Home loan rejected by banks? 5 steps you can take to improve your chances

Buying a home is a significant financial milestone for most people in India. For many, securing a home loan from a bank is the only way to achieve that dream. However, not everyone is eligible to obtain a home loan from traditional banks due to various reasons such as low credit scores, unstable income, or incomplete documentation.

If you find yourself ineligible for a home loan, it can be discouraging, but there are still alternatives and various steps you can take to improve your chances. Here’s a guide on what to do if you are not eligible for a home loan from banks.

1. Improve Your Credit Score

Adhil Shetty, CEO of Bankbazaar.com, says, “One of the primary reasons for home loan rejection is a poor credit score. Banks give emphasis on your credit score when evaluating your loan application. A credit score below 700 is often seen as risky, leading to rejection. If your application is rejected due to a low credit score, your first step should be to work on improving it.”

Here are some steps to improve your credit score:

• Pay off existing debts: Reduce your credit card dues and clear personal loans.
• Avoid new credit: Until your score improves, avoid taking new loans or credit cards, which could further impact your score.
• Timely bill payments: Ensure you pay your bills (credit card bills, EMIs) on time every month.
• Monitor your credit report: Regularly check your CIBIL report to spot errors that could be dragging your score down and get them rectified.

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2. Consider NBFCs

If banks have denied your home loan application, non-banking financial companies (NBFCs) can be a viable alternative. NBFCs often have more flexible lending criteria compared to traditional banks.

NBFCs are known to approve loans for applicants who may have lower credit scores or irregular income patterns, though they often charge a slightly higher interest rate. You should thoroughly research NBFCs and compare their loan terms before committing. It’s also important to ensure that the NBFC is registered and regulated by the Reserve Bank of India (RBI) to avoid falling prey to illegal players.

3. Seek a Co-Applicant or Guarantor

If your personal financial situation is causing the home loan rejection, you could consider applying for the loan with a co-applicant or guarantor. A co-applicant, usually a spouse or family member, shares the loan repayment responsibility. This not only increases your chances of approval but also improves your eligibility for a larger loan amount.

Alternatively, a guarantor, typically someone with a strong credit history, can vouch for you. If a guarantor is involved, the bank or lender may consider your application more favourably. However, it’s crucial to note that the guarantor is legally responsible if you default on the loan, so ensure that both parties understand the risks involved.

4. Explore Government-Backed Schemes

The Indian government has introduced several schemes aimed at making home ownership more accessible, especially for low-income groups. If you’re not eligible for a traditional home loan, you may qualify under one of these schemes:

Pradhan Mantri Awas Yojana (PMAY): This scheme offers credit-linked subsidies to first-time homebuyers. It is aimed at making housing affordable for economically weaker sections (EWS), low-income groups (LIG), and middle-income groups (MIG).

5. Increase Your Down Payment

If banks or NBFCs are unwilling to offer you a home loan for the full amount, you could consider increasing your down payment. Lenders may be more inclined to approve a loan if they see that you are covering a significant portion of the property’s cost upfront. This reduces their risks and increases your credibility as a borrower. While this may require some financial planning, it could help you secure the home loan you need.

Being denied a home loan can feel like a setback, but it doesn’t mean the end of your dream to own a house. By improving your financial profile, you can increase your chances of securing the funds you need.

The table below compares the interest rates on home loans by some NBFCs in India. You can check and take a call based on your requirements and fund needs.

Note: Rates that vary with tenures or credit score within the specified loan amounts are indicated as a range. Data taken from the respective bank’s website as on Sep 20, 2024. Contributed by BankBazaar.com, an online marketplace for comparing loans and insurance products. *Annual percentage rate.