People are very passionate about their dream home. After years of ‘deliberation’ and ‘hard work’ a stage comes in life when one buys a home. Deliberation, because not many realize how important it is to buy a home for self very early in life. Hard work, because it takes years to save amount necessary for the down-payment.
But after all this hard work what happens if one face home loan rejection? It’s no less than a heart break.
In most cases, home loan rejection happens due to poor income levels. Apart from this, high earning individuals having poor credit ratings may also face home loan rejection. Leaving aside income level and credit rating, there are other top reasons leading to rejection of home loan applications.
People reading the fine-prints of the home loan application will know all the reasons. For banks & NBFC’s the other reasons plays a big role in home loan approval. The reasons may be comparatively smaller, but it cannot be ignored. Banks & NBFC does multi layered verification before approving a home loan application.
Top reasons that could lead to Home Loan rejection
In this post we will learn about the other not so common reasons of home loan rejection. Is it important for the applicants to be aware of these reasons? For sure it is not necessary. After all its banks job to do the verification. But doing a little bit for self-preparation will surely help in speedy disbursement of the loan.
Banks and NBFC’s may disapprove loan application for more reasons than one. For people whose loan gets approved must acknowledge that they got lucky. But not everyone is as lucky.
There is no other way to by-pass the procedure of home loan approval. Some banks are more stringent than others. But all banks has to prepare a final report which must be compliant with the norms. Hence, it is only better for loan applicants to be aware of the steps.
1. Lower Education Level
School or college drop-outs may not get loan approval as easily. In fact for undergraduates loan approval can be a big hurdle. There will be exceptions to this rule, but they must be one-off case. People who are highly educated gets loan easily, why? Higher education gives more confidence to the lender about the job security of the applicant. Undergraduates have more chance of being unemployed.
2. Lower Experience in Work
Getting an employment may not be enough. Banks and NBFC’s also like to see a longer work experience attached to a salaried person. The longer will be the work experience, more secure the applicant is considered by the banks. This may be one reason why, freshers find it hard to get their loan application approved. A good suggestion for freshers will be to get their first job, work for around 2 years, and then apply for the loan.
3. Unknown company
Banks eagerly gives loan to people who works for big and renowned companies. But people who work for lesser known companies may find it harder to get their loan application approved. But does it mean that people who work for start-ups can never get loan? No, there is a procedure using which banks cross checks credentials of companies. Banks & NBF’s asks companies to submit their past financial reports. Review of past financial reports will enable banks to establish the credentials of companies. If future prospects of company looks positive, home loan approval becomes easy. But if prospects are not so obvious, bankers may go for home loan rejection of the employee.
4. Changeover phase
A person may be working in a good company and may have required number of work experience behind his back. But still his loan application may get rejected. This happens when the person is in changeover phase. The changeover phase is that initial period when a person has just switched his/her job. Banks may not consider issuing home loan to a person who has just switched his job. There are people who leave job and start their own business. These people find it hard to convince bank to issue them loans. Such changeover phase is difficult for loan applicants.
5. Being part of a joint family
On personal front, a joint family can be a source of strength. But when it comes to lending money from banks, joint family set-up may pose some problems. The bigger is the family, the more are the number of dependents. Banks and NBFC’s do not like to see too many dependents behind one earning member. Joint family also pose one more problem. Generally people living in joint family apply for bigger loan amounts as they need bigger houses. Bigger loan amount and more number of dependents lessens ones credit carrying capacity. But this problem can be managed by having multiple co-owners for one property.
6. Unknown builder
A builder who has not established his credibility in market finds it hard to find buyers. Banks and NBFC’s will not issue loan to finance project of any builder. A builder who has reputation of constructing quality properties, within time frame are preferred by banks. But builders who are not known to banks are susceptible for home loan rejection for its buyers. This is one reason why, builders gets pre-approval from specific banks. This pre-approval eventually helps the potential buyers to get the loan disbursed quickly. For prospective home buyers, it is essential to select a right builder. There are some cases where the builder is good, but still home loan gets rejected. This can happen when the project has not received necessary statutory approvals. As far as home loan approval is concerned, mix of right bank and reliable builder helps.
7. Lower Market Value of Property
Suppose one wants to buy a 2BHK flat for Rs.1 crore in Bangalore. The person wants to finance 80% of the money using home loan. Eighty percent (80%) of Rs.1 crore is Rs.80 lakhs. Balance Rs.20 lakhs will be his self-contribution. With this assumption he approaches a bank and applies for home loan. Before the bank issues home loan, they do techno-legal verification of the property. In this verification process they also estimate the actual market valuation of the property in consideration. Suppose the bank estimates the actual valuation of property as Rs.90 lakhs. In this case, the loan being seeked is 89% (Rs.80/Rs.90) of the property price. There is a high chance that this application make face rejection.
Banks can never overlook this shortcoming. Approval of home loan for overvalued property is very rare. Precise valuation of property is a key factor is getting a home loan approval.
8. Aged and dilapidated property
Banks issue home loans by keeping the property as a guarantee. Aged and dilapidated property are not considered as a good guarantee. Hence it is important to buy relatively new homes to get home loans easily. Generally people take home loans for period as long as 15-20 years. Banks will like to assume that the property in consideration should at least live this life span. Aged and dilapidated properties has less chance of living this long.
9. Others Borrowed Loans making you as guarantor
Generally people do not realize the disadvantage of being a guarantor for others. Being a guarantor for some ones loan reduces the credit-carrying capability of guarantor as well. Being a guarantor for too many people’s loan may call for home loan rejection. It reduces ones eligibility to get bigger loans for self.
10. Payments got bounced in past
In that past, my one month EMI ECS got bounced as I forgot to maintain the account balance. Once I issued cheque payment to a vendor. Due to oversight I issued a wrong cheque. As a result the cheque bounced. These mistakes may seem smaller in normal days, but credit rating agencies keeps a note of these errors. ECS and cheque bouncing is considered very deterrent for ones credit rating. People with lower credit rating might find it impossible to get home loan approval.
Maintaining a good credit score along with a high-paying job, is not sufficient to ensure home loan approval. Despite these being two of the major factors for home loan approval, but other factors also plays their part. Factors like builders reputation, education level, stature of the employer etc, can also lead to home loan rejection.
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