“Your home loan application is rejected!” The above phrase of being turned down by a home loan lender can be a huge disappointment. Did you know that more than 40 per cent of home loan applications are declined every year by a financial institution? Countless people had their home loan applications declined for one or another reason.
But it’s important to know that you are not alone. Some rejections are nothing more than a simple technicality issue and can be resolved by providing additional information or some lenders have just increased their requirements to qualify for a loan which makes it progressively harder to get approvals.
Some decline can be because of your credit score, Loan-to-Value (LTV) ratio, and capacity to repay. However, without any reason, it is very rare for your application to get declined and for that to be the end of your journey. Below we have discussed the reasons behind the rejection in detail and what can be done to get back on track.
Here are a few things that you can do to make your application stronger and apply whenever you are ready.
Find out Why Loan Didn’t Get Approved
Before reapplying for a home loan, it is important to know why you were denied in the first place. The first step is to talk to your lender and get all the details that might include a letter specifying all the little details. Just make sure to ask these questions within the timeline period that is within the 2 months.
These details will help you to ensure that it does not happen again and what can you do to fix these issues. But always remember, this is just the first step.
Assess your Credit Report
Many Indians are not sure about the stand on their credit score. But no one can deny the fact that lenders see a solid history of your borrowing and repaying loans. This is because banks heavily rely on the credit score in decision-making as it denotes how you managed your money in the post.
Your credit history could include the number of credits you have signed up for and its timeline, utilization, and over-limit status, and the most important is the repayment pattern in the last 12 months.
For many, this financial situation can be a reason why a home loan was denied. If this sounds like your reason, you need to examine if your credit report is up to date and accurate, If yes, you need to start repaying outstanding balances on time to re-establish an acceptable record.
Creating a reasonable track of timely repayments will improve your chances of getting a home loan. It is also important to know that a poor credit report isn’t the only reason for the rejection, having no credit at all can also lower your chances of getting a loan.
Assess your Debt and Income
While you apply for a home loan, the lender will look at your work, income, and frequency of a job change. This is to ensure that your monthly income is 70 per cent more than the monthly debts and will be able to make the monthly loan payments. However, your home loan application can be denied if your income doesn’t meet the lender’s minimum requirement.
The other reason can be if your debt-to-income (DTI) ratio is too high. It can be calculated by dividing your debt payments by monthly income. For example, let’s say your debt obligation including everything comes out to be Rs 40,000 per month and your monthly income is Rs 1 lakh.
As per the formula, your DTI ratio is coming out to be 40% which can be more than the qualified ratio for many lenders. With good credit and paying off the other debts on time, you can convince your lender to accept the approval. Also, even if you get a hike or promotion, inform your lender to improve your chances.
Fortunately, some financial institutions in the market understand your situation and might make an exception for you. However, if nothing is working out and you don’t see any promotions in the foreseeable future, you can always ask the lender to approve you for a lower loan amount.
Increase your Down Payment Amount
Once you have finalized the house, your lender will review all the loan programs and will make it clear to you how much you need to put down for closing. However, if you are unable to come up with the stated funds there are chances that you might get rejection. Therefore, you must fund 20 per cent of the amount from your pocket as banks usually avoid making LTV that is above 80 per cent.
You can arrange funds from your relatives and list them as a gift. Another solution can be waiting till you can arrange the minimal funds for the down payment. There can also be a scenario where the lender might not even approve 80 per cent of the LTV.
For example, Kumar wants to buy a house of Rs 2 crore and is ready to pay a 20% deposit that is Rs 40 lakh and needs a loan for Rs 1.6 crore. However, Lender A assessed their metrics and only allowed a maximum loan of Rs 1.5 crore whereas Lender B using their metrics allowed them a loan of Rs 1.6 crore.
This means that every lender has different policies and metrics to assess the loan and has its risk appetite. Therefore, don’t give up and move to another lender for approval.
Atul Monga is co-founder and chief executive officer of BASIC Home Loan. The views expressed in this article are those of the author and do not represent the stand of this publication.
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