10 reasons why a home loan application may be rejected
Purchasing a home is one of the biggest financial decisions we can make in our lives. The dream of becoming a home owner can be fulfilled with the help of a home loan. Even before you finalise your dream home, you must conduct extensive research regarding the different types of lenders (banks and housing finance companies), the interest rates and types (fixed or floating interest rate), and so on. Since a home loan is a crucial loan that can last for over 2 decades, you must also take all the precautions to ensure your home loan is not rejected. Here are 10 of the most common reasons for home loan rejection that you should be aware of, if you intend to take a home loan.
- Borrower’s age during the time of the application: There are two basic scenarios why a home loan application gets rejected; if the borrower is a freshly employed or if his age is close to retirement, when he applies for the home loan. Lenders are often hesitant to approve loans for such individuals since they can’t accurately assess the borrower’s repayment capacity. While a fresher typically has a lower income, an individual who is close to retirement may not have the capacity to repay the loan, when his sources of income diminish.
- Unstable employment: As we mentioned above, home loans generally last for very long tenures. It comes with long-term responsibility. Frequent job changes, with periods of unemployment, can affect your home loan eligibility. You need to be employed for a minimum, continuous period of three years with the current employer for your home loan to be approved. If you are employed for a longer period of time, the lender has the guarantee that you have the repayment capacity to pay off the loan within the stipulated tenure.
- Low Credit Scores: No matter what type of loan you intend to take, lenders today ask for your credit report even before you can apply for the loan. Lenders can check your credit history and worthiness with the help of your credit score. You need a good credit score of over 750 points for your loan to be considered. Your credit scores are affected if you default on paying your credit card bills or your existing loan EMIs. These factors can indicate to the lender that your credit repayment behaviour is not ideal.
- Low loan to income ratio: This is another common home loan rejection reason. You have to inform your lender of the other loans taken, including your car loan, a two-wheeler loan, a personal loan and so on. This helps the lender evaluate your loan to income ratio. The total loans taken by you, including the home loan, if approved, should not exceed 50% of your monthly income. Lenders often reject home loans if the loan to income ratio exceeds half your monthly income. However, you can apply for a home loan as a joint loan by including your family income (income form spouse and children) for it to be approved.
- Failure to file income tax: Filing your income tax returns, year on year is very crucial as this could prove to be a crucial reason for home loan rejection. You must file your income tax even if you are not provided Form-16 by your employer. Lenders check your tax filing records of a minimum of 3 years, before they approve your home loan.
- 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. Your home loan application gets rejected if you fail to do so. Also, ensure you avoid providing any false information since that could affect your approval rate.
- Unapproved property: Lenders often verify if the property taken on loan is approved by local bodies. In case the property is unapproved, or if it fails to adhere to certain guidelines as prescribed by local authorities, the loan can be rejected. Furthermore, lenders are often hesitant to provide loans for purchasing older properties as they do not typically have good re-sale value.
- Lender doesn’t approve the builder: There could be situations when you may have an approved property but your lender doesn’t approve of the builder. Home loan rejections are common in such scenarios. Therefore, you must check with the lender about the list of builders approved by them before applying for the loan.
- Loan applications rejected previously: As we mentioned above, banks ask you to provide your credit report. The credit report comprises a complete record of your previous loan applications, including those that are rejected. It is therefore better to know your results from one bank before you apply to another for a loan. This will help you correct you mistakes and ensure you do not repeat the same, when you apply for the loan a second time.
- Serving as a guarantor to a defaulter: Also included in the home loan rejection reasons is serving as a guarantor to a loan defaulter. You must be extremely careful before you decide to be a guarantor to anybody as it can sometimes prove to be risky for you, especially when you yourself need a loan. You need to be completely sure of the repayment capacity of the borrower before becoming their guarantor. Do not sign up to be a guarantor for a borrower you do not know. If the borrower fails to repay his loan, you are not only held responsible and made to pay the remaining loan amount on their behalf, but it also affects your own credit behaviour.