Gurgaon based Alpana Shah, 35, had been looking for her dream house from a long time. The day she finally found one she didn’t take long to finalize it. The next step towards her dream house was to get a home loan approved. In the current market scenario, where builders are desperate to find buyers to sell out their properties and banks are also trying to attract more customers by reducing interest rates, Alpana thought that the task to get approved for a loan will be easy and will be over in no time. But, to her surprise, her loan application got rejected.
The bank justified the rejection is due to her credit score – that shows how good you had been with your previous debts and credit card payments – that made her ineligible for the loan. “I had to step into several banks before my loan application was accepted. I never thought that a home loan approval could be so difficult,” she says.
There are many people such as Alpana who are not aware of what all procedures and criteria a bank consider before approving a home loan. Well, approval or rejection of the loan application depends on many factors, besides your age, credit history and score, various factors ranging from location of the property and reputation of the builder to your relationship with the bank is what matters. This is the reason why two persons with same credit score may discover different outcomes for their home loan applications.
One of the Banker, says that, “they have internal scores to check if a person is eligible for the loan or not but we don’t fix the pricing on the basis of credit rating.” However, different banks have different criteria and scoring models for considering the approval of the home loans. Let’s take a look at some of the most common perspectives that banks look before approving home loans.
Banks always prefer their customers with clean and clear financial habits. A credit score clarify a lot about your financial health. Your credit report shows whether you pay your EMIs on time or default, which is maintained by different bureaus. Generally, 800 is considered to be the best score, and anything falling between 700 and 800 is considered to be good. If your credit score is below 300, there is a high probability of rejection of your loan application.
Still, a high score does not confirm to get you low interest rates. While banks have started moving towards risk-based pricing, there is still some more time before you start availing the benefit of a high credit score.
Akhil Jain, Co-founder, Mudra Home, says, “A poor credit score affects not only affects your ability to borrow money but harm more than that. Even if you have a good credit score, you may not get a lower rate. However, you can get your loan approval process faster and with fewer checks by the lender.” Mudra Home is an online platform that provides its customers with finding credit scores and different tools to help them in managing their credit history and save money. (Check online loans)
There are certain occupations that banks/ NBFC’s prefer. For example, in many government nationalized banks, government and PSU employees are always preferred as they have a stable job. After government employees, banks prefer people working with white collared profiles, blue-chip companies and doctors. Further down the line comes of chartered accountants, lawyers and engineers. People working in private sector companies and profiles of self-employed get the lowest scores among all. “Occupation is an important factor which is considered while approving and processing a home loan.
It is important to understand that this happens because the repayment capacity depends on the income of the person”. For example, in case of a person working with a company which has a poor history of paying delayed salaries/dues to its employees then the loan application of an employee of that company or the company owner is weakened. Similarly, if a borrower switches jobs quite frequently gives a negative impression. However, every application is treated equally irrespective of whether it belongs to an employee of a government or a private sector because each one has its merits and demerits.
Age is another important criterion that banks look at before approving a loan. To clearly make you understand, people who fall in the age group of 30-50 years are most preferred as they are considered as financially stable. They are left with decent number of working years to repay their loans. On the other hand, people above 50- 60 are the worst in the internal scoring criterion model of banks. That is why is it said that if you want to make an asset, start creating in the initial years of your career.
Another factor that Banks/ NBFC’s consider is the distance of the property from the financing branch before sanctioning a loan. For example, according to one of the public sector banks, a property which is within the city municipality limits or in the same city or town is the mostly preferred. If the property is very far from the location, banks tend to hesitate in taking that property as a guarantee for the loan.
You might have noticed that banks/ NBFC’s credit person ask you about the total work experience with your current company. This is because the longer you serve the same company, more points you earn with the bank/ NBFC. For example, people working for more than 15 years in the same organization are always preferred over those with an experience of less than10 years. Banks prefer customers who are serving in the same company for at least three years.
The eligibility of a Home loan goes up in case of joint home loans because of the repayment capacity (depending on the income of the co-applicant). Let’s assume that you want to buy a property worth Rs 1 crore. The bank usually fund up to 80 per cent of the market value of the property, which comes to Rs 80 lakh. If your sole income does not support such a high loan burden, either you will be forced to look at a house that costs less or you have to add a co-applicant who can support you in paying your EMI’s on time.
However, if in case your spouse is working, both yours as well as your spouse’s income can be considered to calculate your repayment capacity. Moreover, you can avail a home loan at a lower interest rate below the normal home rate if the loan is in your wife’s name.
The shorter the repayment period opted by you, the more your bank likes you. For example, several banks give a high score to the customers who opt for a shorter repayment period of up to five years. It is calculated to half if the repayment period is between 10 and 15 years. And the score comes to the lowest end for those who opt for a repayment period of 15-20 years. So, the next time you think of borrowing a home loan, try to shorten your loan period if approval becomes difficult.
Your chances of getting the loan approved grow higher with the growing relationship with the bank. Banks/ NBFC’s value their old customers due to familiarity with the past financial records. A person who has been connected with the same bank for more than 10 years is definitely preferred over the one with no or lower years of previous relationship with the bank.
You are likely to earn more points if you are buying a ready-to-move house. An under-construction property is considered as more risky as there is a chance of the builder delaying the possession or failing to get all the required approvals from government agencies on time. Similarly, it is easier to get approval for any kind of renovation and repair of a house and most difficult of all to get a loan for land and constructing a house on it.
Your bank finds it safe if you have enough surplus amounts even after paying your EMIs. Low surplus conveys that you are either financially stretched at the present moment or may face similar situation at a later stage and so are more at the risk of defaulting.
So, apply for a home loan by understanding the above-mentioned criterions and save yourself from the trouble of running from pillar to post.