submit the following documents and proofs:

i. Proof of income

The agency providing the home loan will need certain documents to establish proof of income that must be sufficient to pay the loan back. These may include

• Most recent salary slips
• Bank statements for 3-6 months
• Income tax returns for at least two years (for self-employed applicants)
• Audited financials for the previous two years

ii. Proof of address

• Leave and license agreement
• Valid driving license
• Passport that is not expired
• Latest electricity bills or utility bills bearing the current residential address
• Aadhaar card

iii. Proof of identity

• Voter ID card
• Driving license
• Passport -sized photographs
• PAN card
• Aadhaar card

iv. Proof of employment

• Letter from the applicant’s employer
• Offer letter or appointment letter provided by the applicant’s employer
• Office address proof
• Employment certificate from the applicant’s current employer
• Relieving letter or certificate of experience from the previous employer/employers of the applicant to show overall work experience

v. Proof of investments

In case the applicant has made some investments such as fixed deposits, mutual funds, fixed assets (another property), gold, or stocks, this proof too will be required. In fact, such proofs can add a pinch of validation to the home loan credit appraisal process.

Conclusion – What is the necessity of the credit appraisal process?

Successful credit appraisal process makes you credit worthy. Although in theory the process is carried out to ensure that the lender gets back their investment along with the interest, it also benefits the applicant.

If it is found out that your credit worthiness is impeccable, and in fact, quite good, you are in a better negotiating place. You can get a better rate. You can get the processing fee reduced. A greater number of creditors want to give you the home loan. It is an indicator that you are managing your finances well. You can get your loan amount increased. A successful credit appraisal process is a win-win for all the stakeholders.