Home Loan Rejection is a nightmare for a buyer. A proper homework is required to avoid Home Loan Rejection. As i keep highlighting that you should plan at least 18-24 months in advance. Thanks to rising NPA’s of Banks, the home loan approval process is becoming more and more stringent. To counter this, more awareness is required to support the potential borrowers. The home loan staff of Banks and Housing Finance Companies are ill equipped to answer the queries of a potential borrower. Some of my readers shared with me how the helpline no’s are ill prepared to handle basic queries. An unpleasant situation of Home Loan Rejection will not arise if the potential borrower is educated and guided properly on Home Loan Process. Here by the process, i mean an end to end hand holding including credit counselling.
Broadly, the Home Loan Rejection may be on two accounts (a) Home Loan Eligibility of a Borrower & (b) Defect in the Title of the property. To avoid first reason, the potential borrower should apply for Pre-Approved Home Loan. It is in principle approval to lend but not guaranteed. Usually, there is a misconception among borrowers that a pre-approved home loan is guaranteed. Now you must be wondering Why?. The answer is the reason no (b) i.e. Defect in the Title of the property. Here by defect, i mean, any issue related to the property. It is completely unpredictable and unknown factor.
You must be thinking i suggested a solution for a first reason then what is the solution for a defect in the title of the property. To safeguard, his or her financial interests a buyer may include a particular clause in Sale Agreement/Sale Deed. The clause will explicitly discuss the scenario of Home Loan Rejection on legal grounds i.e. defect in the title of the property. It will further add that in this situation the deal stands cancelled, and seller will refund the gross consideration value without any deduction. A buyer may also include a refund of stamp duty, registration charges, penalty (If any) in this scenario.
Till now we discussed key reasons for Home Loan Rejection at the macro level. Some unknown reasons that are never disclosed or revealed by the banks/HFC’s. The only reply from any bank is that your CIBIL Score is LOW. I can’t stop laughing at the financial ignorance of a bank employee. The CIBIL score of one of my clients whose home loan was rejected is 798. On the other hand, bank employee informed him that his score is 683. Therefore, a home loan is denied. Ignorance is bliss but no always. Let’s check out all such hidden reasons for home loan rejection.
Home Loan Rejection – 5 Hidden Reasons
1. The mismatch between Income and CIBIL Score: A high CIBIL Score does not guarantee Home Loan as i explained in the example mentioned above. When i investigated my client’s case, i observed mismatch in the income and the CIBIL Score. Not many borrowers are aware that income of an individual is not reported to CIBIL Database. According to me, this is the biggest flaw in the CIBIL Score. On the one hand, we say that CIBIL is a reflection of creditworthiness, but creditworthiness cannot be judged without considering income. In my client’s case, he was managing his finances very well, but the reason for rejection was a mismatch in income and CIBIL Score. All home loan providers have minimum income criterion for a particular property value/home loan slab. Even though EMI is within a permissible limit of 50% of income, still Home Loan Rejection is a possibility. In short, i am buying a property of high value but availing Home Loan of a lesser amount. In this case, my income might be lower than the bank’s requirement. You will never come to know about this reason for Home Loan Rejection.
2. Valuation of the Property: In another case, one of my client was buying a property for 97 lacs, but the circle rate/guidance value was only 50 lacs. Without any second thought, anyone can predict about Home Loan Rejection. Now you must be wondering why Home Loan Rejection in such cases. It is as simple as that Home Loan Provider will not be able to recover the money in the event of default. Another reason is a collusion between buyer and seller for the higher home loan amount. Considering the case of my client only. He applied for a home loan of 75 lacs. In the case of default, the bank can recover only 50 lacs. Circle Rate is one of the criteria for valuation. There are certified property valuers who submit property valuation report to the bank. A deviation of 15%-20% is acceptable, but huge deviations from fair valuation lead to Home Loan Rejection. Therefore, before you apply for home loan check the fair valuation of the property. Bank or HFC will not tell you this reason of Home Loan Rejection.
3. Employer: All the home loan providers maintain a negative list of corporates or companies. What it means is that if you are working in any of these companies, then the probability of Home Loan Rejection is very high. Trust me some of the reputed names are also there on the list. Therefore, every time it is not only because of you but your employer is also responsible for Home Loan Rejection. To avoid this situation, you should bluntly ask the potential home loan provider whether your employer is in the negative list to not.
4. Frequent Job Changes: When i joined my first job, the maiden professional advice of my father was to stay long with the company. Though he gave suggestion in some other context, it helped. The crux of the matter is that if you are a frequent job hopper, then the probability of Home Loan Rejection is very high. Before you apply for home loan, it is advisable to stay in the same company at least for two years. It is the reason i mentioned, in the beginning, to plan home loan at least two years in advance.
5. The reputation of the Builder: Normally builders prefer that potential buyers should avail Home Loan only from banks or HFC’s those have pre-approved the project. Though i never suggest this approach. Similar to employer list, home loan provider has negative projects & builders list. This list is prepared based on the previous interaction of a bank with the builder regarding disputes, delay, issues, etc. One of the very reputed builders of Mumbai is in the negative list of a one of the largest bank. This builder is notorious for delayed projects. I always suggest availing Home Loan from a Bank. Also, the project should be approved by a couple of Banks and Housing Finance Companies. The projects that are approved only by HFC’s are bit risky. Typically i observed that banks don’t lend to such projects. On the other hand, Builder will force home loan from HFC.
Words of Wisdom: If you ask bank or HFC about Home Loan Rejection, the single liner is that your CIBIL Score is low. It is important to know the exact reason before you apply again so that you can fix the problem. Banks do not inform the exact reason, but you can ask in writing. I will never suggest you to apply again without knowing the proper reason for previous rejection. It may lead to another Home Loan Rejection. After a couple of rejections, you can forget about Home Loan for next 5-10 years. If the reason for your Home Loan Rejection is genuinely a low CIBIL Score, then you can either improve CIBIL Score or explore the option to avail Home Loan without CIBIL Score.
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