Home Loan Rejection – The Many Reasons

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Find out why lenders reject Home Loan Applications.

Key Takeaways

• Lenders scrutinise your Home Loan application thoroughly before approving it.
• They may reject your loan application if they find any missing information or inconsistencies.
• Common Home Loan rejection reasons include low credit score, insufficient monthly income, unstable employment, incomplete documentation, etc.
• You can reduce your Home Loan rejection rate by fixing your credit score before applying or opting for joint Home Loans.
• Most lenders allow you to apply for Home Loans online through their websites.

Buying a property is an investment worthy of its name. Property rates increase with time, and you can build a valuable asset. Today, many banks and Non-Financial Banking Companies (NBFCs) offer Housing Loans to help you purchase a property of your choice. However, since a Home Loan is a long-term, high-value loan, lenders exercise caution while approving applications from prospective borrowers. In this article, we have listed the common reasons for rejection of loan applications and the steps you can take to ensure your Home Loan is approved.

Home Loan Rejection Reasons

The following are some of the reasons lenders give if they reject your Home Loan application.

1. Low Credit Score

   When applying for any loan, lenders check your credit score – a three digit summary that gives them insight into your credit handling and repayment behaviour. The score comprises your past and existing debt handling behaviour and whether you have repaid them on time (e.g., credit cards, other loans, etc.).

   Defaulting on repaying debts leads to a low credit score, causing lenders to deem you a risky borrower. Conversely, a high credit score instils confidence in lenders that you will repay your dues on time. Thus, if your credit score is low, lenders may provide a loan at a higher interest rate or reject your application altogether.

2. Unstable Employment

   You can typically repay your Home Loans in longer tenures lasting up to 30 years. This means that you must repay the loan in Equated Monthly Instalments (EMIs), every month, for years together, throughout the stipulated loan repayment duration. As such, you need to ensure you have a stable job.

   If you are someone who does not hold on to a job for a longer period of time (typically for two consecutive years), if you have gaps in your employment, or if you tend to switch jobs frequently (within 2 years), lenders may reject your loan application. Unstable employment is thus one of the most common reasons for Home Loan rejections.

3. Employer Profile

   Most lenders generally approve Home Loans applications from both, salaried professionals and self-employed individuals. However, they also consider the reputation and profile of your employer, and the nature and type of business they are engaged in, while assessing loan applications.

   If you are employed with a relatively new or unknown company, lenders may doubt whether your employer has the ability to pay your salary on time, which, in turn, impacts your loan repayment capacity. If they deem the business unstable, lenders may reject your Home Loan application. Likewise, your chances of getting the loan approved increase if you are employed with a reputable company.

4. Property-related Issues

   Another prominent reason why lenders reject Housing Loans is that there could be certain issues with the property you wish to buy through the loan. For instance, if you are buying a property from someone who does not have all the documents in order, or if it the property is too old; if it is not authorised by the concerned authorities, lends may hesitate to sanction your loan application.

   Unless lenders are entirely convinced that there is no issue with the property, and that if issues come up, you will still fulfil your loan repayment obligation, they might be inclined to issue a loan rejection letter.

5. Incomplete Documentation

   Lenders expect your to follow the documentation process thoroughly. They review your application multiple times and check if you have submitted all the documents requested by them in the loan application form. They also assess if the documents are proper, and that you have not missed on providing any of the necessary documents pertaining to your personal details (ID and address), employment and income details, and the property you wish to buy. If they find anything missing or doubt the information provided, lenders may consider it a justified reason for rejection of loan application.

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6. Incomplete Verification

   Besides assessing that the documents you have submitted, lenders evaluate if the information provided by you in the loan application form is true and verifiable. Any mismatch in the information provided can lead to Home Loan rejection. For instance, you may have provided the landline number of your employer or a potential loan guarantor, and if your employer or guarantor does not answer the call after a few attempts by the lender, your Home Loan application may be rejected.

7. High Debt-To-Income Ratio

   In simple words, a debt-to-income ratio indicates the amount of debt you have taken against your monthly income. If you have an already existing loan you are repaying from your monthly income, and you intend to take on another one, your debt-to-income ratio would increase. Basically it means that your debt obligations could surpass your in-hand income. Lenders view a high debt-to-income ratio as a potential red flag. It essentially means that if your debt is higher, and you do not have sufficient funds to pay for your every-day expenses, you are more likely to default on loan repayment. This could be another potential loan rejection reason.

8. Default on Loans Guaranteed by you

   Assume you have fulfilled all the requirements to get your Home Loan approved – you have a decent monthly income, are employed with a good company and have provided all the necessary documents,. However, if you have agreed to be a guarantor for someone who has not repaid their loan on time, you could be looking at loan rejection. Remember that when you serve as a loan guarantor for a family member or a friend, and if they default on repaying it, your credit score gets impacted too. This, in turn, affects your chances of procuring a loan when needed.

How to reduce your chances of Loan Rejection

While lenders may reject your Home Loan application due to the above reasons, you can take certain measures to reduce your chances of loan rejection. Here are some steps you can consider taking before sending out your loan application.

1. Improve your Credit Score

   When you apply for any loan, and the lender rejects it, it impacts your credit score even further. As such, you must send your loan application only after improving your credit score. This, you can do by repaying your existing debts on time. Alternatively, you can consider applying for the loan only after clearing you existing dues. Repaying your debts in a timely manner helps improve your credit score. Once it crosses 750 points, you can apply again.

2. Apply only if you are eligible

   Lenders instantly reject your loan application if you are not eligible. Ensure you fit the Home Loan eligibility criteria set by the lender. For instance, you must belong to a certain age group, draw a minimum monthly income as stipulated, be employed with a reputed organisation, among other things. Even if you are eligible, remember to compare various lenders, and eligibility criteria. For instance, one lender may need a higher credit score than another.

3. Opt for Joint Home Loans

   You can also reduce your Home Loan rejection chances by applying for the loan jointly with another close family member, preferably one who is employed, and has no existing debts. A joint application with someone who also has a stable income at a reputed company, along with a good credit score, makes you a viable candidate for loans. Just remember that both borrowers must fit the eligibility criteria and submit all the necessary documents requested by the lender.

4. Ensure Loans Guaranteed by you are Repaid

   If you are listed as a loan guarantor for a family member, relative, or a friend, you must check in on them regularly and find out if they have been repaying their EMIs on time, without defaulting. You can ask them to send you their loan repayment schedule when you sign up as a guarantor. If they continue repaying their EMIs on time, your chances of being approved for the loan also increase significantly.

Final Note:

Home Loans allow you to build a lifelong asset of ever-increasing value. Most lenders today provide up to 90% of the market value of the property as the loan amount, while you must provide the remaining 10% as down payment, Before you apply for the Home Loan online, remember to take these above-mentio necessary precautions so that your loan is not rejected. You can also enjoy tax saving benefits on Home Loan principal and interest repayment.

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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.