Do you know what can be really frustrating? When you desperately need a home loan, and the bank rejects your application for reasons you weren't even aware of. Keep reading to avoid making such mistakes while submitting your home loan application.
Purchasing a house is a significant undertaking that demands considerable effort, time, and financial resources. Many of us aren't financially equipped for such a substantial transaction, leading us to borrow funds from a bank. Home loans, being secured loans, facilitate the acquisition or renovation of your dream house without adversely affecting your savings or monthly expenses.
Given that home loans involve substantial amounts of money (up to Rs. 1 crore or more in some cases) and come with longer tenures (up to 30 years in most cases), lenders adhere to a stringent approval process before granting the loan. They conduct thorough checks to ensure you have the means to repay the loan on time without any defaults. Consequently, if you fall short of the bank's expectations, your home loan application may face rejection.
14 Reasons Banks Reject Your Home Loan Application
This blog will familiarize you with the lender’s expectations and requirements before you fill out your home loan application. Read on to know the various reasons that may cause banks to reject your home loan application.
1. Low Credit Score
A primary reason for encountering rejection in a home loan application is a low credit score. Your credit score, often measured by CIBIL, serves as a reflection of your repayment history and creditworthiness. Consequently, any lender considering your home loan application will assess your credit score, which is available with various credit bureaus, including CIBIL. Lenders generally deem a credit score of 750 or above as good, as it signifies reliability for future repayments.
Delay or default in loan or credit card EMIs can adversely impact your credit score. If your home loan application faces rejection due to a low credit score, you may either be denied the loan or offered one with a high-interest rate. In such a scenario, it is advisable to enhance your credit score initially by ensuring timely repayments. Subsequently, you can then apply for a fresh home loan application.
2. Error in a Credit report
It's possible that, despite having a pristine credit history, a human error might lead to a mistake in your credit report, subsequently lowering your credit score. Nevertheless, it is recommended to regularly monitor your credit score and promptly rectify any errors that may arise.
3. Repayment Ability
When you submit a home loan application, the bank's representative conducts a brief review of your income to assess whether you can comfortably repay the requested loan amount. However, if you have applied for a loan amount that significantly exceeds your repayment capacity, there is a possibility that your home loan application might face rejection.
4. Nature of Work
Individuals employed in the salaried class are more likely to have their home loan applications approved compared to self-employed individuals, particularly those who own small or new businesses. Lenders perceive a sense of security and stable income with salaried employees. However, this stability is less certain in the case of new business owners, as lenders may be uncertain about their financial status. Therefore, if you are a business owner, it is crucial to ensure that your paperwork, including income proofs and at least the last two years' Income Tax Returns (ITR), is in order before completing your home loan application.
5. Age While Applying for the Loan
Regarding age, home loan applications are prone to rejection in two scenarios—either when the borrower is a newcomer to the workforce or when their age is near retirement at the time of applying for the loan. In both instances, lenders may hesitate to approve the home loan application as they are unable to adequately assess the borrower's repayment capacity. Freshers typically have lower incomes, and individuals nearing retirement may face challenges in meeting long-term EMIs.
6. Lower Valuation of Property
Typically, banks provide home loans up to 90% of the property's value. Regardless of the market price, banks conduct their own property valuation, considering factors such as construction quality, location, age, and condition of the building. Hence, even if you qualify for a higher loan amount based on your income, the lender may decline your loan application if they discover that your property has a lower valuation.
7. Unstable Employment
Individuals who frequently change their jobs within 6 months to 8 months are not considered reliable by most lenders. On the other hand, stable employees who are working for an organization for at least 1 year are considered ideal by the lenders as their stability ensures timely repayment of loans.
8. Poor Credit Score of the Co-Applicant
9. Delay in Repayments Guaranteed by You
10. Existing Liabilities
Your home loan application might be denied if your Debt-To-Income Ratio (DTI) exceeds 30%. If you are already servicing other EMIs and the lender perceives that repaying the EMIs for a home loan would consume a significant portion of your salary, raising the risk of potential defaults, they may be reluctant to approve your home loan. A lender can swiftly ascertain the other EMIs you are servicing through your CIBIL report, underscoring the importance of maintaining a good credit score.
11. Incomplete/False Documentation
Providing accurate and genuine documents is crucial for any loan, and a home loan is no exception. When extending a home loan, a lender assumes the risk of lending a substantial amount over an extended tenure. Therefore, it becomes imperative for the lender to meticulously scrutinize all the documents (age proof, income proof, property documents, etc.). Failure to submit all the required documents or providing false information, including inconsistencies in signatures, will lead the lenders to reject your application.
12. Absence of ‘No Objection Certificate
If the current property owner, from whom you intend to purchase the property, had previously taken a home loan, they should have obtained a 'No Dues Certificate' (also known as a home loan NOC) from the lender upon full repayment of the loan amount. In the event that they are unable to furnish the No Objection Certificate (NOC) to you, the bank may decline your home loan application.
13. Frequent credit borrowing
Even if you possess a good credit score or have a history of frequent credit borrowings, banks reserve the right to decline your loan application. The regularity of borrowing may raise concerns for the banking institution regarding your repayment capacity. Despite consistent and timely repayment of credit amounts or EMIs, lenders may scrutinize your credit dependence, deeming you a risky applicant. Consequently, they may reject your loan application, fearing that additional loans could potentially strain your finances, leading to delayed or missed credit payments.
14.Comments on CIBIL Report
The remarks on your CIBIL/credit report can pose a barrier to securing another loan. These comments encompass your credit history, indicating factors such as late payments of EMIs, requests for a reduced interest rate, etc. Any comment in the CIBIL report may suggest a less-than-ideal repayment pattern from the applicant. Hence, it is advisable not to overlook comments in the CIBIL report, as lenders scrutinize all aspects before approving a loan. The applicant should address the comments by seeking a goodwill deletion, negotiating with the creditor, or repaying the loan amount in full.
Conclusion - Reasons Bank Reject Your Home Loan
While it's convenient to swiftly compare home loans from different banks and NBFCs, it's crucial not to hastily reach a decision. Ensure that you qualify for the desired home loan amount and have all the necessary documentation and a satisfactory credit score in order. If you have any queries, reach out to the bank's representative and complete the application form only when you have a clear understanding of every aspect, preventing the risk of your home loan application being rejected by the lender.