Meaning and Importance of Fixed Obligation to Income Ratio(FOIR)
Source: HomeCapital
The capacity of a creditor to repay a loan is the first and most important thing considered when applying for a loan. FOIR will help borrowers quickly gauge that a homebuyer should be able to afford the prospective loan's EMI for all of their expenses.
The FOIR is an abbreviation for fixed obligations to income ratio. Banks and financial institutions have some basic requirements that loan borrowers must meet before they can be given a loan. FOIR is one of those words and some consider it to be the most relevant. Lenders use it to determine that a borrower can cover expenses, taking into account the borrower 's revenue and fixed recurring commitments such as wages, provident funds, other loans, and leases. It's sometimes called the debt-to-revenue ratio.
FOIR is one of the easiest places for banks to determine whether anyone is a successful loan candidate. This means it's one of the factors used to determine whether anyone will pay back a loan. The formula for FOIR is equal to the Summation of Existing Fixed Obligations divided by the Monthly Income multiplied by 100.
Having a lower FOIR means it would be easier for you to pay back your monthly EMI, as a first-time homebuyer. Because your financial expenses would be smaller, you might dip into the remaining funds for paying off the home loan. This is important for first-time homebuyers because, in this situation, you'll be able to pay back the home loan easily without hiccups and without scrambling at different ways to find funds to clear the home loan. For this reason, banks tend to lend to people with a lower FOIR, because it means the financial ability of the borrower to repay the loan is sound.
Consideration of FOIR before awarding a loan is important. This lets banks decide who is the most appropriate candidate for the willingness to repay loans. Banks are always concerned about their loans being paid back. While the margin for fixed income bonds differs from lender to lender and varies in each scenario, banks in India usually consider 40 – 60 percent of income as an individual's required FOIR for eligibility for loans. It also depends on the applicant's level of income, as we can not match a person's FOIR with an income of INR 60,000 and INR 1,20,000.
HomeCapital estimates FOIR to be 65 percent of income. For young, first-time home buyers this makes things simpler. Before needing to think so hard about their FOIR, they can apply for a home down payment assistance and can make their vision of buying a house come true.
Any forms to improve the odds of securing a loan are Clearing current loans – That will help to lower the FOIR score and increase the chances of accepting home loans. Joint loans – This will help you increase your qualifications for credit because you will be helped in repaying the loan with a co-applicant. However, make sure the co-applicant is a competent working person and not a friend, relative, or sibling.
Therefore, it is important that home buyers calculate their FOIR for the first time, and find ways to lower it in case of a higher rate. That will earlier make their home buying dreams come true.
