What to Do If Your Home Loan Application is Rejected?

Facing rejection can be disheartening, especially when it comes to your dream of owning a home. Many aspiring homebuyers face home loan rejection due to various reasons. But one setback doesn't mean you can't achieve your goal. In this blog, we will guide you through the steps to take if your home loan application is rejected. We’ve also provided the possible reasons for your application not making it through. Let’s dive in!.

5 Possible Reasons Why Your Home Loan Application is Rejected

It's crucial to understand why your home loan application is rejected before taking any further steps. Here are some common reasons for loan rejection:

1. Low Credit Score

A poor credit score indicates the borrower’s inability to manage debt responsibly. Credit score is a three-digit number ranging from 300 to 700. The score is provided by credit bureaus like CIBIL and Experian. If you have missed EMI payments or have defaulted on a loan you had taken earlier, your credit score would decrease. Banks consider credit history as a significant factor when approving loans. If your credit score is poor, below 600, your loan application may get rejected.

2. Insufficient Income

Maximum home loan tenure ranges from 20 years to 30 years. Banks will evaluate your income to determine whether you will be able pay EMIs. If you don’t have a stable income or your monthly income is not adequate to pay EMIs, it may lead to loan rejection.

3. Employer Profile

Both salaried and self-employed individuals are eligible for home loan. However, banks may consider the reputation of your employer while scanning your eligibility. If you’re employed with an organisation that has been involved in murky business, your application may get rejected.

4. Incomplete Documentation

Banks require a specific set of documents for verification. Submitting incomplete or inaccurate documents, especially property and ID-related documents can lead to rejection. Ensure that you provide all the required documents in the correct format. It’s important to check the documents required for home loans before you apply.

5. Property-related Issues

Banks steer clear from giving loans against a property that’s tangled in legal battles. If the property you plan to buy is involved in a legal dispute or the seller doesn’t have proper documents, banks may reject your loan application.

Steps to Take After Home Loan Rejection

1. Identify the Reason

Contact the bank and ask for specific reasons behind the rejection. 

2. Rectify the Issue

Once you identify the reason, take appropriate actions to rectify it. For example, if your credit score is low, focus on improving it by paying your EMIs on time and maintaining a healthy credit utilisation ratio.

3. Strengthen Your Financial Profile

Work on improving other aspects of your financial profile, such as reducing existing debts, increasing your income, or adding a co-applicant with a steady income source.

4. Make a Larger Down Payment

Make a bigger down payment so that it reduces the loan amount and shows commitment to the investment. Also, a larger down payment means reduced loan amount, which translates to lesser lending risk. Banks always check the lending risk before approving your loan application.

5. Ensure the Property is Free From Legal Hassles

Make sure the property isn’t involved in legal disputes. Ask the seller to show all property-related documents to get better clarity. Take help of a lawyer if possible to know whether the legalities are in place and there are no disputes involved.

Examples: Fresh Application Steps That Ramesh and Meera Took

Example 1: Ramesh's home loan application was rejected due to a low credit score. To rectify the issue, he obtained a copy of his credit report, identified errors, and initiated the process to correct them. He also started making timely payments on his debts and focused on improving his credit score. After a year, his credit score improved. He re-applied and successfully secured a home loan.

Example 2: Meera's home loan application was rejected because her income fell short of the lender's requirements. She decided to add her husband as a co-applicant with a stable income source. This increased their combined income and improved their chances of loan approval.