When Amit Guha, a 42 year-old financial analyst, applied for a home loan, he was pretty sure he would get it. After all, he had a good job and a decent financial history — there was nothing to worry. But he was surprised to find out that the bank had rejected his home loan application. What went wrong? This is a question that many struggle to answer because apart from having a clean financial record and a stable income, there are many other factors that play out when banks decide to accept or reject home loan applications.
Home loan is a long-term finance product with repayment tenures, often ranging from 10 to 20 years. Banks and financial institutions, due to such long repayment periods, follow a strict approval process to evaluate the repayment capacity of borrowers, which often leads to cancellation of home loan applications. However, doing a bit of homework before applying for a home loan can help safeguard your application from being rejected.
The first thing to consider is your credit score. If you have never bothered to check your credit score, you should do it right now. In the case of loans, the credit score of an individual is increasingly becoming crucial these days, as it is a prime determinant of whether a loan will be approved or not. There are several websites available, where you can assess your credit score, for instance, CIBIL. No matter which route you take, make sure your score is 700+ before applying for a home loan. Anything below 700 will automatically get your home loan application rejected. Besides credit score, there are a variety of other factors that influence the decision of lenders. Here’s a list of the most important factors that lead to rejection of home loan applications.
Most banks have an upper capping of 60 years on the age, after which, applications are not allowed to enter a home loan agreement. Moreover, lenders also want the repayment of the loan to be completed within 65 years of age. So, those entering an agreement at a later stage will have limited time for repayment, which might hike the EMI amount considerably if the down payment is on the lower side. Thus, applicants nearing their retirement age, without other sources of income to justify the EMIs, often face a high risk of rejection. In such cases, a high down payment, or roping in employed family members can improve the chances of loan approval.
Today, it is common among youngsters to frequently change jobs for better income and career prospects. This can, however, adversely affect credit approvals. Banks and rating agencies consider job-hopping as a sign of instability, and hence, such people are considered less creditworthy. Salaried professionals, especially, should time their home purchase smartly. It would be wise to avoid job changes within three to four years of the target date of purchase. That would minimize the chances of rejection.
Fixed Obligations to Income Ratio
Fixed Obligations to Income Ratio (FOIR) is basically the proportion of income that goes towards servicing existing loan repayments, and other fixed obligations like family expenses, insurance premiums, etc. Usually, banks prefer the FOIR to remain within 40% to 50% of the total income of a borrower. Those exceeding the 40% to 50% level, including the EMIs for the new home loan, have lesser chances of approval. To get approved, try paying off your older dues before placing the home loan application.
The Employer and Job Profile of the Applicant
Banks and financial institutions take into account the job profile and the employer of a borrower to ensure certainty. Home loan applications of those working with not so reputed companies tend to get rejected. Even if the bank agrees to finance, they might keep a greater spread on the interest rate to minimize the risk factor. The applicant’s job profile also plays a crucial role in loan approvals.
Guarantee for Other Loans
Any loan guaranteed by you will also affect your loan approval. Defaults in a loan for which you are a guarantor, will reduce your credit score, and heighten the chances of your application getting rejected. Standing as a guarantor for someone will also hit your credit eligibility. For instance, if you are eligible for Rs.40 lakh, but you are already a guarantor for a loan of Rs.10 lakh, your loan eligibility will be decreased by the outstanding amount guaranteed by you.
The above-mentioned factors determine how a home loan application might turn out for you. Usually, the conventional methods of saving hard, paying off your previous dues in time, and setting realistic property goals will help you see your home loan application getting through without much hassles. But if you’re still unable to figure out the real cause of a loan rejection, it’s always advisable that you take up the issue with your bank. In some cases, they may be willing to rethink their decision.