Importance of fixed obligation to income ratio (FOIR)

June 5, 2020 . Financial Planning . 10 min read

When applying for a home buying loan, FOIR is one of the essential things that will be assessed for first time home buyers. Before sanctioning a loan, all banks and financial institutions ensure whether the borrower has the ability to repay the amount they are willing to borrow. So, what exactly is FOIR and what does it mean? Read on as we demystify it for you.

What is FOIR?

The FOIR is an abbreviation for fixed obligation income ratio. Banks and financial institutions have certain crucial criteria that must be met by loan applicants before a loan can be granted to them. FOIR is one of these terms, and some consider it the most important. It is a method that banks, and financial institutions use to calculate whether an applicant has the capacity to pay debts taking into account the applicant’s income and fixed monthly obligations such as taxes, provident funds, other loans and, in some cases, rent.

How is it calculated?

FOIR is one of the top ways in which banks decide whether someone is a good candidate for a loan. This means that, this is one of the parameters used to decide whether someone is capable of paying a loan back.

FOIR = [Summation of Existing Fixed Obligations / Monthly Income] x 100

Let’s take an example. Let’s say Sonia has a salary of Rs 50,000 per month. Her monthly living expenses are Rs 20,000 and she has an EMI of Rs 5,000 per month for an education loan. Using the above formula her FOIR will be 50%. So the potential EMI amount for the proposed loan that the applicant is asking for would have to be less than this 50% in order for them to be able to pay the loan back comfortably.

How is it important to a first time home buyer?

Having a lower FOIR means that it would be easier for you, as a first-time home buyer, to pay back your EMIs. Since your monthly obligations will be lower, the remaining savings could be dipped into for paying off the home loan. This is crucial to first time home buyers, since in this case you will be able to quickly pay off your home loan without any hiccups and without having to look for additional ways to arrange money to clear the home loan. For this reason, banks also have more trust in an applicant with a lower FOIR since it means that the applicant’s financial capacity to pay back the loan is sound.

Why is FOIR calculated before granting a loan?

It is important to consider FOIR before granting a loan. This helps banks assess who the more trustworthy candidate is in terms of loan repayment ability. Banks are always concerned about recovering their loans. Let us take another example. In the above example Sonia has an FOIR rate of 50%.

Another applicant, Aryan has an FOIR of 75%. Banks would not consider Aryan a good candidate for the loan repayment since his high rate of FOIR means that he has less income that can be dedicated to loan repayments. This would mean the chance of approval is lower since his capacity to repay the loan is lower. However, on the other hand, Sonia has higher income that can be dedicated to loan repayments. Thus, her capacity to repay the loan is higher and therefore her chances of getting that loan approved are also higher.

What is the rate of FOIR that banks in India consider while granting a home loan?

While the margin for Fixed Obligations to Income Ratio differs from lender to lender and varies in each scenario, banks in India usually consider 40 – 60% of income as the required FOIR of an individual for loan eligibility. It also depends on the level of income of the applicant since we cannot equate FOIR of a person with an income of ₹60,000 and that of ₹1,20,000.

What is the rate of FOIR that HomeCapital considers?

HomeCapital considers 65% of income as FOIR. This makes it easier for young, first time home buyers. They can apply for home down payment assistance without having to worry too much about their FOIR and can make their dream of owning a home come true.

How can a person improve their chances of getting a loan in case they have a high FOIR?

Some ways to boost your chances of getting a loan are:

  • Clearing existing loans – This would help your FOIR rate to decrease and your chances of home loan approval will be higher.
  • Joint loans – This can help you raise your eligibility for a loan since you will be supported in paying back the loan with a co-applicant who is a working professional. 

All in all, it is important for first time home buyers to calculate their FOIR and in case of a higher rate, find ways to lower it. This will make their home buying dreams come true sooner.  

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