Will the bank grant you a loan?

If you have applied for a home loan recently, you would have come across the term Fixed Income to obligation ratio? But, what does it really mean? What exactly does the bank look at? Are you meeting all the criteria’s that the bank has put forward? If you have similar questions, read on and you will have a better idea of things, the next time you walk into a bank for loans.

What is Fixed Income Obligation Ratio?

FIOR is a parameter that bank’s generally use to determine the loan seeker’s eligibility. As per bank’s eligibility criteria, the borrowers must limit all their fixed obligations, including the currently applying loan EMI to 50% of their monthly income. So, in other words, Say 50% of your income goes into maintaining your lifestyle, the Bank will see that, with the remaining 50%, are you able to repay all your obligations?

The policies or rules with which, the banks evaluate the loan seekers differs from one bank to another. But, there is a list of general criteria that each bank follows, while reviewing. This general criteria include:

  • Fixed and Variable income of the applicant
  • Age of the applicant
  • Qualification
  • Experience
  • The kind of organization applicant currently works in
  • Tax history
  • Assets and Liabilities
  • Outstanding loans
  • Tenure of loan

Hence, make sure that the next time you visit a bank for a loan you have all the above sorted.

Now, Fixed Income obligation Ratio is one of the ratios that banks calculate while giving loans. The other important ratios are:

  • Loan to value ratio
  • Installment Income Ratio

Loan to value ratio, help to determine the maximum limit to which a property can be financed. Banks generally restrict to finance 70-80% of the property. This limit is decided based on the credit repaying history and credit profile.

This is generally done because, the banks want to protect themselves from the property cycles (downturn). Which means that, if there is a downturn in the property market and if the loan seeker sells his property, still he will be able to repay the bank loan amount with the amount he received by selling the property.

Installment to Income ratio, helps to determine the eligibility of the person to repay a loan. So, banks decide an apt amount that the lender will be able to pay easily without defaulting. This amount that the borrower has to pay let him maintain his lifestyle, and his other obligations early.

Now,  Lets have a look at why Fixed Income Obligation Ratio (FIOR) is the most important part of the loan seeking process. FIOR includes all the fixed obligations that a  customer has to pay regularly on a monthly basis. The Fixed Obligations however, do not include statutory deductions from the salary like Provident Fund, Professional Tax and deductions for investment like Voluntary Provident Fund, Insurance Premiums, Recurring deposits etc.

How is FIOR calculated?

Say income of Mr. X a loan seeker is Rs 1,00,000 Per month.

His car loan instalment is 25000/-

T.V. EMI is 4000/-

Education loan: 21000/-

Proposed housing loan is 15000/-

FOIR = (25000+25000)=50000/100000=50%

Hence, FOIR is 50% i.e. 50% of the salary. Let’s say, the bank has a standard of 40% of FOIR. So the loan seeker can pay upto 20000, which is 40% of 50000. Thus, the bank grants a loan to the customer.As, the amount he has to repayis less than 40%

Now, the next time you go to a bank to seek a loan, you will be absolutely clear whether you would be granted a loan or not. And, before the banker tries to explain you about FIOR, you will know what it means!