Due Diligence. Why your home loan’s been rejected

Banks tend to exercise fairly high levels of due diligence before sanctioning home loans, as amounts involved are fairly huge. When you apply for a home loan, your application could get rejected for a variety of reasons, apart from the usual explanation of ‘bad credit score’. We look at a few common as well as some relatively less-highlighted reasons for rejection of home loan applications.

High EMI-to-income ratio

In general, a bank would be comfortable giving a home loan, if the applicant has sufficient surplus after paying his EMI. The rule of thumb is that not more than 35-40 per cent of your net salary should go towards paying your instalments. But if you have many EMIs running in parallel, such as for credit cards, personal and education loans, a large portion of your income would be directed towards repaying these debts. A home loan would thus substantially add to your liabilities — your EMIs may add up to 80-90 per cent of your monthly salary. Such a high proportion of the salary going towards debt repayment is a red herring for banks as there is every chance of a default.

Frequent job changes

To increase salaries and explore newer options, many youngsters tend to jump jobs frequently.

While such moves can help increase your income, for banks and financial institutions, it is a red flag.

‘A rolling stone gathers no moss’ may be an old adage. But banks view such quick moves negatively, as eventually there could be the possibility of job loss and a potential default.

In general, banks and financial institutions like to see you work for at least three to four years in one organisation to be convinced that you are reasonably settled.

From an individual perspective too, it makes sense to stick around in a place for a few years to get a good grip over your cashflows and manage your surplus well.

Co-applicant’s poor record

This aspect is not that well-highlighted. If you apply jointly for a home loan — usually with your spouse — the debt repayment record must be strong for both of you.

If one of the co-applicants has a poor track record of repayment or has taken too much debt, chances are that the home loan application may be rejected. Even if approved, the amount sanctioned may be lower than what you had applied for.

Financial institutions also approve of only certain type of joint loan applications. Usually, parent-adult son, husband-wife, parent-unmarried adult daughter (provided the house to be purchased is solely in the daughter’s name) and brother-brother relationships are generally accepted. Unfortunately, sister-sister, friend-friend and brother-sister applications are not looked upon favourably.

‘Defaulter’s address’

Now, you may have all the credentials for getting your loan sanctioned — a good credit score, sufficiently high salary, a good repayment history etc. But, unfortunately, if you happen to reside in a place that was previously home to a loan defaulter, your application is likely to be rejected.

This is because banks and financial institutions tend to blacklist a defaulter’s address. Any person who has subsequently moved into the place has to unfortunately face the brunt, despite having the right credentials.

Of course, you can persuade the bank and eventually convince the officials to sanction you the loan. But that would be a time-consuming and tedious process.

Property-related issues

There may be instances when an apartment or property that you wish to buy may not be in the approved projects’ list of your bank. It may also be that the builder may not be approved by your financial institution.

Also, if the targeted apartment or property does not have clear documents such as clean title deeds/parent documents or all the necessary corporation approvals or has deviations from the laid-out plan, such applications are liable for rejection.

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