Priya Agarwal, a young, upwardly mobile professional, working with a top retail company, had applied for a home loan. Having a decent salary and repaying capacity, she was confident that her application would be cleared within days. However, she was baffled when her loan application was turned down.
On questioning the decision, she found out that the reason for rejection was that she had failed to pay some of her credit card bills on time. Unfortunately, for Priya, this rejection might prompt other banks to take a similar decision, since it would be considered a red flag in her credit report. Had she taken the trouble to check her credit rating before applying for the loan, she would have saved herself this trouble.
To help potential home loan customers avoid a similar fate, here’s a list of some of the grounds for home loan rejection.
Stability quotient
The first factor that banks consider is the repayment capacity of the borrower. If the borrower’s salary package is not adequate, the loan application might be rejected. Other assets, such as property or fixed deposits, are also taken into consideration while ascertaining the financial stability of the borrower. Apart from this, banks factor in a customer’s job stability. Changing too many jobs reflects poorly on the home loan application. Banks consider job stability as an important criterion for approving a home loan.
High level of debt
If you are servicing any other loans, these are also taken into consideration, since they will have a bearing on an individual’s repayment capacity. If an applicant already has debts that need to be repaid, and if according to the lender’s analysis, his/her repayment capacity seems inadequate, then the loan application might be rejected.
Being a Loan Guarantor
One also needs to be careful before agreeing to act as a guarantor for another person, as it can sometimes prove to be risky for you, especially when you yourself need a loan. This is because any default by the original borrower will also affect a guarantor’s score, and can lead to loan rejection. Thus, you need to be completely sure of the repayment capacity of the borrower, before becoming their guarantor.
The same logic applies while applying for a joint loan. Make sure that your co-borrower has a good credit score before you decide to join hands.
Applicant’s age
The age of the borrower is a crucial factor and most banks ensure that all the EMIs can be paid by him/her during the earning phase. Lenders avoid sanctioning home loans to applicants who are close to their retirement age. This is because after retirement, the applicants will have limited or zero repayment capacity. However, some banks may be willing to offer short-term home loans. Short term loans for big amounts would lead to a really high EMI which may not be financially comfortable for all.
Credit Score/ Credit History
Credit history plays an important role in evaluating loan applications. If a borrower has defaulted on servicing previous loans, his current loan application is likely to be rejected.
You should ensure you have a good credit score when you apply for a loan. Any bank, when it gets a loan or credit card application will pull out the individual’s credit score which is available with the credit bureaus. If your credit score is too low, then your home loan will be rejected.
Discrepencies in Credit Report
Despite having a clean credit history, lenders can reject your home loan application due to an error in your credit report. Therefore, it is important for all potential home loan borrowers to check their credit reports before applying for a home loan.
While defaults lead to serious repercussions, a good report—and, hence, a good credit score—can help you land a sweeter loan deal.
Incomplete Documentation
Accurate documentation is an integral part of the approval process, failing which your home loan can be rejected. You must furnish all the documents as mentioned in the application form. The bank exercises due diligence to determine if the title of the property and related documents are in order since these guarantee the legality of a project.
Property Details
Properties that have a good resale value, stable price, are in demand and are easy to sell, are preferred by lenders. Hence, while choosing your property, do not go for something too old. It is also advisable that the property is constructed by a reputed and trusted builder.
These checks not only safeguard the bank’s interest, but also protect borrowers from legal hassles.
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