What is FOIR and How Does It Affect Your Home Loan?

When applying for a home loan, understanding how your financial obligations are assessed can help you better manage your loan application. One key metric in this process is the FOIR or Fixed Obligation to Income Ratio. This important ratio helps lenders evaluate your ability to repay the loan based on your existing financial commitments.

What is FOIR?

FOIR stands for Fixed Obligation to Income Ratio. It measures the proportion of your income that goes towards fixed obligations like loan EMIs, rent, and other recurring payments. This ratio is used by lenders to determine how much of your income is already committed, which affects how much additional loan you can afford.

How FOIR is Calculated

FOIR is calculated by dividing your total fixed obligations by your gross monthly income. The formula is:

FOIR = [Sum of existing fixed liabilities / Monthly income] x 100 

For example, if your total fixed obligations amount to Rs. 40,000 per month and your gross monthly income is Rs. 1,00,000, your FOIR would be:

FOIR = (40,000 / 1,00,000) x 100 = 40%

Why FOIR Matters

1. Loan Eligibility: FOIR is a key factor in determining how much loan you are eligible for. Lenders typically prefer a lower FOIR, as it indicates you have a manageable level of fixed obligations relative to your income. A high FOIR may suggest that you have a heavy debt burden, making you a higher risk for additional loans.

2. Interest Rates: A lower FOIR can make you eligible for better interest rates. Lenders may offer more favourable terms if your FOIR indicates that you have a comfortable level of financial stability and lower risk.

3. Loan Amount: Your FOIR directly impacts the loan amount you can secure. If your FOIR is too high, you may be offered a smaller loan amount to ensure that your repayment obligations remain within manageable limits.

How to Improve Your FOIR

1. Reduce Existing Obligations: One effective way to improve your FOIR is by reducing your existing fixed obligations. Paying off outstanding loans or credit card debt can lower your FOIR and enhance your loan eligibility.

2. Increase Income: Increasing your gross monthly income, through a raise or additional sources of income, can also help improve your FOIR. This makes a larger proportion of your income available for loan repayments.

3. Manage Expenses: Keeping your recurring expenses under control can lower your fixed obligations, improving your FOIR and strengthening your loan application.

Conclusion

Understanding FOIR is essential for anyone applying for a home loan. It helps you gauge how much of your income is committed to existing obligations and how it affects your ability to repay additional loans. By managing your FOIR effectively, you can improve your chances of securing a home loan with favourable terms and conditions.