Noida based Aparna Singh, 33, had been looking for her dream house for a long time. When she finally found one she didn't take long to book it. The next task was to get a home loan approved. In the current scenario, where builders are desperate for buyers and banks are also trying to attract borrowers by reducing interest rates, Aparna thought that the task will be over in no time. But, to her surprise, her loan application was rejected.
The bank told her that her credit score - which shows how good you have been with your previous debt and credit card payments - made her ineligible for the loan. "I had to go to several banks before my application was accepted. I never thought that getting a home loan could be so difficult," she says.
There are many people such as Aparna who do not know what all it takes to get a bank to approve a home loan. Well, approval or rejection of your loan application depends on, besides your credit history and score, various factors ranging from reputation of the builder and the location of the property to your relationship with the bank. That is why two persons with same credit score may go on to discover different outcomes for their home loan applications.
Ram S. Sangapure, Executive Director, Punjab National Bank, says, "We have internal scores to see if a person is eligible for the loan or not but we don't fi x the pricing on the basis of credit rating." While different banks have different scoring models, let's take a look at some of the most common things banks look at before approving home loans.
Banks always prefer people with clean financial habits. A credit score tells a lot about your financial health. Whether you pay your EMIs on time or default can be easily checked through your credit report, which is maintained by different bureaus. Generally, 800 is considered the best score, and anything between 700 and 800 is considered good. If your credit score is less than 300, there is a high chance that your loan application will be rejected.
Still, a high score does not translate into low rates. While banks have started talking about moving towards risk-based pricing, it is still some time before you start getting the benefit of a high credit score.
Gaurav Wadhawani, Co-founder, Credit Sudhaar, says, "A bad credit score affects a lot more than your ability to borrow money. If you have a good credit score from a credit bureau, you may not get a lower rate. However, you could get your loan faster and with fewer checks by the lender." Credit Sudhaar is an online platform which provides clients with credit scores and tools to help them manage their credit and save money.
There are some occupations that banks prefer. For example, in many government banks, government and PSU employees are most preferred as they have a stable job. After government employees, banks prefer people working with blue-chip companies and doctors. Further down the line come chartered accountants, engineers and lawyers. People working in private companies and self-employed get the lowest scores. "Occupation is one of the important factors taken into consideration while appraising a home loan.
It is important because repayment capacity depends on the income of the person," says an HDFC spokesperson. "For example, in case of a person working in a certain company which has a poor history of paying salaries/dues to its employees, the loan application is weakened. Similarly, a borrower switching jobs frequently gives a negative impression. Also, every application is treated equally irrespective of whether it is of a government or a private sector employee because each one has its merits and demerits," he adds
Age is another criterion that banks look at before giving a loan. To give you an idea, people in the age group of 30-50 years are most preferred as they are considered more financially stable. They also have a decent number of working years left to repay their loans. On the other hand, people above 60 fare the worst in the internal scoring model of banks.
Banks also considered the distance of the property from the financing branch while sanctioning a loan. For example, according to one of the public sector banks, a property within city municipality limits or in the same city or town is the most preferred. If the property is very far, banks tend to hesitate in approving a loan.
You must have noticed that banks ask you for how many years have you been working with your current company. This is because the longer you serve the more points you earn with the bank. For example, people working for more than 15 years are preferred over those with an experience of up to 10 years. Banks prefer people who have been serving in a company for at least three years.
SPOUSE'S INCOME SOURCE
Home loan eligibility goes up in case of joint home loans as the repayment capacity goes up (depending on the income of the co-applicant). Assume that you would like to buy a property worth Rs 1 crore. The bank will usually fund up to 80 per cent of the cost, which comes to Rs 80 lakh. If your income cannot support such a high loan burden, you will be forced to look at a house that costs less.
However, if your spouse is working, both yours as well as your spouse's income will be considered to determine your repayment capacity. Moreover, you can avail of home loan at five basis points below the normal home rate if the loan is in your wife's name. Similarly, many banks prefer people who are IT assesses and paid tax last year over people who are IT assesses but did not pay any tax.
The shorter the repayment period, the more your bank likes you. For example, several banks give maximum score to people who opt for a repayment period of up to five years. It falls to half if the repayment period is between 10 and 15 years. And it is at the lowest end for those opt for a payment period of 15-20 years. So, the next time, try to shorten your loan period if approval becomes difficult.
RELATIONSHIP WITH THE BANK
The older your relationship with the bank, the higher are your chances of getting the loan approved. Banks value their old customers due to familiarity with the financial past. A person who has been with a bank for more than 10 years is definitely preferred over the one with no previous relationship with the bank.
PURPOSE OF THE LOAN
You earn more points if you are buying a ready-to-move house. An under-construction house is considered more risky as there is a chance of the builder delaying possession or failing to get all the required approvals from government agencies. Similarly, it is most easy to get approval for renovation and repair of a house and more difficult to get a loan for land and construction of a house on it.
Your bank likes it if you have enough surplus after paying your EMIs. Low surplus conveys that you are financially stretched and so are more at the risk of defaulting. To give you an example, a ratio of five times and above earns you the maximum points, as it depicts a healthy financial life. So, apply for a home loan by looking at the above-mentioned criteria and save yourself the trouble of running from pillar to post.
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