With rising property prices, home loans have become an essential part of the homeownership journey. However, securing a loan isn’t always straightforward, as lenders have strict eligibility criteria that borrowers must meet to access the funds they need to purchase their dream home.

When a home loan application is rejected, it can leave applicants feeling frustrated and uncertain about their financial plans.

In this article, we will explore the top 5 common reasons for home loan application rejection and what you can do to improve your chances of approval.

1. Low Credit Scores

Low credit scores and home loan rejections are closely connected. A credit score reflects your creditworthiness based on past financial behaviour, such as timely loan repayments, responsible credit card usage, and overall debt management. A low score signals to lenders that you may be a risky borrower, often leading to a home loan application rejection.

While credit score requirements vary among lenders, a score below 700 can make it difficult to get approval for a home loan. On the other hand, a high credit score not only boosts your chances of approval but also helps you secure more favourable loan terms, such as lower interest rates.

What to do: If your credit score is low, take proactive steps to improve it before applying for a loan. A common home loan application mistake is carrying too many outstanding debts at the time of application. To address this:

• Consolidate high-interest debts to simplify repayment.
• Prioritise paying off existing obligations on time.
• Avoid taking on new credit right before your loan application.

Most importantly, give yourself enough time to improve your credit score. Regularly monitor your credit report for errors and work towards building a strong credit profile to enhance your chances of approval.

2. Insufficient Income or Employment History

Lenders want to ensure you have a stable and reliable source of income to meet your repayment obligations. If your income is insufficient or your employment history is unstable, your application is likely to be rejected.

Lenders typically look for a steady income stream that can support your loan repayment. If you've recently changed jobs or have irregular income (e.g., freelance or contract work), lenders may consider this a risk factor.

What to do: To increase your chances of approval, ensure that your income is stable (e.g., a steady job in a reputed private organisation). Avoid changing jobs right before applying for a home loan.

3. High Debt-to-Income (DTI) Ratio

The debt-to-income (DTI) ratio is a critical metric that lenders use to assess your ability to manage monthly payments and repay debts. It represents the percentage of your monthly income that goes toward repaying existing debts. Generally, lenders prefer a DTI ratio of 30% or lower.

high DTI ratio is one of the common home loan rejection causes as it indicates to lenders that you have limited financial flexibility to take on additional debt. A high DTI ratio increases the risk of defaulting on the loan, which makes lenders hesitant to approve your application.

What to do: To improve your DTI ratio, focus on paying down high-interest debts like credit cards. Reducing your overall debt load will lower your DTI and improve your chances of approval. Additionally, increasing your income – whether through a salary increase, side jobs, or other sources of income – can help reduce your DTI ratio.

4. Inadequate Down Payment

Lenders require homebuyers to make a down payment when purchasing a property. This upfront payment helps mitigate the lender's risk by ensuring the borrower has a financial stake in the property. If your down payment is too small or non-existent, it might be a reason for home loan rejection.

In India, the minimum down payment typically ranges from 10% to 20% of the property's value, depending on the lender and the loan amount.

What to do: To avoid this issue, aim to save up a substantial down payment. If you're struggling to come up with the required funds, consider exploring assistance programs for first-time homebuyers.

5. Property Issues or Appraisal Problems

Even if you meet all the criteria as a borrower, your home loan application can still be rejected if the property you're looking to buy doesn't meet the lender's standards. Lenders typically require an independent property appraisal to assess its value and ensure that it is worth the amount you're borrowing. If the appraisal comes back lower than the sale price, the lender may be unwilling to approve the loan, as they might not want to risk lending more than the property is worth.

Additionally, properties with significant structural issues, safety concerns, or other defects may not qualify for a loan.

What to do: Before applying for a home loan, have the property professionally appraised and inspected. If the appraisal value is lower than expected, you may be able to negotiate with the seller to lower the price or request a second appraisal. If the property has significant issues, work with the seller to address them before applying for a loan. In some cases, opting for a different type of loan or selecting another property may be the best solution.

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Conclusion

Understanding the common reasons why home loan applications are rejected can help you better prepare for the application process and increase your chances of approval. By addressing issues such as poor credit, insufficient income, high debt, or property problems, you can strengthen your application and make it more appealing to lenders.

If you're looking for home financing solutions to secure your dream home, SMFG Grihashakti offers home loans of up to 90%* of the property’s value, with attractive interest rates and a tenure of up to 30 years*. Apply online today for a hassle-free experience with minimal documentation.