Rakesh Sharma, a businessman, recently decided to take a home loan from a reputed bank, but despite higher income his loan application gets rejected. He seems to be confused now about the reason for such rejection. There could, however, be multiple reasons for loans getting rejected. Because your income is not the only criteria financial institutions look at when they consider your loan application.

Therefore, high income is no guarantee to securing loans from financial institutions, especially long-term loans. Often people think that high income is the only criteria with the help of which they easily borrow funds, but that is not true in all cases.

Even if you have a high income, there are still a number of reasons why your loan application can get rejected. Here are some of the most common reasons:

Low Credit Score

Your credit score is one of the most important factors that lenders consider when making a lending decision. A low credit score could be a sign that you have a history of late payments or defaults, which makes you a riskier borrower.

Adhil Shetty, CEO, Bankbazaar.com says, “A credit score is a powerful financial tool that can either open doors or create barriers. A low credit score increases the likelihood of loan rejection, as it signals a higher risk for lenders.”

“Your credit score reflects your financial history and provides valuable insights into your ability to manage debt responsibly. Lenders use this information to assess the level of risk associated with lending money. A low credit score often indicates a pattern of missed payments, high levels of debt, or a lack of credit history, which can make lenders hesitant to approve your loan application,” Shetty adds.

Also Read: Top 10 credit score misconceptions & myths debunked

High Debt-to-Income Ratio

Your debt-to-income ratio is the percentage of your monthly income that goes towards debt payments. A high DTI ratio could mean that you don’t have enough disposable income to afford a new loan payment.

Short Credit History

If you don’t have a long credit history, lenders may not have enough information to assess your creditworthiness. Also, if you’ve recently opened a lot of new credit accounts, lenders may be concerned that you’re overextending yourself financially.

Unstable Employment

If you’ve recently lost your job or have a history of job instability, lenders may be hesitant to lend you money. Your employment is taken into consideration by financial institutions when they lend you money. It helps them ensuring that your can return the loan without any trouble.

Loan Purpose

The purpose of your loan may also affect your chances of approval. For example, lenders may be more hesitant to approve loans for risky or speculative purposes. Suppose you are taking a loan to buy the second house while you already have a large home loan going on, chances of rejection is higher in such cases.

Mismatch of Documents

If the documents you have submitted are not matching with the records of the lender, your loan application may get rejected. Therefore, you must keep all your documents handy and they must support your loan application.

Fraudulent Activity

If the lender suspects any fraudulent activity in your loan application, they may reject it. It is important to fill up details which you can support through documents. Any wrong information related to your income, address and employment may lead to rejections.

There are a few things you can do to improve your chances of approval the next time you apply:

Improve Your Credit Score

This can be done by paying your bills on time, keeping your credit utilization low, and disputing any errors on your credit report.

Reduce Your Debt-to-Income Ratio

This can be done by paying down debt, increasing your income, or both. Avoid running multiple loans or credit card debts. Reduce your debt liabilities to increase your chances of getting a loan quickly.

Build A Longer Credit History

This can be done by opening new credit accounts and using them responsibly. Use your credit card and pay your bills on time. It will help you build a solid credit history and ensures a good credit score as well.

Get A Guarantor

A guarantor is someone who agrees to be legally responsible for your loan payments if you default. This can make you a more attractive borrower to lenders.

Shop Around For A Loan

You must compare different lenders, their services, terms and conditions, interest rates before finally applying for a loan. When you take a long-term loan, it becomes even more important to make sure you borrow from a reputed and reliable institution to avoid service-related issues.

Finally, it is important to be realistic. Don’t apply for a loan that you can’t afford to repay. Lenders will be more likely to approve your loan if you can comfortably afford the monthly payments. It may take some time to find a lender who is willing to approve your loan. Don’t give up if you get denied the first time you apply.