Maintaining financial stability and keeping one’s debt situation under control is important to ensure mental peace. Banks and financial institutions closely analyse applicants’ financial stability through a key metric called the Fixed Obligation to Income Ratio (FOIR).
What is FOIR? What is the FOIR calculation formula or how is FOIR calculated? What impact does FOIR have on home loan interest rates and other loan terms and conditions? This article answers these important questions.
What is FOIR?
FOIR full form is Fixed Obligation to Income Ratio. Also often referred to as the debt-to-income ratio, FOIR is one of the most accurate metrics that allows financial institutions and credit information agencies to assess the creditworthiness and repayment capacity of a loan borrower. FOIR is essentially the portion of your total monthly income going towards the repayment of debt in the form of loan EMIs and credit card payments, alongside other fixed financial obligations, such as rent, taxes, and PPF.
FOIR gives borrowers a clear picture of whether or not they will have sufficient funds left after covering existing financial obligations to afford a new loan and its EMIs. A low FOIR indicates few financial obligations and consequently, a high disposable income and higher affordability in terms of another loan. On the other hand, a high FOIR is indicative of low affordability and the ability to afford additional EMIs.
FOIR Calculation: How is FOIR Calculated?
Calculating FOIR is fairly easy. One can calculate FOIR using the following FOIR calculation formula:
FOIR = (Current fixed monthly financial obligations/ Gross monthly income) x 100
Follow these steps to calculate FOIR.
- To start with, add all your fixed monthly financial obligations. This must include your loan EMIs and credit card bills as well as other fixed financial obligations.
- After this, calculate your gross monthly income. While calculating your gross income, do not forget to include income from additional sources, such as income from rentals, or any side business you have.
- Finally, use the formula to calculate FOIR.
FOIR and its Impact on Housing Loans
As previously mentioned, FOIR is one of the key metrics that allows financial institutions to correctly assess a loan applicant’s ability to afford and repay loan EMIs. A high FOIR indicates low disposable income and high reliance on credit. On the other hand, a low FOIR indicates high disposable income, high affordability, and high repayment capacity. Here’s how having a low FOIR helps housing loan applicants.
Individuals with low FOIR are people who understand financial management and have a responsible attitude towards it. These are people who keep their debt-to-income ratio low so that they can repay debt responsibly and without defaulting. Individuals with a low FOIR are seen as reliable borrowers who will make every attempt to avoid financial stress. Therefore, such individuals have high home loan eligibility. Securing housing finance is easy for such individuals. Further, they have high negotiating power. In simpler words, their ability to demand a lower home loan interest rate to ensure ease of payment is much higher than someone with a high debt-to-income ratio. They can also easily ask for higher loan sanctions and longer repayment periods to make the process of loan payment entirely stress-free.
Handy Tips to Help You Improve Your FOIR
If you do not have the ideal FOIR for a home loan, do not worry. Credit users can do a few simple things to improve their FOIR and establish eligibility for housing loans on the best possible loan terms and conditions. Here are a few ideas on how to improve FOIR.
- One of the easiest ways to reduce FOIR is to pay off some of your debt. If you have a credit card that has accumulated a massive bill or a loan that will be easy to pay off, pay it off to increase your negotiating power and secure the most profitable deal.
- If your FOIR is high, consider increasing your income. Loan applicants must include income from all sources, such as rental income, business income, income from bonuses, and sale of shares.
- You can try reducing your fixed monthly expenses. For instance, if you are on a rental, you can consider shifting to a more affordable rental home to reduce your fixed monthly financial obligations. This will help you reduce FOIR.
Final Words
When you apply for a housing loan, know that your lender will check your FOIR, and having a FOIR below 40% will not only allow you to secure housing finance quickly but also secure the loan on the best possible loan terms and conditions.
