In the present day world of technological advancement the modern amenities of information technology has made every individual very much aware enough about why a home loan is required and how to go for an application to get a home loan from banks and NBFCs to buy a property. But in most occasions it is found that the applications so submitted gets rejected. So then only it comes to the mind that what are the reasons for home loan rejection.
Why a Home Loan gets rejected?
A house is one of life’s most prized and valued possessions and purchasing one figures prominently on the list of most individuals.
While home loans offer a convenient financial solution for one’s housing needs but in most of the time the application for home loan is done without adjudging the pros and cons of the whole procedure. That is the reason why after making judicious planning and putting the best efforts, the home loan application still gets rejected from the lender bank or NBFC.
To overcome such a situation, it is better to be aware of the different factors that could lead to home loan rejection so that one can take the adequate remedial measures, if necessary as per the situation.
What are the Reasons that may lead to Home Loan rejection?
Home loan rejection has three major reasons, one is the profile of the applicant, the financial eligibility and the property chosen to be purchased. These three major reasons been explained as under:
Profile of the Applicant:
The applicant must have a very clear perception about his or her profile as per the banking parameter in the industry before going for a home loan application. It may sound a bit discriminative that how the bank or NBFC can be so choosy about the profile of the customer before making the application as a successful one.
Yes it is very much right and there is no such derogatory thoughts behind the whole concept about the process by which the profile of the customer must be checked by the lender bank or NBFC before giving the offer for the home loan or rejecting the same.
There are many factors based on which the profile of the applicant for the home loan is established and then only it is adjudged that whether it is good or unsatisfactory as per the parameter and policies set by the lender bank or NBFC.
The reasons for a home loan rejection generally remain the same across all banks expect for one thing that every bank has its own internal policies in giving out loans to the worthy borrowers.
Home loan rejection could have happened due to the following reasons which in general are based on the below mentioned factors which are taken into consideration by the banks and NBFCs to check the suitability of the profile before approving or rejecting the proposal of home loan:
Low Credit Score:
The primary reason of a home loan rejection is because of low credit score of the applicant. Every bank or NBFC, when it gets a loan or credit card application pulls out the credit score along with the credit track records of the applicant from any one of the credit bureaus operating in our country.
The credit score is the accumulated score based on how regular the applicant were paying back the loans or credit card bill. This is the very first step taken by every bank or NBFC while screening the home loan application. If the credit score is too low from the desirable level, then the home loan will be considered as rejected. So it is best to check the credit score before applying for a home loan.
Another crucial aspect that can affect the application is the credit report itself. If the credit track records contain any mistakes or incorrect information, it may be sufficient reason for loan dismissal. So, monitoring the credit report regularly and rectifying the inconsistencies that can be harmful to the loan prospects are very much required to maintain a clean profile and prevent the home loan rejection.
Unstable Employment:
In general an applicant can typically repay his or her home loan in longer tenures lasting up to 30 years. This means that he or she must repay the loan in Equated Monthly Instalments (EMIs), every month, for years together, throughout the stipulated loan repayment duration.
For that reason the applicant for the home loan must need to ensure that he or she have a stable job either as a salaried person or as a self-employed professional or as a self-employed non-professional.
If someone who does not hold on to a job for a longer period of time that is typically for at least two consecutive years or in the profession for at least three consecutive years.
If he or she is having gaps in the employment may be as a salaried person or as a self-employed professional or as a non-professional, or if he or sheintends to switch jobs frequently within 2 years, then lenders may be a bank or NBFC may reject the loan application.
Unstable employment is thus one of the most common reasons for home loan rejection.
Employer or Employment Profile:
Most lenders generally approve home loan applications from both, salaried persons and self-employed professionals or non-professionals.
However, they also consider the reputation and profile of the employer as well particularly in case of salaried persons, and the nature and type of profession or business they are engaged in case of the self-employed professionals or non-professionals, while assessing loan applications otherwise this can be a crucial reason for home loan rejection.
If the applicant is employed as salaried person with a relatively new or unknown company, lenders may doubt whether the employer has the ability to pay your salary on time, which, in turn, impacts your loan repayment capacity.
In case of self-employed professionals or non-professionals if it is found that the profession or business is unstable or illegal, then lender bank or NBFC may reject the home loan application. Likewise, the chances of getting the home loan rejection gets nullified if the applicants are employed with a reputable company.
Default on Loans Guaranteed:
It can be a nightmarish situation if the applicant after having fulfilled all the requirements to get the intimation of home loan rejection although having a decent monthly income, employed with a good company or running a stable and promising business and providing all the necessary documents only because of becoming a guarantor for someone who has not repaid the loan on time.
It should always be remembered that when a person serve as a loan guarantor for a family member or a friend, and if they default on repaying it, credit score of the guarantor also gets impacted too. This, in turn, affects the chances of procuring a loan when needed.
Financial Eligibility of the Applicant:
The financial eligibility of the applicant with low repayment capacity is one of the home loan rejection reasons.
The lender bank or NBFC from where the applicant wants to apply for the home loan would evaluate the loan amount by calculating the fixed obligation to income ratio (FOIR) to assess that whether the borrower can comfortably pay the home loan instalments in time or not.
If the applicant or applicants are already servicing too many credit payments in form of other loans and credit cards or have other financial commitments, then the loan repayment capacity will decrease, thus increases the chances of getting chances of home loan rejection.
In general the future home loan instalment amount including the present obligations should not be more than 50% to 60% of the total income. If the fixed obligations to income ratio is more than half of the income, then lender bank or NBFC might not approve the home loan application, considering you are over burdened with debt.
But there are some banks and NBFCs who provide home loan on higher fixed obligation to income ratio if the profile of the applicant is very high with excellent credit score and credit track records as per the registered credit bureaus, very high monthly income, very stable employment with top employers of the world or very promising business with prospective future growth and approved properties with zero litigations subject to the policies.
Property chosen for the Home Loan:
The property is one of the crucial factors and plays a huge role in home loan rejection. So the applicant must choose a property that does not have any legal or technical issues and matches the valuation on which the loan to valuation (LTV) is calculated. If these does not match the parameter then it may lead to the home loan rejection of the application.
In general most of the applicant who used to be the first time purchaser of a property always prefer to buy it from the approved real estate projects of various banks and NBFCs so that these problems related to the property may be countered with ease.
But there may be an instance that the applicant has chosen a property which is not within an approved project by the major banks and NBFCs where he or she wants to apply for the home loan.
In such a scenario one must follow the below mentioned parameters which will make the home loan rejection nullified due to the legal and technical issues of the property:
Situation of the Property in Negative Zones as per the major Banks and NBFCs:
The property which the applicant intends to purchase by applying a home loan must not be in the negative areas as per the major banks and NBFCs.
A negative area is one where there are huge natural, political or communal disturbances and the character of the land are mostly agricultural with unauthorised constructions with no sanctioned plan of the buildings from the sanctioning authorities like corporation or municipality or zilla parishad or panchayat.
Apart from these an area is also considered as negative if the banks and NBFCs had faced or are still facing major collection issues of the loans.
Encumbrances of the property:
A home loan rejection can also take place even in areas that do not fall under the lists of negative zones, as banks and NBFCs will restrain from financing a property from purchasing it, if there are any questions over the title documents of the owners of the land on which the property been developed.
During its legal assessment exercise, the bank or the NBFC will establish if the seller is legally authorised to carry out the transaction, while tracking the veracity of the property documents by checking the devolution with proper searching reports and non-encumbrance certificate. Banks will never finance a property that is caught in any kind of legal dispute or financial battle.
Valuation of the property for loan to value (LTV):
Loan to value is a percentage based on which the home loan sanction amount which can rise up to 90% of the property valuation subject to the eligibility of the applicant. But if the valuation does not match the amount of home loan proposal then it may lead to home loan rejection.
So to counter this whole matter the lender bank or NBFC always send technical experts to visit the property and established its market price with regard to its physical condition, location, etc., after conducting a thorough inspection.
If the team appraises the bank of the fact that the sale is taking place at a much higher rate than its actual worth in the market, then it will result to home loan rejection since they have to maintain a loan to value ratio for sanctioning the loan amount.
Reputation and credibility of the Developer or Builder:
In case of the properties purchased from developers or builders who have bad reputation and creditability in the market then it can turn out to be a dubious decision leading to home loan rejection.
Home loan rejection can also take place in cases of under construction properties purchased from unrecognised or new developers or builders who have started developing or building projects recently as in many a times it has been found that the projects got stalled due to shortage of funds.
Final Note:
Home loan rejection will not allow you to build a lifelong asset of ever-increasing value. So it is always recommended to appoint a reputed home loan consultant near you to get the best expertise for smooth and timely execution of the whole process.
Most lender banks and NBFCs today provide up to 90% of the market value of the property as the loan amount, while you must provide the remaining 10% as down payment but before you apply for the home loan online, remember to consider these above-mentioned necessary points which may lead to home loan rejection so that the necessary precautions can be taken as preventive measures against home loan rejection. You can also enjoy tax saving benefits on Home Loan principal and interest repayment.
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