By Ajay Mishra
Home loans are long-term credit products, with repayment periods ranging anywhere from 15 to 30 years. Due to such long tenures, banks and housing finance companies follow stringent approval process to assess the repayment capacity of borrowers, which often leads to rejection of the loan applications. Hence, it’s important to be aware of the factors that impact the approval of your application.
Here are the 7 common reasons why home loan applications get rejected:
1. Poor credit score: Credit score is the numerical representation of one’s creditworthiness. Lenders consider scores of 750 and above as good credit score. As people with lower credit scores usually have a history of defaulting in loans or credit card bills repayments, major lenders usually resist lending to them. Some NBFCs may sanction loans to people with low credit scores, but it will come with higher interest rate and other unfavorable terms and conditions.
Thus, always ensure timely repayments of your debt commitments to have a good credit score. Take out your credit reports at periodic intervals and report the errors, if any, to the bureaus or lenders for rectification. Also keep a close eye on the repayment of the loans guaranteed by you as any delay or default in them would also reduce your credit score.
2. Your Age: Most lenders have an upper cap of 60 years on the age of home loan applicants. They also want the borrowers to complete their home loan repayment by 70 years. Thus, those nearing their retirement age or with insufficient post-retirement income face a higher risk of rejection. In case you are approaching your retirement age, try to rope in your employed children or spouse as a co-applicant to increase the chances of loan approval. Alternatively, you can also opt for a lower LTV ratio and/or higher EMI to improve your loan eligibility.
3. Frequent job-hopping: It’s common today to frequently change jobs for higher income and better career prospects. However, this may have an adverse effect on your future credit approvals. Lenders consider shorter employment stints as a sign of unstable career and hence, consider such people as less creditworthy. This may lead them to reject the loan applications of frequent job hoppers. Instead, salaried professionals should time their home loan application smartly. Once they are three years away from their targeted date for home purchase, they should try avoid job changes as far as possible.
4. High FOIR: Fixed obligations to income ratio (FOIR) refers to the proportion of your total income that will goes towards the servicing of your existing EMIs, various payment obligations like house rent, insurance premiums, etc plus the EMI for the applied loan. As lenders prefer this ratio to be within 40–50%, those exceeding these limits may have their loan application rejected.
Thus, try to pay off your existing loans or part of it before applying for a home loan. Alternatively, opt for a lower EMI for your new loan application to maintain your FOIR within the 40–50% level of your total income.
5. Job and/or employer’s profile: Your job and your employer’s profile also has a bearing on your home loan application. Usually, government employees and those working with reputed corporates are preferred due to the higher job certainty.
6. Property-related issues: The property chosen by you would also affect your loan eligibility. Lenders don’t lend for properties not adhering to the guidelines set by local authorities. Similarly, lenders also hesitate to finance the purchase of old properties as they have lower re-sale value. Thus, ensure that your residential property has been approved by local agencies and its title is clear of any dispute.
7. Being guarantor of other loans: The loans guaranteed by you make you equally responsible for repayment. Any missed payment or default in those loans will reduce your credit score and the chances of loan approval. Additionally, your loan eligibility will also decrease by the amount of the outstanding loan guaranteed by you. For example, assume that your annual income allows you to avail a home loan of Rs 50 lakh for 20 years. Now, if you have already guaranteed loan of Rs 10 lakh, your loan amount eligibility for that same home loan for the same tenure will reduce to Rs 40 lakh.
(The author is Vice President & Business Head–Secured Loans, Paisabazaar.com)