Why Home Loans Get Rejected?
Some of the reasons for which a lender can reject your home loan application are:
1. Missed or late credit payments
Before approving a home loan application, lenders check your credit history. In the credit report, they check whether the past loan payments or credit card bills were paid on time or not. How punctual you are with your credit payments reflects how responsibly you can handle credit in future. Therefore, it is necessary to never miss deadlines on credit payments.
2. Error in the 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. Request credit reports from all credit reporting bureaus (TransUnion CIBIL, Equifax, Experian and CRIF Highmark) as at least once in a year. Study each of them carefully and if you find an error, get it immediately corrected.
3. Applicant’s age
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, there are also lenders from where you can get short-term home loans. Availing such loans for big loan amount would also mean paying high EMIs, which may not be financially comfortable for all.
4. Unstable employment
Applicants who frequently change their jobs are not considered reliable by lenders. Stable employment, on the other hand, is more ideal for lenders as it ensures timely loan repayments. To be eligible for a home loan, lenders prefer applicants to have employment history of at least one year in the current organisation.
5. Delay in repaying loans you guaranteed
The loans that you guarantee for your family or friends too affect your credit history. You might have been punctual with all your credit payments but if they do not pay their loan installments on time, it will reflect in your credit report. Also, if the borrower defaults, lenders will hold the loan guarantor for repaying the loan. Therefore, you should be a guarantor only when you are confident that the borrower will pay their loan installments timely.
6. Unsatisfactory employer profile
Though you may have a good income but the profile of your employer also impacts your prospects of getting a home loan. Applicants working in MNCs or well-known companies have more chances of getting home loan application approved as compared to applicants working for barely funded start-ups. This is because there are more chances for a start-up to close due to a financial turmoil than a well-established enterprise.
7. Issues with the property
Home loan is a secured loan. This implies that to avail the loan, borrowers will have to pledge property as collateral to lenders. But lenders do not accept all types of residential properties as security. They prefer properties with a good resale value as they are easy to sell if the need arises. The property should not be too old and situated in a good location. Also, make sure that the property has clear title and you have all documents related to it.
8. Multiple loan rejections
When you apply for a loan, the lender enquirs for your credit history, which reflects in the and Credit bureau CIBIL also records incidents of loan application rejections. Such incidents become a part of an applicant’s credit record. Therefore, the applicant must check their credit score at one bank before they apply to another. This allows the applicant to correct their mistakes and make sure there are no reasons for rejection of loan application because of a similar mistake while applying the next time.
9. Unapproved Builder
Before approving a home loan, lenders also ensure that a reputed and trusted builder has constructed the property. You cannot get the loan if the lender does not approve of the builder. Therefore, when looking for a property, ensure that it has been constructed by a RERA approved real estate developer/builder. To increase the chances of home loan approval, you may apply for loan against the bank’s list of pre-approved properties.
10. Unapproved Property
Even if your lenders approve of builder, they may not approve the property. There can also be cases wherein particular phases of a project may not have bank approval. To avoid such home loan rejections, check that the real estate developer/builder and the entire housing project (including its different phases) have the necessary bank approval.
11. Incomplete or incorrect documents
A home loan is sanctioned mainly on the basis of the documents you submit. If the documents required for home loan are incorrect or incomplete, the lender may reject your loan application. Therefore, it is important for applicants to furnish all documents when submitting the home loan application form.
12. Low repayment capacity
Low repayment capacity of an applicant is one of the home loan rejection reasons. The lenders would evaluate your loan to income ratio to assess if you can comfortably pay your loan installments in time or not. If you are already servicing too many credit payments or have other financial commitments, your loan repayment capacity will decrease, lowering your chances of getting home loan approval. Ideally, your loan amount including the future home loan should not be more than 50% of your income. If your loan to income ratio is more than half of your income, then lenders might not approve your home loan application, considering you are over burdened with debt.
In such cases, you can apply for joint home loan. Your spouse or children can be the co-borrowers.
What if my home loan application is rejected?
If your home loan application is rejected, you can take the following steps to increase your chances of home loan approval:
Pay off outstanding dues
Not paying your dues on time not only decreases your loan repayment capacity but also shows your careless behaviour towards credit repayment. To increase your chances of home loan approval, borrowers must pay off their outstanding debts as soon as possible. Doing so reduces your debt-to-income ratio and increases your loan repayment capacity. With an increased repayment capacity, you can take loan of a bigger amount and buy better property.
Improve your credit score
Poor credit score reflects how bad you have handled your credit in the past. It may lead to home loan rejection or at a higher interest rate. A good credit score, on the other hand, will increase your chances of getting home loan approval that too at lower interest rate and better terms and conditions. To improve your credit score:
- Pay your loan installments and credit card bills on time
- Keep your credit utilization ratio below 40%
- Do not close unused credit card accounts
- Do not apply for new credit unless necessary
- Check your credit report from all credit bureaus to avoid errors
Suggested Post: What are the different ways to improve your credit score?
Mortgage high-value property
As per RBI guidelines, lenders can finance 75% to 90% of the property value, depending on your repayment capacity and loan amount. So, if your home loan application was rejected due to insufficient income or low repayment capacity, you can try mortgaging a property that has high current market value (if you already own one or more high-value properties).
Apply for joint home loan
If your income is insufficient, apply for home loan with your earning spouse or earning as co-applicants. Applying for home loan jointly increases your home loan eligibility. In such cases, lenders consider the income and credit score of both the loan applicants when evaluating the home loan application.