Worked Example: Estimating Loan Affordability
Suppose your net monthly take-home salary is ₹1,00,000, you pay an existing car EMI of ₹10,000, and the bank applies a FOIR (Fixed Obligation to Income Ratio) limit of 50%:
- Maximum allowable EMI budget = ₹1,00,000 × 50% = ₹50,000
- Available EMI for new loan = ₹50,000 - ₹10,000 = ₹40,000
- Assuming an interest rate of 8.5% p.a. for a 15-year tenure.
- Estimated eligible loan amount = ₹40,62,000
Based on your profile, you qualify for a maximum home loan of ₹40.62 Lakhs.
How Loan Eligibility is Calculated
Banking organizations evaluate loan approvals strictly using the following mathematical systems:
1. FOIR Limit Cap
First, banks limit your total monthly payment capacity to a maximum percentage of your salary (usually 50%):
2. EMI Amortization Reverse Translation
Using the max allowed EMI, the principal borrowing limit is derived using the standard EMI annuity formula backwards:
Where:
- EMI = Maximum allowed monthly EMI
- r = Monthly interest rate (annual rate / 12 / 100)
- n = Number of monthly installments (Years × 12)
Frequently Asked Questions
A credit score of 750 or above is considered excellent by lenders. It qualifies you for the lowest interest rates and highest eligibility limits with minimal documentation.
It is difficult to get unsecured personal loans if your FOIR exceeds 50%. However, for highly collateralized loans like home loans, some lenders may extend the FOIR limit up to 60% or 65% depending on your income volume.