Have you ever heard a banker or lender talk about FOIR and wondered what it is? Or wanted to understand how financial loan eligibility is calculated? If you have then this post is just for you.
In this post, we will look at everything you need to know about FOIR and how it impacts your loan eligibility.
What is FOIR?
FOIR (Fixed Obligation to Income Ratio), also known as Debt to Income Ratio (DTI Ratio), is the parameter that banks use to assess your financial loan eligibility. It is a measure of the percentage of your monthly income which is spent towards repayment of loan obligations.
In general, the higher the portion of income spent towards repayments, the lower the confidence the lenders have towards your ability to repay. Therefore, when you apply for a loan, your loan eligibility highly depends on the FOIR.
How is FOIR calculated?
The FOIR is calculated by taking into account your gross monthly income and the monthly obligations (EMIs of all loans that you are paying). Additionally, it will also include the EMI of the loan which you are currently seeking.
It should be noted that statutory deductions such as Provident Fund, Investment Deductions, or Professional taxes are not considered part of the monthly obligations. Neither are household expenses such as rent, utilities, etc.
The formula for calculating FOIR is as below:
FOIR = (Sum of All EMIs / Gross Monthly Income) * 100
For example, let us assume you have a monthly income of Rs.60,000. Also, you have a car loan with an EMI of Rs. 9,000 per month and a personal loan with an EMI of Rs. 6,000 per month.
Given this your current FOIR will be:
Sum of all EMIs = 9,000 + 6000 = 15,000
Gross Monthly Income = 60,000
FOIR = (15000 / 60000) * 100 = 25%
What is a considered good FOIR?
While various banks and lenders have different FOIR levels which are considered acceptable, the maximum acceptable FOIR is generally between 40% – 60%. However, this will vary based on the income bracket, the type of employment, etc.
As a thumb rule, you should always maintain a FOIR of less than 50% to be viewed favourably by lenders.
So in the above example, the FOIR of 25% is a good FOIR.
How is loan eligibility calculated?
Banks and lenders use a reverse calculation to determine the eligibility for a loan.
Let us look at a couple of examples to make things clear:
Mrs. C has a gross monthly income was Rs. 50000, with a car loan EMI of 9,000 and personal loan EMI of 6,000. Now she wants to apply for a home loan and would like to understand her home loan eligibility.
In order to do this, let us assume that the lender she is applying to allows maximum FOIR of 50%. As a result, the sum of all EMIs for Mrs. C should not exceed 50% of the gross income.
In this case:
• 50% of 50,000 = 25,000
• Total existing EMIs = 9,000 + 6,000 = 15,000
• Remaining disposable income for the home loan = 25,000 – 15,000 = 10,000
• Therefore, the bank will calculate the loan eligibility based on EMI of 10,000
So, Mrs. C will be eligible for loan amount of maximum EMI of 10,000.
Mr. A has a gross monthly income of Rs. 100,000, with a car loan EMI of 24,000 and a home loan EMI of 36,000. Now Mr. A would like to apply for another home loan and wants to understand his home loan eligibility.
In order to do this, let us assume that the lender he is applying to allows a maximum FOIR of 50%. As a result, the sum of all EMIs should not exceed 50% of the gross income.
In this case:
• 50% of 100,000 = 50,000
• Total existing EMIs = 24,000 + 36,000 = 60,000
• Existing EMIs are greater than FOIR allowed (60,000 > 50,000)
• Therefore, the bank will calculate the loan eligibility as 0 for Mr. A and loan application will be rejected.
Will my FOIR be considered if I have a good credit score?
While a good credit score is a reflection of healthy credit history and disciplined repayment of obligations it does not replace the calculation of FOIR.
In fact, we see many cases where applicants assume that since they have a good credit score their loan application will be approved. Only to find that in fact their loan application is rejected due to non-eligibility resulting from existing high obligations.
Therefore, it is important to keep track of your FOIR as your obligations increase. Especially if you are planning to purchase a home and need a home loan.
What should I do if my FOIR is high?
If your FOIR is already high and you are still looking to apply for a home loan you will need to do one of the following:
First, consider applying for the home loan with an earning co-applicant who does not have a high FOIR. In this case, both incomes and obligations will be considered so if your co-applicant has a low FOIR you will have higher chances of loan approval.
Second, consider applying for the home loan once you repay some of your previous loans or get an increase in monthly income. In fact, some banks will not take an obligation into consideration if only 3-6 EMIs are remaining. Plan your home purchase accordingly.
Third, consider maximising your loan tenure to increase the loan eligibility. Since increasing the tenure of the home loan will reduce the monthly EMI it will increase the eligibility.
Lastly, you can also consider step-up EMI home loan offered by specific banks. In a step-up loan, the EMI is low for the first couple of years. Subsequently, the EMI increases in the future as your income level increases.
To summarize, maintaining a healthy FOIR is key to ensuring you are eligible for the home loan you require. However, considering that different banks and lenders have different FOIR standards, checking your eligibility across the various lenders can be painful and time-consuming.
With this in mind, we at ValuCircles work with all lenders to ensure that we capture accurate FOIR calculation for each of them. So, when you check your LPi with us you also get to understand the lender specific eligibility based on the FOIR applied by each of our partner banks. Furthermore, we will also assess your profile and tell you the banks where you have the highest chances of loan approval.
So, sign up and calculate your LPi to find the right home loan for you.