What is FOIR? Understanding Fixed Obligation to Income Ratio for loans - Loan Trivia

## Thursday 18 July 2024

In this diversified world of banking and finance, some metrics play an important role towards understanding the financial stability of individual borrowers. FOIR is one such metric. Understanding FOIR in home loans is crucial to increasing the chances of loan approval. Potential borrowers can read on to learn about FOIR, how to calculate it, its importance and so on.

What is FOIR (Fixed Obligation to Income Ratio)?

FOIR stands for Fixed Obligation to Income Ratio. It is a financial instrument that lenders use for determining the repayment ability of a borrower considering their monthly income and expenses. There is however no fixed FOIR value. The value varies from one lender to another depending on their loan eligibility.

However, the majority of lenders have high FOIR limit that depends on the loan type and risk tolerance of lenders. Conversely, a low FOIR means that lenders need to improve the loan terms and approval. Thus, every lender assesses the credit history, assets and sources of income of individual borrowers to measure the risks associated with lending money.

How is FOIR calculated?

FOIR calculation is easy and hassle-free. Here is the formula to be used for FOIR calculation:

FOIR = (Total Monthly Loan Obligations/Gross Monthly Income) *100

Total monthly loan obligation is calculated by adding up all financial expenses monthly including credit card payments, existing EMIs and other financial obligations. Gross monthly income, on the other hand, is the total income before deductions that considers business income, real income, salary and others.

Importance of FOIR calculation in loan approval

FOIR calculation plays an important role in loan approval. Thus, both lenders and borrowers must consider this. Here are the reasons stating the importance of FOIR calculation:

1. Assessment of risk

FOIR calculation lets lenders understand the financial condition of borrowers. A high FOIR implies a borrower’s monthly income allocation to several obligations that might raise the chances of risk of default. However, a low FOIR reflects the borrower as a risk-averse individual.

1. Eligibility of loan

FOIR ratio helps to determine whether an individual borrower qualifies for a loan. A low FOIR raises the chances of loan approval while a high FOIR poses a chance of loan rejection.

1. Responsible borrowing

Maintaining a standard FOIR value reflects the financial stability of the borrower. This thereby also encourages individuals to avoid taking more debt compared to their income.

How to improve FOIR?

It is essential to improve FOIR for well management of finances and loan security. Here are the tips to follow to improve FOIR:

1. Pay off existing debt

The more the existing loans and credit card balance will be reduced, the lesser will be FOIR. To clear out debts, make necessary payments on time.

1. Lowering fixed monthly obligations

It is important to lower fixed monthly obligations by cutting down costs or opting for refinancing loans.

1. Raise income

Opt for a secondary source of income or other high-paid jobs to raise gross monthly income. Raising income consequently lowers FOIR value.

1. Avoid new loans

Avoid opting for any new loan or credit card if the FOIR value is high. Let existing obligations to reduced to opt for a new loan.

Many reputed financial institutions provide pre-approved offers to their existing customers. These offers are on financial products that include a home loan or loan against property. Entering name, contact details and email address lets one check their pre-approved offers hassle-free and conveniently.

To conclude, maintaining a healthy FOIR is of utmost importance. It will not only benefit the lenders but will also enable borrowers to make informed financial decisions and build a better and secured financial journey. Maintaining a healthy FOIR not only raises loan eligibility but also promotes financial stability. Thus, FOIR is one of the important financial parameters to consider during the loan approval process.