How much loan can i get from bank is a pretty popular question once you start looking around to buy something. It can be a house, a car or any other expensive item that you are looking to get financed from bank.
The rule of thumb that most bank’s follow is to multiply your net salary by 60 to reach at the maximum loan (especially house) amount that you can get.
In this article, we are trying to present the bank’s salary calculation with respect to your net salary and how much housing loan (or for that matter any kind of loan) they can give you on your current salary.
This is applicable to any public sector bank like SBI, PNB or a private sector bank like ICICI, HDFC.
How Banks In India Calculate Home loan Eligibility for Salaried Professionals
Your net salary is what is most important, while calculating the eligibility for total loan amount.
Normally, all banks provide home loans up-to 60 times your monthly NET pay but it can vary from case to case basis and your personal credit rating. 95% of the cases fall under the 60 times rule and banks rarely breach this limit to limit their loan loss.
Home loan eligibility for salaried person – Example
- You have a monthly in-hand (take home or net pay) salary as INR 50,000 and you are looking for a home loan of about 30 lakhs.
- Your gross monthly income might be much more than INR 50,000 per month but that does not matter while calculating the net pay.
- You don’t have any other loan like car or personal on your name.
- Bank rules say that you are eligible to get 60 times your monthly NET pay as loan.
Well, all sounds good till the time you are talking to your bank executive or an agent over phone for your eligibility. They ask you for your net pay, you answer 50K per month and they immediately say that you are eligible for a 60 times your monthly net pay i.e. 30 lakhs of loan.
You are excited that everything is going as per your expectations and you will get the amount what you were looking for.
But things change dramatically, after you have actually applied, submitted your salary slips and have paid the loan processing fees. The bank will evaluate your loan eligibility once again and this time it will most probably come out to be much less than what was communicated over phone (recall the 60 times rule).
You start wondering about what has changed? You salary slips still show the same 50K as net pay and you don’t have any other loan.
Then how come the eligibility has come down? Is bank not interested in giving out that much loan or the rule of 60 times your net pay is just a marketing gimmick? Read on to find out.
What is the catch in calculating NET pay by bank?
The catch could be anything from a bank’s marketing strategy to attract customers or your low credit score. But most of the times, it is your salary components which are play a spoilsport. You might be getting a net pay of 50K per month, but there are some components which may not qualify for adding to your net pay loan eligibility.
If you take a closer look at your salary slip, you will find these components (some may not be there at all, that’s OK):
- Basic Salary
- HRA (House Rent Allowance)
- LTA (Leave Travel Allowance)
- Medical Allowance
- Performance Bonus
- Conveyance Allowance
- Special Allowance – It could have different names in different companies like city compensatory allowance etc.
- Food Coupons
- PF (Provident Fund) – Shown as a deduction in Salary Slip
- Any other allowance
A standard pay slip (one month) in our example might look like this (I have taken all sample values):
|Basic Salary||15000||Provident Fund||1800|
|Conveyance Allowance||800||Income Tax||1250|
|NET pay||50,000 (53,050 – 3,050)|
Now, the components which most banks (like SBI) do NOT consider while calculating your NET pay are LTA and Medical Allowances, specifically for housing loan. So, Even though your salary slips depict Rs. 50,000 as NET pay, bank will NOT consider LTA and Medical allowance as a money which would be available with you for spending on loans.
Bank believes that you will actually spend these LTA and medical allowances on the activities which they are paid for.
Hence, what bank will do is, deduct these amount from your pay slip NET pay as follows:
|Net pay as per salary slip :||50,000|
|– LTA amount||3500|
|– Medical Allowance||1250|
|New Net Pay||45250|
Which is lower than earlier eligibility by about 10% i.e. 2,85,000.
If you want to know your Net pay, you can use Salary Calculator India (that you see in your salary slip each month).
If you had planned your finances keeping in mind that you would get a loan of 30 lakhs by bank and manage other money yourself, you now would need to pool in 2,85,000 more.
How much Car loan can I get?
The loan eligibility calculator is with you, if you have read the above information. Simply multiply the net pay and you reach a maximum amount. But, remember, the bank would also consider these points in reducing your net pay in case of Car loan:
- Reduce your net pay by any home loan EMI or house rent that you are paying per month. That essentially means that they will deduct the HRA or the rent you pay from your net monthly salary.
- The minimum amount of money that you need to pay on your ‘credit cards’, if you have any. This usually is a small amount in the range of 1-2% of your monthly balance that you carry on credit card.
Bank wants to make sure you can pay your liabilities and bills without defaulting. They do not want you to be exposed to higher debt than you can easily handle.
I hope you would have understood the concept. I would urge you to keep these calculations in mind and do not blindly believe what bank sales executive commits, as he is more interested in bringing a client to bank.
You will get to know these details only when you would have actually paid the non-refundable processing fees of the bank. You would have no option but to go on with it and find out other ways of financing the deficit amount.
Comments, suggestions and queries are most welcome.