“Your mortgage application is rejected! The above sentence of being turned down by a home loan lender can be a huge disappointment. Did you know that more than 40% of mortgage loan applications are refused each year by a financial institution? Countless people have had their home loan applications turned down for one reason or another.
But it is important to know that you are not alone. Some rejections are nothing more than a simple technical problem and can be resolved by providing additional information, or some lenders have simply increased their requirements to qualify for a loan, making it progressively more difficult to obtain approvals.
Some drop may be due to your credit rating, your loan-to-value ratio (LTV), and your ability to repay. However, for no reason, it is very rare that your request is denied and this will be the end of your trip. Below we have discussed in detail the reasons for the rejection and what can be done to get back on track.
Here are some steps you can take to strengthen your application and apply as soon as you are ready.
Find out why the loan was not approved
Before re-applying for a home loan, it’s important to know why you were turned down in the first place. The first step is to talk to your lender and get all the details which could include a letter specifying all the little details. Just be sure to ask these questions within the 2 month time frame.
These details will help you make sure that this does not happen again and what can you do to resolve these issues. But always remember, this is only the first step.
Assess your credit report
Many Indians are unsure of their credit score position. But no one can deny the fact that lenders see a solid history of your borrowing and loan repayments. This is because banks rely heavily on credit rating in decision making because it indicates how you handled your money in the mail.
Your credit history can include how many credits you’ve signed up for and its timing, usage, and over-limit status, and most importantly is the repayment pattern over the past 12 months.
For many, this financial situation may be a reason why a home loan has been turned down. If this sounds like your reason, you should consider whether your credit report is up to date and accurate. If so, you must start paying off outstanding balances on time to restore an acceptable record.
Creating reasonable tracking of timely repayments will improve your chances of securing a home loan. It is also important to know that a bad credit history is not the only reason for rejection, having no credit can also reduce your chances of getting a loan.
Evaluate your debt and income
While you are applying for a home loan, the lender will look at your job, your income, and the frequency of a job change. This will ensure that your monthly income is 70% more than the monthly debt and that you will be able to make the monthly loan payments. However, your home loan application may be refused if your income does not meet the lender’s minimum requirements.
The other reason can be if your debt to income ratio (DTI) is too high. It can be calculated by dividing your debt payments by the monthly income. For example, let’s say your debt including everything is Rs 40,000 per month and your monthly income is Rs 1 lakh.
Depending on the formula, your DTI ratio is 40%, which may be higher than the qualified ratio for many lenders. With good credit and paying off other debts on time, you can get your lender to accept the approval. Also, even if you get a raise or a promotion, let your lender know to improve your odds.
Fortunately, some financial institutions in the market understand your situation and could make an exception for you. However, if nothing works and you don’t see any promotion for the foreseeable future, you can always ask the lender to approve you for a lower loan amount.
Increase the amount of your deposit
Once you have finalized the house, your lender will review all loan programs and make it clear to you how much you need to put in for the closing. However, if you are unable to find the funds listed, you may be rejected. Therefore, you need to fund 20 percent of the amount in your pocket, as banks usually avoid making LTVs greater than 80 percent.
You can organize funds from your loved ones and list them as a gift. Another solution may be to wait until you can have the minimum funds for the down payment. There may also be a scenario where the lender might not even approve 80 percent of the LTV.
For example, Kumar wants to buy a house for Rs 2 crore and is willing to pay a 20% deposit or Rs 40 lakh and needs a loan of Rs 1.6 crore. However, Lender A evaluated his parameters and only authorized a maximum loan of Rs 1.5 crore, while Lender B, using his parameters, gave him a loan of Rs 1.6 crore.
This means that each lender has different policies and measures for evaluating the loan and has their appetite for risk. Hence, don’t give up and move on to another lender for approval.
Atul Monga is co-founder and CEO of BASIC Home Loan. The opinions expressed in this article are those of the author and do not represent the position of this publication.
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