Real estate is the most coveted investment instrument in the country. Buying a home, whether for investment or residential purposes, can take years to materialise and given the prices, few can afford to pay the money upfront. In such situations, buyers inevitably turn to banks for home loans.
Although the norms for approving home loans have eased in the recent past, don't expect it to be a cake-walk. One small mistake can result in you merely dreaming of the house, and never actually owning it.
We look at factors that can play a crucial role in getting your loan approved or rejected.
You cannot build a house if the foundations are flimsy, right? When it comes to loan approvals, banks use a similar analogy. If you have a low credit score, you will be denied a home loan outrightly even if you fulfill all other conditions. Credit score is considered to be the most important factor by the banks while disbursing a loan.
"Credit score reflects a consumer's behavior towards the financial transactions. In some ways, it is a mirror to his financial habits and underwriters base their decision and develop risk-based pricing based on the credit score," says Anil Sachidanand, MD & CEO, Aspire Home Finance Corporation.
So, if a person has defaulted or delayed the payment on any kind of loan or credit cards, it will have a negative impact on the credit score. Other factors like being guarantor to a person who defaults on payment of his loan can affect your credit report too if you fail to repay his loan. So, be very sure before taking up the role of a guarantor. There are credit rating agencies like CIBIL, Experian Credit Information Corporation of India, Equifax Credit Information Services and High Mark Credit Information Services that provide credit score to individuals. "Once you submit your loan application, the lender seeks a copy of your credit report from the bureau. They analyse this not only for the credit score, but also to review the extent of existing loans / credit cards, performance of ongoing and closed loans. All these go in to the final assessment of your loan application," says Rahul Soota, executive director, Mymoneymantra.
A credit score provided by CIBIL is a three-digit TransUnion score which is derived from the credit history found in credit information report (CIR). A CIR is an individual's credit payment history across loan types and credit institutions over a period of time. It ranges between 300 and 900. It indicates the probability of default of a borrower based on their credit history.
To maintain a healthy credit score, one should ensure timely dues payment and avoid taking too many unsecured loans as it may be considered negative. But if the damage is already done, you can work towards improving it slowly. (See: How to repair a bad credit score).
Your credit information report contains your personnel detail, so wrong information can lead to a mismatch between the details on your loan application and credit report and hence lead to your loan rejection. If there is any change in the personal details, you must update your lender so that it is reported to the credit information bureau and is reflected in your credit report. Any individual can get the credit report for a nominal fee from the credit bureaus.
However, it is important to check the report for anomalies like a credit card listed in your report but not owned by you, or a loan on their name which they had never taken. "Prospective borrowers can also apply directly to the credit bureau for their credit report for a nominal fee. This allows you to review the facilities listed against your name, seek corrections if you spot any anomalies like a credit card listed in your report which is not yours and to know your bureau score", says Soota. All bureaus have dispute resolution forms on their websites which aggrieved customers can fill and send with relevant identification documents.
Some people tend to apply to multiple banks at the same time. However, remember that if your loan is rejected from one bank then it can have an impact on your credit score and hence lead to the loan being rejected by other banks too. It is better to wait for the reply from one bank before applying to another so that you know why your loan is rejected and get the same rectified.
NEW OR UNSTABLE JOB
Since the repayment of loan is of utmost priority to the lender, they would like to ensure that you have timely repayment capabilities when he disburses the loan. In case of salaried person a steady flow of income is determined by the stability of job. "Since repayment of home loans is normally sanctioned for 15-20 years, stability of income in future becomes a necessary criterion to be assessed at the time of loan sanction. For example, if the borrower has a contract of employment with just eight months left in it, it is natural for the lender to enquire if the contract has been renewed in the past or whether the borrower holds any professional qualifications which would give comfort that alternate employment would be forthcoming," says Soota.
It is a similar story when it comes to changing jobs. While it may give the buyer a higher income level, it gives a negative impression to the lender. It is generally advised not to change your job if you are planning to take a home loan in the near future. In fact, the financial strength of the employing company is also considered as one of the factors for the evaluation of the application says Sukanya Kumar, founder and director, Retail Lending, a home loan consultancy. "People working in a proprietorship company, having less than 50 employees & not having provident fund facility, face issues in getting a home loan," adds Kumar.
Age is one of the most important factors considered by the lender while disbursing a loan. Typically, they put a minimum age bracket of 23-24 years and maximum limit of 60-65 years for loan applicants. "Assuming a 22-year-old, who has been working for the last three years, applies for a home loan and the qualifying criterion for that lender is a minimum age of 23 years with at least two years of continuous work experience, the lender would in all probability turn down such an application," says Soota.
APPLYING WITH RELATIVES OTHER THAN SPOUSE/PARENTS
If you want to get a home loan of a higher amount, clubbing the income of your spouse is a good option. But while banks allow clubbing of income of the spouse, father and son, the same does not extend to every family member. Some banks are sceptical of clubbing the income of the siblings because in case of a dispute, the EMI could be delayed. Clubbing the income with any other relative is not allowed. Also, a coapplicant can't be a minor.
LOCATION OF THE PROPERTY
Banks also make their decision to disburse loans on the basis of the project's location. Take for instance, Noida Extension, where a number of projects suffered due to lack of clearance and acquisition disputes in 2011. As a result, a number of public sector banks stopped sanctioning fresh loan sanctions in the area, as per news reports. "All lenders have limitations with the geographic locations. If the property is beyond such limit, the loan will get declined. The technical valuation of properties in remote locations may also be lesser than the purchase cost; banks do try to cover the risk of funding in an under-developed area on case-tocase basis," adds Kumar.
UNSATISFACTORY EVALUATION OF THE PROPERTY
You must ensure that you are buying a house at a price which is close to the market price. This is important because the bank does the valuation of the property itself and will give a loan of upto 80% of the property value after considering other factors like your repayment abilities.
UNCLEAR PROPERTY TITLE
"In the event that the property does not have a clear and marketable title, or there are issues connected to the approvals from the relevant authorities, normally banks or home finance companies keep the loan sanction letter valid till the customer finds another property which has clear title and approval," says Sachidanand. So, before buying a property you must ensure that it is not involved in any dispute.
LACK OF REPAYMENT CAPABILITIES
Banks ascertain your repayment capabilities before disbursing the loan. It depends on the disposable income that is left in your hand after paying off existing EMIs. Banks generally give a loan which amounts to an EMI of upto 50% of the disposable monthly income. So, first assess your repayment capabilities before applying for a loan.
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