“Your mortgage application has been rejected!” The above sentence of being turned down by a home lender can be a huge disappointment. Did you know that more than 40% of mortgage applications are refused each year by a financial institution? Countless people have had their home loan application turned down for one reason or another.
But it is important to know that you are not alone. Some denials are nothing more than a simple technical issue and can be resolved by providing additional information or some lenders have simply increased their requirements to qualify for a loan making it increasingly difficult to obtain approvals.
Some decline may be due to your credit score, loan-to-value (LTV) ratio, and repayment capacity. However, without any reason, it is very rare that your application is refused and that is the end of your journey. Below we have discussed in detail the reasons for rejection and what can be done to get back on track.
Here are a few things you can do to make your app stronger and apply whenever you’re ready.
Find out why the loan was not approved
Before you reapply for a home loan, it’s important to know why you were turned down in the first place. The first step is to talk to your lender and get all the details which could include a letter detailing all the fine details. Just make sure to ask these questions within the given time frame i.e. within 2 months.
These details will help you make sure it doesn’t happen again and what can you do to fix these issues. But always remember that this is only the first step.
Evaluate your credit report
Many Indians are unsure of the standing of their credit score. But no one can deny the fact that lenders see a solid history of your borrowing and repayments. This is because banks rely heavily on credit score in decision-making because it indicates how you handled your money in the mail.
Your credit history can include the number of credits you signed up for and its timing, usage and over-limit status, and the most important is the repayment pattern in the past 12 months.
For many, this financial situation may be a reason why a home loan was turned down. If that sounds like your reason, you need to check to see if your credit report is up-to-date and accurate. If so, you must begin repaying outstanding balances in time to restore an acceptable record.
Creating a reasonable track of timely repayments will improve your chances of getting a home loan. It is also important to know that a bad credit report is not the only reason for rejection, no credit at all can also reduce your chances of getting a loan.
Assess your debt and income
While you apply for a home loan, the lender will review your job, income, and frequency of job changes. This is to ensure that your monthly income is 70% higher than the monthly debts and that you will be able to make the monthly loan repayments. However, your home loan application may be denied if your income does not meet the lender’s minimum requirements.
The other reason can be if your debt to income ratio (DTI) is too high. It can be calculated by dividing your debt repayments by your monthly income. For example, say your debt including everything is Rs 40,000 per month and your monthly income is Rs 1 lakh.
Depending on the formula, your DTI ratio is 40%, which may be higher than the qualified ratio for many lenders. With good credit and paying off other debts on time, you can convince your lender to accept approval. Also, even if you get a raise or promotion, let your lender know to improve your chances.
Fortunately, some financial institutions in the market understand your situation and could make an exception for you. However, if nothing works out and you don’t see any promotions in the foreseeable future, you can always ask the lender to approve you for a lower loan amount.
Increase your deposit amount
Once you’ve finalized the home, your lender will review all loan programs and clearly tell you how much you need to deposit for closing. However, if you fail to find the indicated funds, there are chances that you will be rejected. Therefore, you should finance 20% of the amount out of pocket, as banks generally avoid making an LTV above 80%.
You can arrange funds from loved ones and list them as gifts. Another solution may be to wait until you can arrange the minimum funds for the down payment. There may also be a scenario where the lender might not even approve 80% of the LTV.
For example, Kumar wants to buy a house of Rs 2 crore and is ready to pay a 20% deposit which is Rs 40 lakh and needs a loan for Rs 1.6 crore. However, Lender A assessed his parameters and only allowed a maximum loan of Rs 1.5 crore, while Lender B using his parameters allowed him a loan of Rs 1.6 crore.
This means that each lender has different policies and parameters for evaluating the loan and has their own risk appetite. Therefore, don’t give up and move on to another lender for approval.
Atul Monga is co-founder and managing director of BASIC Home Loan. The opinions expressed in this article are those of the author and do not represent the position of this publication.
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