Lenders consider several factors while evaluating home loan applications. Home loan applicants failing to match any of the eligibility criteria may fail to get their home loan application approved. Here are some of the major reasons for home loan rejection:
Poor credit score: Credit score is a numerical representation of an individual’s creditworthiness. It denotes how one has managed his or her debts in the past. Credit scores of 700 and above usually indicate disciplined credit behaviour and lower chances of loan defaults. This leads the lenders to use credit score as one of the first filters for evaluating home loan applicants. As part of their risk-based pricing strategy, many lenders also factor in the credit scores of their home loan applicants while setting their interest rates. Thus, applicants having higher credit scores have higher chances of loan approval and at increasingly lower interest rates while applicants having poor credit scores have higher risk of home loan rejection or are charged higher interest rates by the lenders to compensate for the higher credit risk associated with such applicants.
Tips: Ensure to repay your EMIs and credit card dues by their due dates. Also fetch your free credit reports from the credit bureaus or online financial marketplaces at least once a year. Report the errors or misinformation, if any, to the concerned lender or the bureaus for rectification. A rectified credit report may improve your credit score.
Age of the applicant: Most lenders usually cap the maximum age limit for making home loan applicants at 60 years. Additionally, most home loan lenders usually require their borrowers to complete their home loan repayment by the age of 70 years. Thus, home loan applicants nearing their retirement age, with inadequate repayment capacity to complete their EMI repayments by the age of 70 years, have lower chances of loan approval.
Tips: Applicants nearing their retirement age can include their working children or spouse as a co-applicant to increase their home loan eligibility. Alternatively, they can make and/or higher EMI to reduce the risk of home loan rejection.
Low repayment capacity: Lenders usually prefer home loan applicants whose total monthly loan repayment obligations, including the EMI of their proposed home loans, remain within 50-55% of their monthly income. Thus, home loan applicants exceeding this ratio may have their loan application rejected or are required to make bigger down payments.
Tips: Applicants having low repayment capacity can opt for longer tenures, if possible, to reduce their home loan EMIs in such a way that their total monthly repayment obligations remain within 50-55% of their monthly income. Else, they should either make a bigger down payment to reduce their loan amount and thereby, their home loan EMIs, or add working family members as co-applicants to increase their home loan eligibility.
Job and/or employer’s profile: Lenders also consider the employer’s profile or occupation profile of their home loan applicants while evaluating their home loan applications. Applicants working with government/PSUs or reputed private sector companies have higher chances of loan approval due to their higher job certainty. On the other hand, home loan applicants employed with smaller companies, unlisted entities and new start-ups may have lower loan eligibility due to their low job certainty.
Tips: Applicants failing to get home loan approval from banks due to their occupation or employer profile can approach Housing Finance Companies (HFCs) for home loans. HFCs usually have less stringent home loan eligibility criteria than banks. Alternatively, they should visit online financial marketplaces to find multiple lenders open to offer them home loans based on their credit profiles.
Property related issues: As the property purchased or constructed through home loan proceeds acts as the primary security for any home loan lender, lenders critically evaluate the property’s title, location and age while evaluating home loan applications. Thus, home loan lenders reject loan applications for properties with unclear titles or violating the various regulations set by the local authorities. Lenders may also desist from approving home loan applications for old properties because of their lower saleability.
Tips: Make sure that your chosen property has a clear title and the necessary clearances from the local authorities before signing the purchase deal.
(An edited version of this article was printed in The Hindu)