Home loan can be rejected on other grounds even if credit record is good

Buying a house is an aspirational purchase for many Indians, and home loans make this task much easier. Access to home loans is no longer limited to urban cities but has spread to Tier-II and -III cities, thanks to digitalisation and various government initiatives. 

The government and regulators have made home ownership easier by increasing affordability, lowering effective interest rates, stabilising property prices, etc, through Pradhan Mantri Awas Yojana (PMAY) subsidy and other tax incentives. 

The convenient access to quick approvals of home loans, however, can be challenging if one is not careful to avoid the common mistakes while applying for it. For beginners, a home loan should never be finalised based on just your close friends or family suggestions as every home buyer is different in terms of income profile, type and value of the property, level of savings, age as well as other fixed obligations. So a loan or lender that what worked well for a friend may not be the prescribed loan offer for you. 

Buying a home is a cumbersome process with multiple decision points which include choosing the right property, selecting the right lender, applying for the loan and getting the loan sanctioned before being able to purchase the shortlisted property. It is vital to do some research and preparation to ensure a hassle-free home loan journey. Let's look at some of the common mistakes borrowers usually commit while taking home loans. 

Looking for a lender first:

Your home loan application can be rejected on aspects other than eligibility and your credit history, which can be related to the property you are seeking to buy. Banks prefer to provide loans for authorised, be ready-to-move or under-construction properties of approved builders. Unapproved or unauthorised property increases the chances of application getting rejected. Thus, your home loan process begins with selecting the right property with all approvals and title chain deeds in place.

Once you identify the property, you can even ask the property agent to help you in finding the right lender as many times agents and builders already have tie-ups with lenders to provide home loan for the concerned property.

Not knowing the amount you are eligible for:

Clarity on a few questions before you initiate the home purchase and home loan decision can go a long way in ensuring a financially safe future. Some of the pertinent questions that need to be answered include estimating your property budget based on your aspiration, income, savings, family obligations and the amount available for down payment. Eligibility calculators can come in handy to help you arrive at this answer. One should never take loans that are hard to repay. 

Remember, as a prudent policy, banks like to limit equated monthly instalment outflow at between 30% and 50% of net monthly obligations after deducting other fixed expenses. Taking a higher loan than this not only increases the chance of loan rejection but may also result in difficulty in repayments. If you are planning to buy an under-construction property in which you have to pay in instalments, banks may require you to make the entire down payment amount in one go before they make the disbursal. This also means that you need to enough funds for the downpayment before you go ahead with the loan application.

Not being transparent:

Be transparent while disclosing household incomes and expenses to the lender. An inaccurate assessment of one's borrowing power and repayment capacity can lead to loan disapproval if the lender senses it during the loan appraisal process. Not being transparent can also land you in legal trouble, if proved, at a later stage. Taking a loan based on an accurate estimate of one's income and expenses can help choose the right loan amount, EMI, interest rate and loan tenure. Any single EMI or loan default can adversely impact your credit score, which is the most important factor in ensuring that you a get a loan when required. 

Not taking a health/life insurance: 

It is always advisable to get a health/life insurance before taking a home loan to improve your ability to sail through adversities. One may need urgent medical attention, which can derail the entire home budget. However, an insurance plan safeguards the borrower from such mishaps by covering their medical bills in times of crisis. Similarly, a life insurance cover protects your loved ones from financial distress in case of an unfortunate event even though it might look like an extra cost.

Choose the right home loan:

Spare some time to decide the right home loan type for you which includes the optimal loan tenure, fixed rate versus floating rate and even considering a home loan overdraft. 

Longer tenure loans result in smaller EMIs which are more affordable but can result in significant interest outgo. Hence, loan tenure is a critical decision based on an evaluation of the right amount of EMI you can service comfortably. Opting for a floating rate loan may be advisable as it allows one to prepay loans without any penalty whenever there are surplus funds available with the borrower. Similarly, a home loan overdraft may work well for businessmen and professionals with fluctuating income flows as it allows borrowers to utilise the amount of money as per their requirements and save interest on any unutilised loan amount. 

Owning a home is a big feat but taking a wrong loan decision can turn one's life upside down. So it is always advisable to take a short tour through all the terms and conditions of the loan before applying for it. And most essentially, be mindful of avoiding the aforementioned mistakes to avoid regret later in life. Investing in a property is not a day-to-day activity; thus, it demands extra care and prudence before committing to anything.

The writer is co-founder and CEO, MyLoanCare