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.
Calculate Home loan Eligibility – Salary Professional
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. This certainly, can vary from case to case basis and your personal credit rating.
95% of the cases, though, fall under the 60 times rule and banks rarely breach this limit to limit their loan loss.
Example scenario we will talk about:
- Your monthly in-hand (take home or net pay) salary is INR 50,000. Looking for a home loan of about 30 lakhs. Real Estate property cost: 40 lakh.
- Your gross monthly income might be much more than INR 50,000 per month. Bank only considers your in-hand salary. Calculate your in-hand salary.
- You don’t have any other loan like car or personal on your name. You do have 1 credit card with credit limit of INR 10,000.
- Bank rules say that you are eligible to get 60 times your monthly NET pay as loan. Read on to find out how much loan do you qualify for.
Well, all sounds good till the time you are talking to your bank executive or an agent over phone to ask “How much can I qualify for“.
They ask your net pay, your answer, 50K per month immediately prompts them to say “you are pre-approved for 30 lakhs of loan“.
You are excited that your worries about ‘how much loan will I get approved for’ has been answered.
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?
Calculating ‘NET Salary’ as Bank would do
What you are pre-approved or pre-qualified for could be vastly different from what you bank would finance you.
The catch could be anything from a bank’s marketing strategy to attract customers or your low credit score.
Assuming bank played no gimmick and your credit score is ‘Good or excellent’, it is definitely your salary components reducing your over-all loan pre-approved amount.
Take a closer look at your salary slip and check these components in RED (some may not be there at all, that’s OK):
A standard pay slip (one month) in our example might look like this (I have taken all sample values):
|Basic Salary||15,000||Provident Fund||1,800|
|Conveyance Allowance||800||Income Tax||1250|
|NET pay||50,000 (53,050 – 3,050)|
The components in RED (LTA and Medical) are not considered part of your in-hand income by most banks (like SBI) specifically for housing loan.
In this case, even though your salary slips shows 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 loan EMI.
Bank believes that you will actually spend these allowances on the activities which they are designated for.
The result is your decreased qualification as shown here:
|Net pay as per salary slip :||50,000|
|– LTA amount||3,500|
|– Medical Allowance||1,250|
|New Net Pay||45,250|
Which is lower than earlier eligibility by about 10% i.e. 2,85,000.
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 Loan can I get approved for?
The final approved or sanctioned amount still needs more checks.
In addition, there are expenses that bank will get to know from your credit history report and will further reduce your loan eligibilty:
- Credit card minimum balances: If you shop around using credit cards, you do get monthly bills and bank knows this. The total of ‘minimum payment‘ each month on all cards is REQUIRED to be deducted from your NET pay to reach the loan eligibility.
This is generally 10% of your total credit limit. In our example, this comes out to be INR 1,000 per month.
Now, reduce your NET pay (45,250) by another 1k to reach at 44,250.
- Car Loan/Personal Loan/ Gold loan: If you have an existing loan, do deduct the monthly EMI amount from your net pay.
In our case, we have assumed to have none. If you do have one, deduct the monthly EMI from the Net Pay calculated in above point.
- Home rent: If you are trying to take home loan for an ‘under construction‘ property, the bank will reduce the loan eligibility amount by the rent you pay monthly.
We have assumed to be buying ready to move in home and hence no more deductions.
At this point, you should have the NET pay (44,250) that bank will consider for finding your maximum loan qualification.
To answer your question: ‘How much loan will i get approved for’, simply multiply 44,250 by 60.
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.
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.