How to improve mortgage eligibility after rejection – Forbes Advisor INDIA
Home loans often have a long term, prompting lenders to follow strict discipline. They are satisfied with a guarantee that the loaned money will be repaid without complications. If the lender is not satisfied, they have the right to deny your mortgage for the smallest of reasons. This can lead to disappointment and could derail your goals. However, a thorough understanding of what is needed to be successful after loan rejection could help. Here’s what you need to know to improve your mortgage eligibility after a rejection.
Top Reasons For Rejecting Your Home Loan Approval
The first step would be to know the reasons for rejection and how to avoid them.
Low credit rating
Your credit score is the accumulation of all debt payments and the regularity with which you have paid off your loan or credit card bill. A bad credit score on your credit bureau report is the number one reason for the rejection of a housing application. This mainly happens because many borrowers don’t know their credit reports and barely check their credit scores.
According to a survey conducted by the credit health improvement company, Credit Sudhaar, 85% of respondents did not know about credit bureaus while 92% of respondents had no idea of their credit scores. This ignorance is not comforting to lenders and can become one of the main reasons for the rejection of the mortgage application.
Lenders have a list of fixed documents on the basis of which your home loan is primarily granted. If your documents are incomplete or crucial information is missing from your application, there is a good chance that the lender will reject your application.
Therefore, it is always advisable to fully check the report and ensure that such errors are reported to the office and duly corrected. Additionally, you should update your lender if there is any change in the personal details.
Age of borrower and remaining years of service
All lenders have minimum and maximum age criteria that are very important to meet. The typical age of the mortgage loan application is between 18 and 65 years old. If you are young and have more time to repay the loan, there is a good chance that you will get approved for a loan with a longer repayment term. However, if you are nearing retirement, it is important to apply for a loan with a shorter term to avoid rejection. This is because your years of service and your applied seniority go hand in hand.
To know your repayment capacity, your salary plays an important role in convincing your lender. If it does not meet the income criteria stipulated by your lender, there is a good chance that you will face rejection. Indeed, the ratio that lenders keep in mind is 40% of the salary in pocket to determine the monthly loan payments (EMI).
It is strongly advised that you calculate your total monthly debt payments based on your monthly income and then only apply for home loans. In addition to income, those who are unstable in their work and change jobs frequently are considered more risky to lend.
Residential property condition
Each lender has their “distance limits” against which they finance residential properties. If the chosen property is beyond this distance, there is a chance that the request will not be accepted. The age of the property also plays a determining role in the decision to grant a loan. For example, some banks do not lend money if the house or apartment in question is over 30 to 40 years old. However, this is not a strict test and depends heavily on your financial lender.
Lenders tend to assess the likelihood of structural collapse in addition to their technical surveys. Indeed, for a lender to be ready to take the risk, the physical condition of the house must be favorable.
Legal property rights
Before applying for a home loan, it is important to ensure that the title deed identified is clear and meets the guidelines prescribed by local authorities. Indeed, any error or discrepancy can result in the rejection of your mortgage.
If you go for a property by a builder, even their background is checked before the banks finance their projects. If it is found blacklisted or not approved, the chances of getting approved for a home loan decrease.
Ways to Improve Your Home Loan Approval Chances
Once you know the reasons for your home loan refusal. Here are some crucial steps that could help you secure your dream home despite your mortgage application being rejected.
Here are some strategies to improve your chances of mortgage loan approval.
Share your loan burden
If your income is not enough to qualify for the home loan you need, there are other options you can consider. Find a co-signer or guarantor where a portion of that person’s income can be included in the payment amount. This could improve your chances of being eligible for a home loan. This route can also help you make up for your low credit score, your higher loan amount, and of course, boost your application.
According to the law (with certain expectations), your spouse, your siblings and your parents can be your co-applicants. If your co-applicant is a woman, it is much better, because women have the opportunity to take advantage of lower rates. However, make sure that you and your co-signer both understand the financial and legal obligations and know the risks involved.
Try another lender
Even if it is rejected by a lender, don’t be stressed, you may be accepted by other lenders. As each lender has their own criteria, there may be certain things that could cause your request to be refused by one but not the other. If you’re having trouble finding a lender who can approve your application, hire mortgage brokers. Also, when trying with other lenders, try to pre-qualify for a loan by meeting your expectations.
Know your FOIR (ratio of fixed bonds to income)
For lenders, this is a fairly popular metric for determining mortgage eligibility. This takes into account all the monthly debts of a borrower and assesses the salary in hand. Lenders keep in mind 40% of the salary in their pocket to determine the EMI loan. The remaining 60% is used for living expenses.
FOIR is calculated by the formula = [sum addition of all instalment/Monthly Income]
Case 1: Suppose Mr. X earns an income of 1 lakh INR per month. He already pays an IME of INR 20,000. His FOIR is 20%. The IME / income ratio according to the bank should be 40%. Therefore, the total borrowing capacity of 1 lakh INR is 40,000 INR. So Mr. X can afford an additional NDE of INR 20,000 per month.
Case 2: Suppose Mr. Y earns an income of INR 2 lakh per month. He already pays an IME of 1 lakh INR. His FOIR is 50%. The IME / income ratio according to the bank should be 40% and the total borrowing capacity of 2 lakh INR is 50,000 INR. Since Mr. Y has already used 50% of his FOIR, he cannot continue the loan until his existing loan is paid off.
Each lender has a different FOIR for different loans. For personal loans it can be 50%, but for home loans it is usually 35-40%. The lower your FOIR, the higher your chances of getting a loan, as a lower FOIR indicates lower liabilities for a borrower.
Improve your credit Goal
Even though it’s a time-consuming process, it’s the most convenient way to increase your chances of getting approved. Your credit history shows how punctual and regular you are with your past loans. So make sure you make your payments on time, even if there have been delays so far. It’s never too late to improve your credit score.
Following the same can help you maintain a credit score above 750 out of 900. This is considered a very positive score and may help you benefit from a lower interest rate from your lender.
Borrow with guarantee
If you don’t have enough salary on hand, lenders also offer the option of using your assets as collateral for repayment. Providing security to your lender can help you get your mortgage application approved. It is used as protection against potential losses in the event of payment default.
In such a case where the borrower cannot repay the loan amount, as compensation, the collateral becomes the property of the lender. The asset can be your real estate, like your house or any other land you own. Other examples of guarantees include a cash deposit, savings accounts or your vehicles.
Clear your existing debts
If you already have multiple loans, existing debts can affect your chances of getting a home loan. It may take a few years, but start by effectively paying off your current IMEs and moving on to a home loan. A lender would always take your unpaid debts into account before approving a home loan.
Pay a higher deposit
A home loan with a higher loan-to-value (LTV) ratio is considered risky, which is why many banks do not want an LTV ratio of up to 80% or more. Many lenders can push the limit to 90% under certain circumstances. To increase your chances and show that you are a less risky borrower, make a larger down payment.
According to the Reserve Bank of India, there is a maximum LTV ratio set for various categories of loans.
- For loans up to INR 30 lakh, the maximum LTV allowed is 90%.
- For loans between 30 and 75 lakh INR, the authorized LTV is 80%.
- For loans over INR 75 lakh, the authorized LTV is 75%.
A home loan is a long-term commitment and the process from rejection to approval can be difficult. The way you take great care when selecting your home, you need to make sure you take great care in knowing what exactly the lender wants as a home loan borrower. A single rejection can teach you a lot, and you might take this opportunity to avoid further rejections.
Ask your lender lots of questions until you don’t know where you’re going wrong. Doing things according to the required guidelines will help you become a more attractive loan candidate. With a little patience and hard work, you will be able to change your situation.