Many home buyers may face a rejection of their home loan application for some reason. This should not be a cause for worry as they are not alone. A common reason for a home loan application being rejected is that some lenders may amend their eligibility requirements for home loan qualification and this makes it progressively harder for applicants to get approval.
A home loan application may rarely get declined without a valid reason. To assist home loan borrowers in making their applications full-proof, here, we will discuss various reasons why a housing loan application can get rejected.
- Low down payment
Banks and lenders review loan policies every year and may change the rules regarding how much amount is to be paid upfront while buying a home. If you are unable to arrange the funds accordingly, there are chances that your home loan application may be rejected.
As a thumb rule, you will have to finance at least 20% of the house or property value by yourself. This is because most lenders limit the loan to value ratio (LTV) to about 80–85%. To gather the required funds for the down payment, you can make use of your savings or arrange funds from your family and state them as a gift. To ensure that your home loan application is not rejected, you should ensure to have the funds for the down payment before you reach out to your lender and begin the application process.
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- Incomplete documentation
Most home loans require a lot of paperwork, including proof of identification, income, and residence. These are apart from property papers, documents authorised by relevant authorities, etc. Even if a single document out of the list is missing, your bank or lender has the right to reject your home loan application. This is why it is important to make sure that all your documents are valid and in place while applying for a home loan.
- Unstable income source
If your income is insufficient or you are unable to furnish proof of a stable income source, your home loan application could be rejected. Therefore, before applying for a home loan, make sure to have a stable income source. Other than your regular income like salary or profits from your business, you can identify and show income from other sources, such as rental income from property or investment returns. This will boost your chances of loan applications being approved.
- Low credit score
If your credit score doesn’t match the bank or lender’s eligibility criteria, your home loan application can get rejected. Most banks and lenders consider a score above 750 as good since it reflects a good repayment track record. This indicates a lower risk for the banks. A high score of 750 or above increases your chances of home loan approval and also helps in fetching competitive interest rates. It is important to note that while lenders give importance to high credit scores, they may also consider scores between 700–750, provided all other eligibility criteria are met.
- Suitable property as collateral
The house or property for which a home loan is being sought also plays an important role in the approval of a home loan application. While most lenders finance all kinds of properties, there are certain criteria to be checked before loan approval. As a thumb rule, lenders prefer to extend loans for homes or properties that are in a good location, are from reliable developers, and there are many amenities attached to it that can result in a high resale value.
- No government approval
If a house or property is not approved by relevant government agencies there are chances of your home loan application getting rejected. Therefore, be sure that the property is approved by the government before availing a home loan from a bank or lender.
- Income tax returns
It is important to file your income tax returns on time every financial year. Before granting a home loan, banks and lenders check for a clear track record as far as income tax returns filing of the past two years is concerned.
- Home loan eligibility criteria
There are certain eligibility criteria that have to be met while applying for a home loan. Some of the basic requirements for a home loan in India are:
- Indian Residents, Non-Indian Residents (NRIs), and Persons of Indian Origin (PIOs)
- The credit score should be 750 or above
- The minimum age should be 23–25 years and the maximum should be 60–70 years
- Applicant must have at least 3 years of work experience if employed with an organisation
- Self-employed applicants must have at least 5 years of business continuity
- Applicants must be earning at least Rs. 25,000 per month
- Loan-to-Value (LTV) Ratio cannot exceed 80–90% of the property’s value
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- Documents required
To get your home loan application approved, you must furnish certain essential documents. Some of the commonly sought documents are:
- Valid address proof: Voter Card, Ration Card, Aadhaar Card, Driving License, etc.
- Age proof: Voter Card, Ration Card, Aadhaar Card, Driving License, etc.
- Residence proof: Utility bills, tax receipts, etc.
- Income proof: Salary slips/P&L statements, bank statements, etc.
- Property related documents: Title Deed, etc.
If one bank rejects your home loan application, it is not the end. Different banks have different criteria. If you do not fulfil the criteria of one bank, you can always reach out to other banks. If your loan is rejected, you must find out the reason behind the rejection and learn about other banks’ criteria to submit a fresh application and improve the chances of approval.