Reasons Why you May be Denied a Home Loan

According to the monetary policy released by the RBI in October 2020, the repo rate remains unchanged at 4% which will enable borrowers to avail a home loan at favourable interest rates. Furthermore, since the benefits under section 80EEA have been extended for the financial year 2020-21, individuals opting for a home loan can now avail deductions on interest payments which will enable them to save a significant amount on yearly EMI outgo.

However, prospective borrowers should also keep in mind that their home loan eligibility depends on several factors. Not adequately fulfilling any of them can lead to a rejection of your home loan application. So, here are some top reasons that can result in the denial of a home loan.

• Inadequate value of the property as per loan requirement –

Since home loans are secured credit options, the value of the property plays a significant role in assessing an individual’s home loan eligibility. If the property which is being offered as collateral does not follow the guidelines prescribed by a relevant authority such as RERA, then the lender can suitably reject the loan application.

A financial institution may also reject a home loan application if the property is too old or has poor resale value. On that note, a new home buyer planning to sell the house in a few years should know about the features that can improve his/her property’s value to enhance the overall appeal of such property.

• High debt to income ratio –

Debt to income ratio is used by lending institutions to calculate the percentage of your monthly income which goes towards repayments of all fixed debts for the period, such as credit card bills, loan EMIs, rent, etc. In other words, it is used to ascertain a borrower’s loan repayment capacity.

For instance, B has a monthly income of Rs.40,000. His monthly debts include Rs.5,000 for rent, Rs.10,000 for a car loan EMI and Rs.10,000 for a loan EMI. Thus, B’s total fixed obligations are equal to Rs.25,000, and his debt to income ratio is 62% which is quite high. If he now applies for a home loan, his application will be rejected by the lender because he has a high debt to income ratio.

Thus, a borrower must focus on reducing his/her debt to income ratio to improve the overall home loan eligibility. Lending institutions usually consider 30 to 50% to be an ideal debt to income ratio.

• Incomplete documentation –

Lending institutions verify the identity of borrowers and other information such as employment and income proofs provided by them based on the documents submitted. The loan application is sanctioned only after the verification procedure is complete.

Thus, if a borrower provides incomplete or improper documentation, the lender will not be able to determine his/her home loan eligibility adequately, thus denying the application.

Hence, to avoid rejection of home loan applications, one should go through the list of documents specified by the lending institution.

Borrowers can also consider opting for a home loan from a lending institution that provides pre-approved offers, which aid in simplifying the loan application procedure. Such offers are also available on other credit facilities too, such as loans against property. Moreover, to check the pre-approved offer, one only needs to enter nominal personal details.

• Unstable employment history

Home loan are long-term credits spread over a period of 15 to 20 years. As such, lenders need to determine whether a borrower has the capacity to avail a loan for such a long duration as well as pay the EMIs due in time.

In such a situation, Individuals who change jobs frequently, or work on a freelance basis are deemed risky by lending institutions, and therefore their loan applications stand a high chance of rejection.

Salaried applicants with a work experience of three years or more with their current employment at a reputed public or private company are considered eligible for a home loan since they come with high repayment capacity.

Additionally, self-employed individuals with business stability of 5 years or more also stand a better chance of receiving home loan approval. Applicants with no stable employment history can consider applying jointly with their spouse or family member holding a steady job and positive repayment history. Accordingly, they should also know the tax benefits on a joint home loan.

Besides employment, age is another factor which has a significant impact on home loan eligibility. Home loans come with a repayment tenure of 15 years or more. Thus, younger applicants stand a better chance of repaying the amount in full compared to individuals who are on the verge of retirement.

Apart from that, individuals can also opt for online tools like a home loan eligibility calculator before applying to check the amount that they can qualify for based on their income, age and employment. It will also reduce the chances of rejection of a home loan application.