20 Reasons Why Banks May Reject Your Home Loan Application
Even though they lure you with grand promises of quick disbursal and assurances of ‘hassle-free’ processing of home loans, banks do several checks on you, before they approve your home loan application. Among these checks if they find one good reason that makes the borrower seem like a risky bet, they would reject your home loan application. In this article, we list out 20 such reasons—some known and some not commonly known—based on which a lender may reject your home loan application.
1. Poor credit score
All of us are different and deal with money differently. However, any slip made along the way, will find a mention in your credit history, which is compiled by credit bureaus in India. As the first step while processing a loan application, the bank will access you CIBIL report from a credit bureau. In case of a low score – credit scores are assigned by credit bureaus to borrowers in India, based on the latter’s banking/payment history, on a scale of 300 to 900—the bank will reject your application.
Currently, banks pay a lot of attention on this aspect. Lenders like Axis Bank, for instance, charge lower interest on home loans, from borrowers with impressive credit scores.
2. Frequent job change
In your opinion, this should certainly not be any of their business, as long as you have a stable job and have the repayment capacity. If anyone should actually care about this, it should be your employers. However, financial institutions also take an adverse note of the fact that you have been changing employment quite frequently. The notion is based on the assumption that you may lack the commitment and stability which acts as a pre-requisite to serving a long-term liability such as a home loan.
3. Nature of work
Unlike borrowers from the salaried class, self-employed people find it harder to secure a home loan, especially if they own small business. Self-employed borrowers do not inspire the same confidence among the bank officials, as salaried people do, as the latter enjoy a certain level of job security and stable income. For the self-employed to secure a housing loan, the borrower must have good paper work in place, before he approaches a bank. In case the bank finds any loopholes with regard to your income, business or income tax filing, they will not waste much time in rejecting your application.
4. Type of job
Banks also refrain from offering loans to salaried employees who work in certain sectors, because of the assumed risks in lending to this category. People employed with the police departments may, for example, not find banks as forthcoming to lend to them. The same goes for lawyers and journalists. Such borrowers may have to provide a guarantor for their home loan, in order to secure the credit. Banks also maintain a list of companies they have banned funding. If the builder is in this list, you may have to search for another lender.
5. Address-related issues
While preparing their defaulter’s list, banks may not only blacklist the applicant but his address, as well. This means you may have to bear the consequences of being a tenant of a house whose owner may have found a mention in the bank’s defaulters’ list, for no fault of yours.
6. Previous rejections
A bank would know your home loan application has been rejected by another lender, as soon as it accesses your CIBIL report. Aside from the fact that you have suffered the rejection, the credit report will also mention the reasons based on which the bank decided to decline your request for the home loan. This gives the lender a reason to be concerned and apply higher checks on such a borrower.
7. Properties in ‘red zones’
Banks typically have a list of areas, categorized as the ‘red zones’, where they do not finance house purchases, as they consider these locations as risky propositions.
There are only specific locations and specific properties for which financial institutions typically lend housing finances. In Delhi, for instance, a buyer who might be purchasing in property in a Lal Dora area will have to depend entirely on his own resources to make the purchase, since most lenders will not offer loan for a home in an area. This rule applies to most under-developed areas or areas that have seen a surge of unauthorised constructions in the past two-three decades.
There are also certain types of properties for which banks do not offer loans. While they would be quite willing to lend money for an under-construction project, banks may shy away from lending if the property is old and dilapidated.
8. Encumbrances on the property
Even in areas that do not fall under the list of red zones, a bank will restrain from financing a property purchase, if there are any questions over the title documents. During its legal assessment exercise, the bank will establish if the seller is legally authorised to carry out the transaction, while tracking the veracity of the property documents. Banks will never finance a property that is caught in any kind of legal or financial battle.
9. Over-valued property
Banks send technical experts to visit the property and established its market price with regard to its physical condition, location, etc., after conducting a thorough inspection. If the team appraises the bank of the fact that the sale is taking place at a much higher rate than its actual worth in the market, the bank will reject your home loan application, since they have to maintain a loan-to-value ratio. They will not lend you, say, Rs 50 lakhs, to buy a property, which in their assessment, is not worth more than Rs 40 lakhs. Since they typically maintain a loan to value ratio of 80%, they will also offer only 80% of the Rs 40 lakhs as loan and not anything more.
10. Builder’s credibility
One would face no difficulty in finding a lender for housing projects of reputed builders. However, it may be equally hard to find a lender that would loan money to buy a project with a builder that has been accused of dubious dealings in the past. For example, at a time like this, a bank would think 10 times before it agrees to lend money to a buyer to purchase a home with Amrapali, Unitech, 3C Company or Jaypee. All these developers are currently battling for survival after payment defaults and long project delays.
11. Past defaults
In case you have been sloppy in the repayment of your previous loans, this would reflect in your credit history. The situation will be much worse, if there are multiple instances of repayment defaults. Since a poor repayment record will inspire little confidence in a lender, they may reject your application.
12. Absence of a credit history
In the absence of a credit history, the bank has no way of knowing how financially prudent you are and how maturely you can deal with the pressure of a consistent monetary burden. Unless you have a good employment record or great savings to make up for the absence of a credit history, the bank may reject your home loan request.
13. Buyer’s age
Banks prefer young borrowers—people who have their entire working careers to repay the loan. Now, borrowers who are slowly moving towards retirement, do not fit well in a lender’s scheme of things for a variety of reasons. Such a borrower will have a very limited working life and consequently, a short tenure to service the home loan, which is typically huge in amount. Secondly, the chances of career growth in older people may be slim. Thirdly, in case of sickness or death of the borrower, the bank will be forced to recover the loan through other means. This is a proposition that lenders never look forward to, because of the hassle involved in the process.
14. Property’s age
Aside from your age, the age of the property also determines whether or not the bank will give you a loan. Even if the property is located in a seemingly premium location but is dilapidated and damaged, it would fail to get a financier.
15. Current EMI burden
Banks view borrowers favourably, if they are able to allocate 40% of their take-home salary in repaying the credit liabilities every month. So, a borrower who is already servicing multiple loans and is spending a large part of his take-home salary, will find it hard to convince a lender to offer him housing finance.
16. Income tax returns
An obvious sign of a responsible citizen is that they properly file their taxes every year, irrespective of whether they have a taxable income or not. Unless you have done so and have the documentary support to prove this to the bank (banks generally ask for the tax return documents of the past two years), your home loan application will be rejected.
Also, in case you file your taxes for more than one year, just to get a home loan, the banks will perceive this as a desperate attempt to secure a loan. While they may not reject your application based on this factor alone, they would certainly have a higher bargaining power.
17. Signature mismatch
This is possibly one of the most careless mistakes that can lead to rejection of home loan applications. The borrower is expected to sign on several pages of the home loan application form. The signature at all these points must be exactly the same. If any discrepancies are found in the matter, the bank will reject the application.
18. Address mismatch
The bank will send its representatives to verify your current address. It will also send its staff to check your office address and whether you actually work in that office. Needless to say, you have to be present at these locations when the bank representative makes a visit. In case they do not find you are these locations, the lender will not process you request for housing finance.
19. Single borrowers
Banks prefer co-applicants in a home loan, for the obvious reason that they will have two adults responsible for the same liability. Even if there are issues with the repayment capacity of one buyer, the other will come forward and shoulder the responsibility. They would find several reasons to reject the home loan application of a single applicant, unless they have an impressive work profile and high upfront money (the amount that the buyer will spend from his own pocket). They would insist that the borrower get a co-applicant to increase his home loan eligibility. It is precisely for these reasons that single women find it hard to get easy credit.
20. Profile mismatch
Not all banks lend money to all sorts of borrowers. Banks typically cater to a specific set of borrowers. Most banks lend more freely to salaried people with impressive credit scores for purchase of new properties in established housing markets. Any proposition that is different from the combination thus mentioned, may fall away from the target client base of the bank. Now, even if you are a salaried individual with a good credit score, the bank may shy away from lending you money for purchase of land or property in rural areas.