What is FOIR?
The full form of FOIR is Fixed Obligations to Income Ratio, also known as the debt-to-income ratio. It forms the most basic premise for lenders while assessing loan eligibility. Lenders use it to calculate whether applicants can repay the loan after considering their income and fixed monthly obligations such as taxes, provident funds, other loans, rent, etc. They closely examine the credit history, sources of income, assets and liabilities to gauge an individual’s financial standing and associated risks in tendering loans.
A FOIR in the range of 40% to 55% is usually recommended. A modest FOIR shows that the applicant’s net monthly liabilities are significantly lower than his/her income reflecting a sound repaying capacity. It indicates a responsible borrower with a higher disposable income and fewer obligations thereby raising one’s chances of gaining loan approval.
What is the Impact of FOIR on Your Home Loan?
Every bank or financial institution evaluates the financial profile of Home Loan applicants prior to approving loan applications. This assessment is conducted based on specific important considerations, one of which is the FOIR. Such verifications enable lenders to understand the applicant’s monetary situation and his/her ability to manage a housing loan. Since Home Loans are high-ticket commitments, they extend over many years. Establishing the loan repayment capacity of a borrower allows lenders to analyse the risks involved in lending credit.
How to Calculate FOIR in a Home Loan?
The FOIR calculation formula is simple and may be computed using the equation given below:
The monthly debts of an individual normally include loan EMIs, credit card bills and other forms of credit. The sum of these debts is first divided by the net monthly income and then multiplied by 100 to arrive at the FOIR.
So, FOIR = [Sum of existing fixed liabilities / Monthly income] x 100
For example, Asha draws a salary of Rs.50,000 per month. Her regular expenses each month are Rs.17,000 and she pays an EMI of Rs.8,000 for a personal loan. Using the above formula, her FOIR will be 50%.
FOIR = [(17,000 + 8,000) / 50,000] x 100 = 25,000 / 50,000 x 100 = 50%
If Asha were to apply for a Home Loan, the EMI amount should ideally be less than this 50% so that she can repay the loan comfortably.
Why is FOIR Calculation Essential?
Let’s suppose that Asha, who has a FOIR of 50%, and another applicant Vinod, who has a FOIR of 65%, both apply for a Home Loan. It is very likely that lenders may extend the loan to Asha rather than Vinod. The latter would not be favoured due to a high FOIR which demonstrates lesser disposable income for making loan repayments. In contrast, Asha with a lower FOIR will have more funds available to repay the debt, raising her chances of loan approval.
Importance of FOIR for First-Time Home Loan Borrowers
Maintaining a moderate FOIR makes it easier for first-time loan borrowers to manage the EMIs with their savings, instead of looking for additional ways to arrange funds. Lenders place more faith in applicants with smaller FOIR as they are economically better placed to pay back the loan.
Effective Ways to Reduce FOIR
If you find your FOIR to be on the higher side, you can reduce it by following the techniques mentioned here:
- Co-apply for a housing loan with a working member of the family who possesses a good credit score. Your combined income will decrease the FOIR.
- Maintain a healthy credit history with timely repayments.
- The credit utilisation ratio, which is the ratio between your credit amount to the maximum available credit, should be restricted to 30%.
- Avoid taking up multiple loans to retain optimal funds for handling EMI pay-outs.
- Do not change jobs frequently over a short span of time.
Once you understand the importance of FOIR and the factors that can affect it, aspiring housing loan borrowers should calculate their FOIR and, if necessary, improve it before they approach lenders for a Home Loan. Most importantly, they must possess a flawless credit history which can single-handedly bring down the FOIR. This will enable them to avail of a housing loan of the desired principal amount along with suitable terms and conditions.
*Terms and conditions apply.
Frequently Asked Questions
The ratios that can influence your Home Loan eligibility include the loan-to-value ratio (LTV) and fixed obligation-to-income ratio (FOIR). Lending institutions usually consider these ratios as deciding factors for approving loan applications as it allows them to analyse an applicant’s repayment capabilities.
An ideal FOIR ratio can range from 40% to 55%, which is usually considered as decent for getting a loan application approved.
Usually, the ideal FOIR requirement for the majority of financial institutions ranges between 40% and 55%. However, this range can vary depending on the applicant’s financial background.
