Why Your Home Loan Can Be Rejected

<p>Owning a home is a long-standing dream for many Indians. However, after spending an enormous amount of time and energy on identifying and finalising a suitable property, many people are stopped short by rejection at the loan-approval stage.&nbsp; What are the reasons for this rejection and how can you avoid them?<br><br>There are three main reasons why your loan application is rejected:<br><br><strong>1. Personal Reasons</strong><br>Often, a loan size much higher than your current income can afford is a reason for rejection. Lenders want to be assured that you have a sufficient monthly income that will allow you to pay off your loan obligation. To avoid rejection, choose a property that fits in with your income profile. If you choose too expensive a property, the projected EMIs will consume a large part of your monthly income, which is not sustainable over a long period. Choose a loan size and loan tenure where the monthly instalment (EMI) remains affordable.&nbsp; &nbsp;<br><br>Having multiple existing loan obligations is another factor for rejection. Lenders look at your monthly income, deduct your existing EMI obligations across all your loans, and then calculate if you can afford an additional repayment on your remaining net income. There are two ways you can overcome this problem. You should pay off your smaller loans before applying for a housing loan.&nbsp; Doing this will reduce your monthly EMI outflow when you apply for the housing loan. Alternatively, choose a longer loan tenure so that your repayments are spread over a longer period which will bring down your monthly EMI obligation.<br><br>Residing in an incompatible pin code could also disqualify you, strange though it may seem. Through experience, banks have drawn up a credit profiling system that identifies 'negative pin codes', where a high percentage of defaulting customers live. If your postcode happens to be on that list, you will be automatically disqualified. Unfortunately, there is no way of knowing if you live in a negative pin code until you check with a bank before applying.<br><br><strong>2. Credit reasons</strong><br>Having an unstable employment history with frequent changes of jobs is not conducive to loan approval.&nbsp; Housing loans have a long repayment period, stretching over decades, and lenders want to be assured that the customer has a steady, relatively predictable monthly income that will allow repayments over the entire duration of the loan. If you are planning to apply for a housing loan, make sure that you have been with the same employer for at least one year.<br><br>Your past credit history plays a significant role in the loan application process. Lenders typically look for a CIBIL score of 750 or above and check your credit report for any negative behavior - high percentage of delayed repayments and any negative status reported. Multiple loan applications recorded in your credit report also have a negative impact on your application as it signifies that you are credit hungry and have applied for credit from multiple sources.<br><br>Another negative factor is rejection of past applications for credit - whether auto, housing, personal loan or credit card applications. It sends a signal that previous lenders did not judge you to be credit-worthy. Finally, having multiple existing (open) loans can affect your approval since lenders are nervous about your ability to take on an additional debt burden.<br><br>There might also be some external reasons for rejection. You might be guarantor for a loan that has been defaulted on. Or your co-applicant for this housing loan could have a very bad credit score.<br><br>The good news is that improving your credit history and becoming loan-eligible is one area that is completely in your power. Make sure that you check your credit report at least a year before you plan to apply for a loan. This way you have enough time to identify any problem areas in your credit profile and work towards resolving them.<br><br><strong>3. Legal reasons</strong><br>The lack of a clear title is often the most common reason for loan rejection on legal grounds. You need documents that establish the title of the existing owner - in other words, the seller should have documents proving that he is the legal owner of the property that he is selling to you.&nbsp; All the requisite government approvals for the property need to be obtained. Further, if the house/apartment you are contemplating purchasing is very old, lenders might be hesitant to extend a loan.<br><br>All these personal, credit and legal reasons can be overcome if you plan sufficiently well in advance and are well-prepared before embarking on the loan-application process.&nbsp; Whenever you contemplate buying a house, your first step should be to take a look at your credit report so that you have enough time to rebuild your credit health, if required, and become credit-worthy. If you take these few steps, that dream of home-ownership will very likely come true.<br><br><em>The author, Ranjit Punja, is CEO &amp; Co-Founder, www.creditmantri.com</em></p>