FOIR: Explained Simply
The Fixed Obligation to Income Ratio (FOIR) is a critical metric lenders utilize to assess your ability to manage debt when considering a home loan application.
Simply put, FOIR reveals the percentage of your monthly income dedicated to repaying all your existing financial commitments. This includes payments such as existing loans, credit card dues, and any other regular financial obligations. Lenders primarily look at FOIR to estimate how much of your income is already committed and how much you have available to service a new home loan. The lower your FOIR, the better your chances of securing a home loan, as it demonstrates that a larger portion of your income is available for the new loan repayment.
Calculating Your FOIR
Calculating your FOIR involves a straightforward process, demanding you to first gather all details of your income and financial obligations. Begin by summing up your gross monthly income from all sources, including salary, business income, and any other regular sources of earnings. Then, gather all your existing monthly debt obligations. This includes installments on all current loans (personal loans, auto loans, etc.), credit card payments, and any other recurring financial commitments. Add all these figures together. Finally, divide your total monthly obligations by your gross monthly income and multiply the result by 100 to get your FOIR percentage. For example, if your total monthly obligations are ₹30,000 and your gross monthly income is ₹100,000, your FOIR would be 30% (₹30,000 / ₹100,000 * 100).
FOIR and Loan Approval
The FOIR plays a crucial role in the home loan approval process. Lenders have set limits on acceptable FOIR percentages. These limits vary across financial institutions, but generally, a FOIR of 50% or less is considered favorable. This indicates that half or less of your income is already allocated to debt repayments, leaving ample capacity for the new home loan. A higher FOIR may raise concerns about your repayment capacity and may result in the rejection of your loan application. Lenders meticulously assess your FOIR alongside your CIBIL score and other factors, like income stability, employment history, and property valuation, to make a comprehensive decision. Therefore, maintaining a low FOIR is important to increase your loan approval chances.
Impact of CIBIL Score
While a good CIBIL score is important, it is not the only factor in loan approvals. Your CIBIL score is a three-digit number, usually between 300 and 900, that indicates your creditworthiness. A score of 750 or higher is generally considered excellent. A high CIBIL score can positively influence your chances of getting a loan and may qualify you for more favorable interest rates. However, even with a great CIBIL score, a high FOIR can still lead to loan rejection. Lenders view a healthy CIBIL score coupled with a low FOIR as the ideal scenario. Therefore, managing your existing debt and keeping your FOIR within reasonable limits is as vital as maintaining a healthy credit score to secure a home loan.
Improving Your FOIR
If your FOIR is high, there are several steps you can take to improve it and increase your chances of loan approval. The first and most effective step is to reduce your existing debt obligations. Consider paying off existing loans early, or explore options to consolidate debts. You can also temporarily avoid taking on new debt, such as new credit cards or other loans, before applying for a home loan. Increase your income to lower your FOIR, for example, look for additional sources of income that can boost your total monthly earnings. This improvement will then reduce the percentage of your income being absorbed by existing debts. By actively managing your debt and increasing your income, you can significantly improve your FOIR and enhance your chances of securing a home loan.
FOIR vs. Other Metrics
Besides FOIR, lenders evaluate other metrics when assessing your loan application. One of these metrics is the Loan-to-Value (LTV) ratio, which is the percentage of the property's value that the lender is willing to finance. The LTV ratio, along with your FOIR and CIBIL score, helps lenders assess the overall risk associated with lending you money. In addition to these metrics, lenders also assess your debt-to-income ratio (DTI), which is another indicator of financial health. DTI measures your total debt obligations relative to your gross income. All of these factors are important in determining your eligibility for a home loan. A strong profile across all parameters increases your chances of approval. Therefore, understanding and managing these metrics is key to navigating the loan approval process effectively.
