Only a small percentage of home loan applications get rejected primarily on account of a poor credit score or when the project itself does not have approval from the concerned authorities.
When considering a home loan, the sanctioning authority considers the amount of loan sought, the applicant’s current income, the borrower’s repayment capacity, taking into account income by way of salaries/business income, the tenure of repayment, especially if the applicant is old. ( Normal age for loans ranges from 21 to 60 though banks do make exceptions up to 65.)
A typical loan is given for 20 years with EMI of 240 instalments where interest and principal have to be paid in full over the EMI tenure.
The sanctioning authority may decline an application for a home loan on the following grounds:
- Poor credit score of the applicant (In India, a good score is around 600+ on a scale of 300 to 900.Anything above 750 is considered very good)
- The project is not viable (due to the poor reputation of the builder or the construction company)
- The amount sought is too high compared to the cost of the house being purchased.
- The applicant has too many existing loans, leaving little capacity to repay EMIs consistently.
- The applicant’s similar application was rejected earlier as well.
For availing of a home loan, the applicant must have a source of regular income, preferably working in a company of repute, with at least 3 years’ service, thereby, helping the sanctioning authority feel comfortable about repayment capacity over the tenure of the loan. Length of service (Job hoppers are at a disadvantage), adequate income by way of regular salaries from a reputed organization, lack of too many other financial obligations, all help to assess the applicant’s repayment capacity, helping avert the applicant turning delinquent over time. The sanctioning authority also checks the applicant’s history of defaults, if any, on credit card or other payments, which get reflected in the credit report prepared by CIBIL, Equifax, Experian or any other accredited agency. Such reports are considered by every sanctioning authority and give them an idea of the applicant’s creditworthiness.
A very common reason for rejection of a loan is providing insufficient documents or withholding information that could have an adverse impact on the loan application. All sanctioning authorities today routinely go through the applicant’s entire credit history and any information withheld can act as a dampener and lead to rejection. This can, of course, be set right with some effort from the applicant but then could delay sanction as no financial institution today will risk the danger of a home loan which is otherwise fully secured with the mortgage of the property, turning a non-performing asset (NPA).