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How To Deal with Home Loan Application Rejections

Home Loan Applications can be rejected for many reasons. Not only does such a rejection waste you a lot of time and money, it seriously impacts your credit score and influences the probability and cost of any loan you wish to take in the future. So whether you’re actively looking to get a new loan, or trying to minimize the chances of rejection on your current application, or searching for the next steps after your loan has been rejected, this article has the right information for you. We’ll take a look at the different categories under which a home loan rejection is filed, what these categories mean, how you can avoid them, and what you can do to overcome them. 

Rejection Reason 1: Low Credit Score

Everyone who does their market research must be familiar with the importance of credit scores in pushing forward the loan application. If you got your home loan application rejected due to a low score, this recent rejection also becomes a part of your credit report, further affecting your credit score. 

What Causes This Rejection?

Rejections through low credit scores can happen due to several factors. One of the main factors is your credit repayment history. Your lenders keep track of your payments and if you miss out on even one, your profile will receive a default. 

A profile with a credit score as low as 650 has almost zero chances of approval. Whereas, the profile with a score of 750 and above has increased chances of approval.

Along with repayments, credit bureaus also analyze your credit utilization ratio.

The credit utilization ratio is the total credit used divided by the total credit limit, accumulating all credits taken. In simple terms, if you have 2 credit cards of Rs. 25,000 each, and you’ve currently spent Rs.15,000 on one and Rs.20,000 on the other. Then your credit utilization ratio is (15000 + 20000) / (25000 + 25000) = 70%.

If your credit utilization ratio is more than 30%, then it reflects on your credit score as highly dependent on credit, causing rejection of your application.

A low credit score is possible due to credit mismanagement: Having too many unsecured loans such as personal or credit cards in your name.

Finally, a hard inquiry is another common factor that affects your credit score for home loan. Lenders carry out a hard inquiry on applicants to check the financial status and evaluate liabilities. A hard inquiry reflects on your credit report for 2 years.

What Can You Do To Avoid It?

  1. The first thing you need to do is ensure you have high enough credit. You can improve your credit or keep it high by following a few easy methods. Learn more by clicking here.

  2. You have low credit. Now what. First, check your credit and know the red flags. What do banks consider as red flags, so you walk into an application with your eyes open? Know the ranges of acceptable scores. 

  3. Ensure you do a soft inquiry, not a hard inquiry. If it reveals a gap in your credit score, do not go through with the application. Instead, get your credit score fixed first. 

  4. If you absolutely cannot wait, for instance, emergency loans, then apply with your eyes open, i.e, through an aggregator who will find you the right lender given your low score. Make sure your application is targeted to maximize your approval chances. 

So You Got Rejected. What Next? 

Ask the lender you approached for the reason behind your housing loan application being rejected. Every lender will and should provide a documented reason for rejection. If the reason is clearly due to a low credit score, then check if the credit report is up-to-date and accurate. 

If there are any defaults mentioned in your repayments that are actually incorrect and if there is a faulty report of missed payments, then these errors add up as a negative remark on your credit report, therefore lowering your credit score. If this is an administrative error like an incorrect or delayed report, then raise a dispute with the credit bureau to rectify the error.

If there is no error in the report, then you need to start improving your credit score. It takes only a little bit of knowledge, some basic good financial habits, and a lot of patience. Start here with this handy guide and rest assured your score will increase with time. Then again, you need to be patient as your credit score will go up over time. 

Rejection Reason 2: Income Deficiency

Different lenders have different criteria regarding applicants’ income. If you do not match that criterion, then you get your home loan application rejected. What is important to note is that it is disposable income that banks are keenly analyzing, and not total income. 

This means if you earn a high monthly income of Rs. 2,00,000 but the EMIs on your outstanding loans are Rs. 1,50,000, then you still are, most likely, not eligible for a home loan.

How Does This Rejection Happen?

Every lender will evaluate your loan to income ratio. This means the total loan repayments you make combining all the EMIs must not exceed 50% of your monthly income. If your income streams suddenly dry up midway through the application, for instance, if you quit your job, lenders may still reject your case. 

What Can You Do To Avoid It?

Banks collect a few income documents like three months’ salary payslips and your bank statement. Your payslips show where you work and how much you earn. The bank statement shows that the amount is deposited to you and allows your lenders to study the EMIs and other payments you make. 

Lenders carefully study the form in which your salary is credited to you. Although cash payments are not usually the direct cause for getting your home loan application rejected, they can effectively increase your rate of interest. Make sure you have all the required documents ready to submit to the lender during the application process.

You are also required to submit Form-16 which proves that you and your employer are paying the taxes in the right way. Keep in mind that any discrepancies in that can harm your application status. You can obtain the Form-16 from your company’s online portals or by approaching your HR department. This applies to your previous employment as well. You may need to submit Form-16 for the last two years.

If you are self-employed, then you will have to submit a profit and loss statement along with the balance sheet. The lenders evaluate your revenue and see if your source of income is earning the estimated turnover.

Almost all banks look for a debt-to-income ratio between 20 to 35% and if yours is below this tolerance limit, then first reduce your liabilities and increase your LTI before applying. 

So You Got Rejected. What Next? 

Whether you are a salaried individual or self-employed, make sure your source of income is stable for at least two years straight before you apply for home loan.

Reconsolidate your income and payments and prepare a budget plan so that your income is 70% higher than the monthly debts.

You can negotiate with lenders based on good credit history, provided you paid off other debts on time. It also helps if you can show you are lined up for an imminent rise in income, perhaps a promotion or bonus.

You can opt for a joint application with your partner or family member. The combined income will raise your income eligibility and according to section 24 of the tax law in India, you and your partner can avail of Rs. 2 lakhs tax benefit, which lenders consider positively for a joint application.

Finally, if you don’t have a partner or supporting family member, you can apply for a lower loan amount from the lender. The best way to do this is to check your loan eligibility based on your income and credit profile, and not apply for loans that are larger than this eligibility amount.

Rejection Reason 3: Property Deficiency

An application falls under a negative profile by evaluating not only the source of income of the applicant but also the property they are trying to buy.

How Does This Rejection Happen?

Your property is analyzed closely before you become eligible for a home loan. As part of your application, you need to submit documents like the agreement to sale and a property paper chain document that shows the details of previous ownership. Missing out on any of these documents might show that the property is risky, and pushes your application into a negative profile.

The valuation of the property plays a vital role here. If you are buying a property for Rs. 75 lakhs and the certified property valuers give the bank a valuation report of only Rs. 50 lakhs, then the bank will not be able to proceed with your profile. This is because, in the event of default, the bank must be able to recover the loan amount from the property. 

If the property is not valued at the amount the bank lent, then it is a faulty investment. Though a few lenders accept 15 to 20% deviation, it is hard to find a lender who would risk more than that. In some cases, you still might receive a loan with a high-interest rate for the property, but the loan amount is likely to be far lower than what you applied for. 

Another factor that causes lenders to reject your application is when the title of the property is not clear. Your lenders ask you to submit a title deed that proves the ownership of the property. Through this document, it is easy to learn if there is any disputed ownership that can reduce the value of the property in the long run.

What Can You Do To Avoid It?

It is important to make sure that the property has all the legal compliances beforehand so that you can negotiate property deficiencies with the lender. Sometimes, the builder of the property doesn’t have the approval the bank needs, or the portion of the property is in violation of government regulations. Make sure that the property has none of these cases involved. 

In some cases, properties that have legal hurdles can in fact get regularized after you get a loan, so check how effective the disputes truly are.

Tackle the title dispute smartly. In general, you will obtain the title deed by transfer of sale or through the will of the owner. If it is not the case, under the transfer of property act, 1882, you have the right to procure the deed by applying to the urban development authority. By having this deed in hand you are proving that the title of the property has been transferred and there are no running disputes.

You can learn if there are any legal hurdles regarding the property in the past. Most registration websites run by the government have a tool called Title Search. Using this tool you can look for legal litigations on a property. And, you can get complete details of the past registration of that particular property. Ensure that the registration details are intact. If you find that there are far too many discrepancies to handle, then you are better off looking for a new property with no litigations. 

Make sure you gather all the above-mentioned documents with no serious flaws, and you would have minimized your risk of getting a rejection.

So You Got Rejected. What Next?

Take your time and check for accurate property deficiency reasons behind the rejection so that you can rectify them. Regarding the title dispute, apply for a Title Insurance that covers all disputes of the past that can cause unclear title. This protects both lender and the buyer from financial losses due to defects in the title of the property. There is also another insurance called Conventional Insurance that can cover future financial losses due to unseen defects in the property title. 

Having these insurances covering your property, your lenders are more assured and might be willing to approve your future loan applications. 

Also obtain a non-encumbrance certificate, that can be your firm evidence of ownership that ensures that the property has no legal problems whatsoever.

Finally, you could also send a positive signal through the amount of loan you apply for. Banks use the Loan to Value or LTV ratio to calculate how much of a loan to approve. This is based on the value of the property. So if the LTV is 80%, the loan amount they sanction will not be higher than 80% of the property value. On the other hand, if you apply for a loan that is much lower than the LTV, then lenders are more confident about their ability to recover their investment based on the property value. 

Rejection Reason 4: Negative Profile

An application is considered a negative profile if there are unreasonable discrepancies in the job they have or transactions they carried out in the past.

How Does This Rejection Happen?

Whether you are going with a bank or a Non-Banking Financial Company (NBFC), they are obligated to find out if you possess a stable job. It would show the lender that the borrower is in fact capable of repaying the loan with a secure stable income from a stable job. A few applicants even have criteria that the borrower must be in a stable job for at least three years. 

Lenders generally classify companies into different classes. Most reputed companies are in the first category or class A, So, it is possible that if you are an employee of an MNC, you have a higher probability of loan approval than someone who is earning more than you in a start-up.

Another important aspect that deserves a category of its own is regarding cheque bounce cases. All banks consider cheque bounces as a criminal offense and the person receiving a faulty cheque has a right to file a complaint before the magistrate. 

Lenders make sure that the applicants don’t have cheque bounce cases involved, to avoid fraudulent profiles. However, they check for the technical reasons behind the bounce. If it is something trivial like a signature mismatch, for which a fine is imposed, banks might not consider it a liability. Whereas, for something like insufficient funds, the profile is marked negative.

Furthermore, the cheque bounces are classified into two types. Inward return and outward return. An inward return is when the cheque coming to the bank gets returned due to technical reasons. An outward return is when the cheques are deposited by a third person to the account holder and bounced. In most cases, lenders accept 4 to 5% of outward returns and only 2% of inward returns.

What Can You Do To Avoid It?

Make sure that your job description has no discrepancies involved whether in your offer letter or in your payslips or even in form-16.

Check for the legitimacy of the company you are working in. All companies must be registered with the Ministry of Corporate Affairs. You can go to the MCA website and search for the company name. You will be shown the LLPIN/CIN/Form INC-1 Ref number along with the registered full name, state, date of registry, and status if the company is registered.

So You Got Rejected. What Next?

Check for the exact reason behind the rejection. If it is your profile with your company, or if it is the company itself, ask financial advisors like Mymoneykarma how you can deal with this problem. 

In most cases, you will have to look for a better opportunity at a registered company that is listed in a better category in the job market. And, if your profile has a cheque bounce record, wait for a sufficient period before your next housing loan application. As the banks take it as a red flag if the profile has a cheque bounce case involved in the last 1-year.

Tackle Smart with Mymoneykarma

Rejection has a big negative impact on your credit score and your chances of getting a loan approved in the future. So before you apply, make sure your application is water-tight and fulfills all the requirements that banks have. Unfortunately, this can be quite a challenge because of the long list of requirements and the fact that banks often vary considerably in their specific criteria. 

Fortunately, mymoneykarma can help you out with an internal analysis that provides a free credit report, a free interest rate benefit assessment, and a free analysis of your profile to check for gaps and identify lenders.

Mymoneykarma reviews all the documentation required for the loan process. This means you can get your KYC, income, property, and banking documents reviewed and organized without any remarks on your profile. Once your documentation is shaped perfectly, your profile goes through the all-important next step: Selecting the right bank.

Consider an example where your income profile is 100% accurate but the property you wish to buy has government litigation. Let us say you wish to buy an apartment on the fourth floor of a 4-storey building. But the building has the approval for only two floors. For this reason, you are receiving the apartment for a cheaper price. Unless there are life-threatening hazards in the property, the apartment can undergo regularization making the violation go away. Until then, not all banks approve the loan for the rate of interest you wished for. 

Mymoneykarma does the negotiations for you and finds the right bank with a favorable interest rate. As soon as your property is regularized, mymoneykarma finalizes your loan at the ideal rates, even from the banks that were reluctant before. You can opt for a balance transfer and let the loan work for your benefit.

In this article, we have summarized the main reasons you are likely to have your home loan applications rejected. These reasons are low credit score, income deficiency, property deficiency, and negative profile. Additionally, you should now be confident about how to avoid falling into some common traps, how to address gaps or flaws in your profile, and how to proceed if you are faced with rejection. Remember, a home lasts a lifetime, a home loan lasts 20 years, so this is a long game to be played with patience, research, and diligence.

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