Owning their dream house means a lot to people. This is even more true in metropolitan areas considering that a new report by CRIF High Mark shows that home loans above 75 Lakhs account for 30% of all home loans.Loan Rejections. Banks look at multiple factors before approving loans. Honestly, even your appraisals probably don’t have so much scrutiny.
Has your faced home loan rejections recently? Are your dreams of purchasing a home fading away? So, what do you do once your home loan gets rejected? Don’t worry! You are at the right article. In this article, we’ll be covering steps to take to make sure your home loan doesn’t get rejected when you apply again. Let’s get started!
Why did your loan get rejected? Common Reasons for Home Loan Rejections
Poor Credit Score
A Credit Score is more than just a fancy number. It’s your financial health report card. Lenders will access your credit report to see if you’re a trustworthy candidate. They don’t want to lend to someone who specializes in minimum amount due payments.
Low/Insufficient Income
Banks use certain metrics to evaluate if you’re capable of paying the home loan back. They check your existing liabilities, income going towards existing repayments, etc before approving your home.
Sometimes the loan amount may be big, but your income level may not make the cut for the loan. During scenarios like this, it may make sense to take a joint home loan. (Attach Co-Applicant Benefits Article)
Unstable Employment
Home Loans usually have long tenures. Lenders want someone with a stable income who can pay back the money. If you’ve jumped jobs like jumping on a trampoline, lenders may view you as unstable.
Det-to-Income Ratio
It simply refers to how much debt you have in proportion to your income. Let’s say your monthly income is 1 Lakh. You have existing EMIs of 40K monthly. In this case, your DTI is 40%. If you’re DTI is 35% or lower, you have a higher chance of banks approving your loan.
Incomplete or incorrect documentation
Make sure to submit all documents requested by the bank or lender. Lenders will verify your documents, and if they find the information to be fishy and it raises suspicion, then they will reject your home loan. Similarly, if you are purchasing a home from someone who has missing documents, lenders may hesitate to approve the loan.
Unacceptable property or location
Lenders can reject applications if the builder or project is not verified. Certain properties can have issues, like pending approvals from concerned local bodies and authorities. Banks will not lend unless they find the property to be free from issues.
Sometimes lenders have issues with certain localities. If the locality is not in the good books of the bank, your home loan can get rejected.
What to do after your home loan rejection?
After a rejection, a thousand thoughts pass through your head at 100 km plus. But it’s important to stay calm and analyze the situation rationally, instead of letting your emotions take over.
- Seek feedback from the lender: Considering the lender is the one who rejected your application, you can enquire and understand why they did the same. This will help you understand where the issue is and take corrective action.
- Review and assess the reasons for rejection: As mentioned above, there are various reasons why a lender can reject your application. Some reasons can be rectified earlier than others. If the issue is with the property, you can instead look for another property. But if it’s with your income or credit score, it is gonna take some time and work before you can apply again.
- Check for errors in the credit report: If you’re confident you’ve never missed a payment, and maintain all healthy credit practices, but your credit score is low or has dropped, check your credit report. Sometimes there can be errors in your report.
- Not just that, if you’ve fallen prey to some sort of phishing scam where you tried to save the world from global warming by entering personal details, then fraudsters probably have fake loans in your name. Make sure to report these activities if any or get help from our team of experts here at Credit Dharma.
- Evaluate your financial situation: Finally, evaluate your current financial situation. Can you afford to pay back the EMIs? Maybe try clearing off any existing debt first. You can also use this timeframe to save up more for your downpayment. It will help reduce the loan amount and interest burden.
Tips to improve your credit score to avoid Home Loan Rejection
Your credit score is your marksheet. Just like how mark sheets matter to crack Top B-Schools, so does a credit score to get a home loan. A CIBIL score of 750+ will get you easy loan approvals.
- Always pay bills in full and on time: Never pay just the minimum amount due, which is usually around 10% of the bill amount. It’s not free, for starters interest will accrue on the amount, and it will in the long run increase your credit utilization ratio.
- Speaking of credit utilization, keep it under 30%: It is calculated as the total debt you owe divided by the total debt limit. For example: You have a credit limit of 1 Lakh and you spend 50 thousand, in this case your credit utilization ratio is 30%.
- Limit apply for multiple cards or lenders at once: This will result in your credit score taking a dip. Yes, just because one lender rejected you, don’t go about applying with 100 others at the same time. This only impacts you negatively.
- Have a mix of secured and unsecured loan accounts: This makes you look credible in the eyes of lenders. Only unsecured loans will term you risky.
Importance of Income Stability and Debt-to-Income Ratio
Lenders look for stability. This implies sticking to a job for a longer period of time. A longer tenure at your job implies a steady income, meaning the chances of you defaulting on EMIs are lower.
We all want to be Spiderman, but swinging around and job hopping doesn’t help your home application. Secure income and assets like Batman does.
Quick Tip: Focus on increasing your side incomes. This will help make lumpsum principal repayments. Maintain income records, IT filings, etc. These documents will aid you in your applications.
Finally, debt-to-income ratio. It refers to how much debt you’re paying in proportion to your income. Lenders prefer a DTI ratio of less than 35%. Hence, try to reduce your DTI. Also, avoid taking up any new credit.
Debt is great to Robert Kiyosaki, he’s a macro investor. Sadly debt is bad for you. Don’t blindly follow advice on social media. Be rational.
Rectifying Documentation Issues and Consider Property Relocation
Banks will verify your documents. And they are quite extensive with the verification. For Example, they will verify your employment status, IT returns, and other details you provide.
If your application says you’re Bruce Wayne, but in reality you’re Batman, forget getting that loan. (Suffering from success, I know). The point is, to make sure your documents are free of errors.
If the bank rejected your application due to locality issues, consider looking at other properties that match the bank’s applicability criteria. Explore multiple options before applying again.
Take feedback. Understand what could be the specific reason and cross-confirm with the bank. Then plan your next course of action.
Consider Alternative Financing Options
What if you’re fixed on that one property? I understand what you feel. Sometimes we have our eyes on a particular thing and want it at any cost.
In this situation, start trying alternative financing options. Here are a few options:
- Apply for a joint home loan: Consider taking a joint loan with your spouse or an eligible person. Joint home loans have a higher chance of approval.
- Look at other financers: Multiple banks and institutions offer home loans. Find lenders who don’t have an issue with your property.
- Govt Schemes and Subsidies: Pradhan Mantri Awas Yojana (PMAY) and the Credit Linked Subsidy Scheme (CLSS) offer benefits if you fall under a certain income bracket. Be sure to check it out.
Conclusion
If you get a home loan rejection, don’t fret too much. It’s not the end of the world. You can always come back stronger, better prepared, and more confident. Every failure is one step closer to your dream house. This is because there is learning at each point as well.
This is why it’s best to ask many questions about why your application was rejected. And then later implement changes to avoid it in the future. To avoid getting rejected, reach out to us and let us help you snag the best rates in the market!
Frequently Asked Questions
Yes, you can still apply for a loan after being rejected. However, it’s essential to understand why your previous application was rejected and address any issues before reapplying. Consider improving your credit score, reducing debt, increasing your income, or applying with a different lender who may have different eligibility criteria.
While eligibility criteria vary by lender and location, generally individuals without a stable income, poor credit history, or insufficient collateral may struggle to qualify for a home loan. Additionally, those who are underage or lack legal residency status may face challenges in obtaining a home loan.
Several factors could contribute to not getting approved for a home loan, including a low credit score, high debt-to-income ratio, insufficient income or assets, unstable employment history, or inadequate collateral. Additionally, errors on your credit report or incomplete documentation could also lead to rejection.
If your loan application is rejected, the lender is typically required to provide you with a written explanation detailing the reasons for the rejection. You may have the opportunity to address the issues identified, such as improving your credit score or providing additional documentation, before reapplying. Alternatively, you can explore alternative financing options or seek assistance from a financial advisor to improve your eligibility for future loan applications.
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