How to obtain a home loan after prior rejection?

A home loan is the most convenient option to arrange the funds in your journey towards homeownership. Generally, it is easy to avail a home loan if the applicant has all the documents in place and has a good credit history. However, banks may still reject a home loan application due to various reasons. 

So if your home loan application is rejected, don’t worry! You can still obtain a home loan by understanding the reason behind the rejection and taking the required steps to remedy the situation. This article will help you navigate through the nuances of the application process to understand why a home loan application might get rejected and how you can fix them. 

See also: Difference between home loan and mortgage loan

 

Reasons behind home loan application rejection

Let’s try to understand the reasons behind a home loan application getting rejected:

Poor credit score

A low credit score indicates prior defaults in repayment of credit, and in turn a higher risk of defaulting on the current loan as well. This might reduce the trust of the lender and lead to the application being rejected.

Insufficient income

Lenders have an elaborate assessment criteria to evaluate the applicant’s ability to repay the loan. If the applicant’s income is not sufficient to cover the EMI without compromising other financial obligations, it is likely that the application will be rejected.

Unstable employment history

Frequent job changes or a short employment history is generally perceived as a risk. The risk is higher if the applicant is not employed in a permanent position.

Existing debt

A higher debt-to-income ratio, caused by high levels of existing debt, is indicative of a difficult situation for the client when it comes to managing additional loan payments.

Inaccurate information

If any discrepancies or inaccuracies are detected in the application form, your loan application might get rejected. This includes incorrect personal information or misrepresented financial information. 

Property issues

Legal disputes, unclear titles or issues with the builder are some problems that might arise while purchasing the property to cause hindrance in the approval process of the loan.

Age

Age becomes an important factor during the loan approval process. It might be more difficult for applicants nearing retirement age or very young applicants without sufficient work experience to get their applications approved.

Inadequate documentation

Documents such as proof income, identity and residence and those related to the property being purchased are mandatory requirements. Failure to furnish them can lead to rejection.

Poor banking history

If you have a history of bounced cheques, delayed payments or other negative banking behaviour patterns, expect some trouble in getting your loan application approved.

High loan amount

The lender deems appropriate a certain amount that the applicant is eligible to borrow based on their income and repayment capacity. Applying for a loan amount significantly higher than this diminishes the chances of approval.

Co-applicant’s profile

In case of a co-applicant, it is crucial to ensure that their profile does not default in any of the requirements or factors taken into consideration during the approval process. A poor credit score or unstable financial situation on their part can also hamper the loan approval. 

Economic conditions

Loan approval rates are also subject to broader economic conditions and lender policies. Borrowers might have to face a stricter criteria during economic downturns.

 

Steps to increase chances of approval

Now that we have gone through the reasons behind the rejection of a home loan application, here are some steps you can take to remedy them:

Improve your credit score

Pay all your bills in time, including credit card payments and other loan EMIs. Lower your debt-to-income ratio by paying off existing debt without defaulting as much as you can. Also make sure to review your credit report regularly and get the errors corrected promptly if there are any detected.

Increase your income

Aim towards improving your income by asking for a salary raise or looking for job opportunities with a better pay. You can also consider opting for secondary sources of income by freelancing, consulting or taking up part-time jobs.

Clear existing debts

Consolidating loans is a good option to consider if you have multiple loans. This can help reduce overall interest rates and simplify the payments procedure. Try to reduce the number of outstanding loans as much as possible by clearing smaller debts first.

Provide accurate information

The information you provide with the loan application should be accurate and up-to-date. Additionally, it is also important to ensure that all the required documents are in place and correctly filled out.

Stabilise employment

Before you reapply for a loan after getting rejected, make sure you have been in a stable employment for a considerable period of time. Moving to a permanent position from a contractual one generally helps your chances of securing a loan.

Choose a suitable property

A property with a clear title and free from any outstanding legal disputes is more likely to secure a loan. If buying from a builder, it is recommended to go for a reputed one or check their credibility and track record.

Save for a larger down payment

A larger down payment implies a lesser amount eligible to be borrowed, thereby increasing the chances of your application being approved. Make use of your savings and investments to cover a significant portion of the property cost and reduce your dependency on the loan amount.

Apply with a co-applicant

If you have a co-applicant with a good credit score and stable income, it can significantly enhance your chances of approval.

Seek professional advice

Financial advisors and mortgage brokers can provide you with personalised guidance based on your financial situation, so it is recommended to consult professionals about increasing your chances at loan approval.

Reassess loan amount

If your loan request gets rejected due to a large amount, consider applying for a smaller loan amount that aligns better with your repayment capacity.

Rebuild financial discipline

Manage expenses and savings effectively by maintaining a strict budget to enhance the lender’s trust in your creditworthiness. Make sure you do not apply for any new credit or loans right before reapplying for the home loan.

Wait and reapply

Very often, giving it some time is the solution. Simply waiting for a few months before applying again can considerably improve your financial situation. During this time, it is advisable to break down your financial profile and address the potential reasons for rejection so that you can reapply with confidence.

 

FAQs

What is the first step I should take after the rejection of my home loan application?

Understand the reason behind the rejection by reviewing the rejection letter carefully and contacting the lenders. Next, address the specific issues such as credit score or documentation.

How long should I wait before reapplying for a home loan?

3 to 6 months is the ideal waiting time when you should address the reasons for the rejection and try to stabilise your income.

How can I improve my credit score after rejection?

Follow consistent financial discipline by paying bills on time, reducing existing debts and keeping credit card balances low.

Can reapplying with a different lender increase my chances of approval?

Since lenders have different criteria, catering to the requirements of a lender with more lenient terms after rejection might help improve your chances.

Can applying with a co-applicant improve my chances of getting a home loan?

If your co-applicant has a stable income and good credit score, the combined income and creditworthiness might work in your favour.

What additional documentation might help the case of my application?

Comprehensive documentation, including proof of stable income and proof of assets can help strengthen your application.

Can seeking professional financial advice help in obtaining a loan after prior rejection?

Consulting with a financial advisor can provide valuable insights and personalised advise to improve your financial profile according to the cause of rejection.

Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com