What is FOIR and How It Affects Your Loan Approval
What is FOIR and How It Affects Your Loan Approval
In the personal finance domain, it is important to learn about the inner workings of the loan process.
One important factor for lenders, amongst others, is the Fixed Obligation to Income Ratio (FOIR).
FOIR, put simply, is a measure of an individual’s ability to service their monthly debt obligations
with respect to their income, and is an important factor to determine loan eligibility and the interest
that would be offered.
Before we understand the role of FOIR in loan approval process, let’s explore what is FOIR and
how it is determined.
Understanding FOIR
The Fixed Obligation to Income Ratio (FOIR) is a financial measure that has many corollaries, or in
plain language, it is used to compare an individual’s monthly debt payments with their income.
FOIR is an important consideration for lenders in the decision process on loans.
The foundation of FOIR is so important in loan approval and interest rates.
Not sure how FOIR affects loan eligibility?
Relax! We got you covered.
Lenders will typically have some FOIR limit they can be “comfortable” with and set their own
limits for different types of loans. If you have exceeded a lender’s FOIR limit, you may not get
approved, or the loan’s terms will be not be proposed to you in a favorable type-period loan, larger
loan amount, or higher interest rate.
Effects of High FOIR on Loan Approval
Let’s further explore into understanding FOIR and its impact on loan approval and risk
mitigation. An elevated FOIR, which indicates debt expense constitutes a sizable length of your
income, can drastically affect the probability of the approval for a loan. Lenders often exercise more
caution in determining if they will lend to someone with an elevated FOIR due to the greater
expectation of default.
FOIR Limits Provided by Lenders
Many people these days are avoiding loan burden with FOIR. Lenders tend to also establish
ranges of FOIR levels they deem acceptable for different types of loans. Depending on the loan type
(i.e., mortgage, auto loan, personal loan), the lender’s appetite for risk, and economic conditions,
these levels may differ.
For example, lenders may be more stringent about acceptable FOIR levels for mortgages, as they
are inherently riskier types of secured debt. The opposite may be true with a smaller type of loan,
such as a personal loan.
Calculating Your FOIR
When calculating FOIR for loans right, first of all collect your financial documents. This includes
your income slips, credit card statements, loan statements, and any other document that notifies
recurring life expenses. Once done, note down your monthly income from various sources like rent,
salary, etc. and your monthly debt be it rent, car loan, credit card payments, or any other recurring
payment.
Tips to Calculate FOIR Accurately
❖ Include all income sources. Be it any part-time income, freelance payments, or investment
income!
❖ Think about average monthly expenses and if your expenses vary, calculate an average
monthly number or amount to stabilize accurate representation.
❖ Be mindful of the underlying costs. Insurance premium costs, property taxes, subscription
fees, etc. need to be part of your recurrent life cost.
❖ Use budgeting tools! There are online budgeting tools that may help to keep a good running
record of your monthly income and expenses.
Once you have your FOIR, you can use it to determine a reasonable loan size. The rule of thumb is
to target a total debt-to-income ratio (DTI) of 43%.
Know the difference between Flat Interest Rate vs IRR
How to Improve Your FOIR?
If your FOIR is higher than you would like, there are a number of options you may consider to help
improve your FOIR:
❖ Pay Down Debt – Address paying down any debt you have that has a high interest rate like
credit cards; consider debt consolidate or refinance to try to obtain lower interest rates.
❖ Increase Your Income – Think about increasing your income like asking for a promotion at
work, finding a side gig, or having a conversation with your employer to get a pay increase.
❖ Refinance Any Loans – If any of your loans allow it, check to see if you can refinance, to
try to lower what you are paying.
❖ Talk to Your Creditors about Payment Options – If you can, talk to all creditors about
the possibilities of reducing interest rates, or even extending repayment terms.
Conclusion
For responsible borrowing, it is important to understand FOIR. Learning about how FOIR is
calculated and the affect it has for loan approval can help you make responsible decisions for your
financial future. Keep in mind to also think about other factors in addition to your FOIR
calculations, factors such as credit score, income stability, and other potential obligations.
If you are not sure about your FOIR or if you seek some guidance on how to improve your financial
future, a financial adviser could be of value to you. The more started you are with being proactive
in your process in managing your finances and in determining how to improve your FOIR, the
better your odds are of qualifying for a loan or of qualifying for more desirable terms of a loan that
will get you one step closer to reach your financial goals.
