With the prices of the property heading north, buying a home looks like a daunting task with the available funds you have. A Home Loan comes handy in such situations and is the best option to meet the shortfall of funds when you plan to buy a house either as an investment or for residential purpose.
Although the process of applying for a loan has become easy, your application may get rejected for varied reasons. Your loan application may be rejected as banks feel that the repayment potential is low and they do not want to increase their non-performing assets (NPAs). The repayment potential of an applicant is assessed in terms of various parameters.
Let us look at certain factors in detail that can play a significant role in getting your loan rejected or approved.
Age Is Not Just A Number Here
Banks look at your age to understand your borrowing potential. If you are nearing retirement, banks reserve the right to say no to you. The logic here is the older an applicant is, the nearer he/she is to retirement, thus making it harder to advance a loan for extended terms like 25-30 years. Lending companies prefer borrowers in 20’s or 30’s with a stable monthly income.
If you are nearing your golden years, go for a shorter term, which might end up increasing the EMI, but an approval will be more likely. It also means that you would pay less interest overall.
Know How Much You Can Apply For
Before approving your loan application, lending companies will make sure that your income is sufficient to take care of the loan repayment. For example, if there’s an outstanding loan/liability to the applicant’s name, banks would calculate the effective income by subtracting the monthly EMI that goes toward the outstanding loans. This is done to ensure that the fixed obligation to income ratio (FOIR) doesn’t exceed 50% of their monthly income.
If you have other loans, try to add your spouse or family member as a co-applicant, given he/she is gainfully employed too to increase your borrowing potential.
You Need A Good Credit Score
The Credit Score is your financial report card, which tells about your performance in repaying loans and Credit Card bills. It mentions about your payments, defaults, and misses. Most financial institutions, banks or lending companies now exclusively look at the Credit Score of an applicant to weigh the risk of lending to him. A score of 750 plus is considered healthy for lending while anything less than 600 is considered poor.
An applicant with a poor Credit Score must work towards setting it right first by taking smaller loans and repaying on time before going for a Home Loan.
Other Reasons For Loan Rejection
Non-payment of utility bills and other delinquencies
Sometimes lending companies/banks run multi-layered checks on applicants and if they find out irregularity in payment of utility bills such as electricity bills, etc., they assess the creditworthiness of the applicant to be low. Delay in Credit Card payment/ EMI also reflect badly in your credit history, thus indicating low borrowing potential.
Stability in employment
Lenders take into account the job stability of a borrower. An applicant who has been there in the present job for at least two years is preferred over someone who has had too many job changes in a short while.
Builder’s reputation
Before you zero in on a house make sure that the builder’s reputation is in place and all the documents are legal. Banks prefer properties with clear titles, good resale value and no minor rights.
Ensure all documents are in place
The paperwork involved in getting a home loan approved is quite intense and one must meticulously arrange for what’s required in order to escape rejection. KYC details, proofs of income, updated bank statements are some of the essentials required for swift approval of home loan application.
These are some of the factors to be kept in mind while applying for a home loan. If your loan application gets rejected in the first instance, do not keep applying for it as it would only reduce your creditworthiness showing you to be credit hungry. Instead, work on your eligibility before you reapply.
(The writer is CEO, BankBazaar.com)