Housing Loan interest rates are at their lowest ebb making it a perfect time to plunge and purchase the property you admire. But if you are pondering that your good credit score is for the home loan approval, well you are highly mistaken. Keep reading to figure out, as Square Yards have covered every aspect that is considered for home loan approval. Without any second thought, a good Credit Score shuts off numerous doubts of the lender, but more factors are still taken into consideration for complete satisfaction. It gives a clear idea about the repayments of previous loans and helps in figuring out the eligibility of the applicant. Still, considering other factors is equally important as such a huge financial decision can’t be made based upon a single parameter.
Credit Score is considered a critical parameter when it comes to applying for a home loan. Banks glean the home loan interest rate for a borrower as per the credit score, timely payments and financial stability. That is why having a good credit score is a must. Pondering about the chances of loan rejection even after having a good credit score? Well, it is crucial to have a good credit score to get housing loan approval, but it isn’t the sole parameter to consider. If you want the ball in your court in addition to credit score you have to focus on other factors too including default payments, previous loans, credit cards, and correlated payments. Moreover, an applicant with a credit score above 700 is an ideal candidate to sanction a housing loan with the best interest rate for a home loan.
An applicant must plan & meticulously draw up the home loan amount needed for notable purposes such as construction, renovation, or plot purchase. After deciding about the requisite finances all you need is a simple home loan approval from the lender. Seems to be a cream puff? Decided to march confidently just by considering your good credit score? Well, remember there are chances of not getting home loan approval despite having a good credit score. So, it is always better to buckle up your shoes before you start to walk.
If you are stuck in a similar situation, here is a way out to it. Here is the limelight to what actually went wrong and acted as a hindrance in your home loan approval.
What Went Wrong and Hindered Your Home Loan Approval?
Banks scrutinize an array of factors to depict the financial fitness of the home loan applicant and credit score is just one amidst them. It is for sure a crucial one but not the only one. The other important factor is the borrower’s ability to repay the debt that he is applying for through a home loan. For instance, if the borrower is so far repaying an Education Loan, together coupled with other loans, the lender will focus more on the debt-to-income ratio. It helps to gauge the borrower’s ability to manage debt repayments. To compute the debt-to-income ratio, the total debt obligations of the month are divided by the monthly income. Debt obligations comprise Credit Card payments and other ongoing loans. The home loan issuers usually compute this ratio every month to come up with a realistic figure. With this ratio, the lenders can easily determine what amount of additional debt the borrower will be able to comfortably handle together with the existing debt burden. An ideal debt-to-income ratio of 30% is considered as a threshold limit.
Moving forward, enlisted are the factors that help banks to arrive at the decision of home loan approval and offer able home loan interest rates.
Remarks in Credit Reports:
In general credit reports comprise numerical scores, remarks along with comments by the finance providers. Sometimes lenders allow you for prepayment of the loan, and interest rate reductions based upon various factors. You might avail them in terms of benefits as you save a huge amount with such schemes, but in the end, you will get a remark which acts against you. When you repay the amount, opting with an alternative option i.e., apart from the one you agreed within the agreement, acts as a warning sign for the other lenders. Any comment such as “settled”, “DPD: Days Past Due act as a warning sign and acts as a reason for loan rejection.
Defaulter Guarantor or Co-Applicant:
Lenders consider a guarantor indirectly responsible for loan repayment in case of non-repayment of the best interest rate for home loan. If there is a situation where the lender finds the guarantor at default, then there are chances of loan rejection. You might get a chance to replace the guarantor, but it entirely depends upon the lender.
Details Matching with a Defaulter:
Banks and financial institutions perpetuate a list mentioning individuals’ details such as name, age, residence, occupation. This list is prepared for the persons who have defaulted in terms of payments while being in loan tenure. If the details submitted by the loan applicant mistakenly get matched with the recorded ones, then the applicant receives denial for loan approval. It is also possible that the property you are about to buy was previously held by a defaulter which resulted in the match of the defaulter record.
If the Borrower is Overleveraged:
If the applicant is already burdened with the existing EMIs then he will not be approved for a new one. Let’s say you have three monthly installments worth 10,000 each and your monthly income is 50,000. After paying for the debts you are left with 20,000 which is essential for personal expenditure. In such cases, banks can’t sanction you the home loan and you will be considered overleveraged. The applicant’s DTI ratio is considered unfavorable.
Inadequate History of Tax-Payments:
Banks preferably approve the applicants who actively file income tax on a regular basis. It helps to determine the creditworthiness of the applicants. When you file income tax it somewhat gets represented on your credit score and it helps the lender to determine if the applicant is worth loan approval or not. So, inadequate tax payments can be a reason for the decline.
Over-borrowing:
If an applicant has already availed many loans in the past, regardless of the timely payments banks deny for the approval of loan application. Such applicants are seen as credit-hungry applicants and banks don’t appreciate getting in agreement with them. Even if they have clean chit, they are counted as a risky home loan candidate.
Secured to Unsecured Loan Ratio:
When you avail a loan against assets such as housing loans and car loans, it is termed as secured loans whereas loans availed without security such as personal loans and credit cards are termed as unsecured loans. Banks consider the applicant who has fewer unsecured loans contrary to secured ones.
How to Enhance the Chances of Loan Approval
If you have a bad credit score, yet badly need to avail lower home loan interest rate consider the following things. These will help you maximize your chances of getting a home loan approval:
Count on Lower Loan-To-Value Ratio:
LTV ratio stipulates the property’ value proportion that the lenders sanction as a loan. When the finance providers evaluate the housing loan application, this ratio is fixed based upon the applicant’s credit profile together with the risk assessment. When the bank deems the applicant of low creditworthiness, the applicant will be offered a low loan-to-value ratio. In simple words, you will have to pay a higher amount as a down payment. As per the RBI guidelines, the upper limit for the LTV ratio is limited to 75% to 90%.
An applicant with a low credit score can avail of a home loan with higher down payments. When you opt to pay a higher amount through a down payment, the LTV ratio is lower down and the chance for approval gets increased.
Add a Co-Applicant:
When banks assess home loan applicants having a Credit Score, less than 700 and a high DTI-debt-to-income ratio, they ask to add a co-applicant/ guarantor. With the presence of a co-applicant, the chances of loan approval get increased. A co-applicant with a good credit score will be an ideal choice to get easy approval. Additionally, it results in increased eligibility. Remember, a co-applicant will be equitably liable for the repayment of the loan. In case of defaults and delayed payments, the credit score of applicants, as well as co-applicant, is adversely affected.
Consider NBFCs and HFCs:
Getting approvals from financial institutions, non-banking financial companies, and housing finance companies is a bit easier compared to banks. This is because NBFCs and HFCs offer loans with relaxed parameters HFCs. Loan aspirants who get a rejection from banks give a try to such institutions. The chances of getting loan approval are higher but at higher interest rates.
Count on Loans with Higher Rate of Interest:
Lenders go along with the enactment of linking the home loan rate of interest with applicants’ credit scores. of the applicant. So, if the applicant does have a bad credit score, there are high chances of rejection. In such circumstances, all you can do is count on loans with higher interest rates. Rather than facing multiple rejections, we recommend availing of a loan at higher rates.
Well, before counting on higher rates, go through home loan online sections of various lenders and compare the offered rates as per your credit score. Grab the best interest rate for a home loan after comparing the available ones. Before you finalize your home loan EMI, you need to make sure that the DTI ratio doesn’t outdo 50-60%. Moreover, you can choose long repayment tenures and give a shot to foreclosure. It will help to reduce interest payout.
Other Reasons for Housing Loan Rejection
Captivating a home loan online or offline is a crucial step to build or buy a new home, especially when you don’t have sufficient funds. When you apply for home loans you have to pass through considerable research, documentation processing, and decision making. Being prepared saves huge time and associated efforts. You might come across a situation where you don’t know enough about the formalities and other paperwork. Thus, you need to be loan-ready. In addition, you should have sufficient knowledge about the reasons for loan rejection. When you know about these reasons in advance you can prepare and fix them to get guaranteed approval of the home loan and to avail best interest rate for a home loan.
Unpaid Dues:
When you apply for a home loan, one of the pre-eminent things that banks consider for the approval of the application is credit history and repayment record. The credit history typically involves a mess of determining on-time payments of debts and monthly installments of loans. The foremost way to pass through this criterion is by making timely payments. Never skip the EMI deadlines. Try your best to keep them up to date. Easily keep an eye on your credit record by making prompt payments of your bills as well as repayment dues.
Other Debts:
If you have accessed a greater number of debts in your name, then the lenders compute your real income by deducting the repayment amount from your monthly income. If as per the lender’s evaluation, the applicant’s capacity of repaying the debt seems to be inadequate, the lender denies approval of the home loan.
Address of the Applicant in Defaulter List:
In some cases, there are possibilities that the applicant has moved to an address that was previously occupied by a defaulter. Someone who failed to pay an availed loan or had pending credit card payments. If the tenant gave the same address within the record of a bank then it would be present within the defaulter database. When you mention the same address, automatically you will be detected as a defaulter which eventually increases the possibility of your loan rejection.
Job Stability:
Hopping from one job to another creates a poor reflection on your application. As a borrower, you must have a job and financial stability. If you kept on changing jobs, regardless of your income amount and eligibility your loan application might get rejected. If you have been working with a dedicated firm for a long, then there are more chances of loan approval. Being employed in a secured company somehow adds to the eligibility.
Rejected Home Loan Applications:
If you are applying for home loans at multiple lenders, drop the idea. The rejection of home loan applications creates a negative impact on your credit record. Rather than applying for loans directly, compare home loans online and get a clear idea about the best home loan interest rate for you. When you apply for the first time and get rejected, don’t repeat the mistakes the second time. Be more cautious and prepare a checklist and work in a procedural manner.
Property with Minor Rights:
If you apply for a loan on the property associated with minor rights, even after having a good credit score your application can get rejected. If the owner or seller of the property hides this information i.e., minor having property rights, then the approval gets interrupted.
Rejections Based on Association:
Not only individual factors but the association can also be a reason behind loan rejection. If the co-workers of the applicants are listed as defaulters and have bad credit records then it may affect your application too. The lenders reject the application as you are somehow linked with the borrowers who defaulted in making payments. Any sort of issues with the association can be a rigid reason for your loan application rejection.
Wrapping Up
Summarizing the factors, we can conclude that apart from credit score other factors play a crucial role in the approval or rejection of the applications. The enlisted ones aren’t a joke and can’t be fixed in a day. You need to be well-prepared and check upon the enlisted factors before applying for a home loan. To avail best interest rate for a home loan, ensure that you have clear past records with on-time payments.
