Buying a home is a big milestone and a bigger financial commitment. A couple of decade back it was a norm to save and build a house closer to retirement age. But with better pay scales, economic development, lower rate of loan interest and numerous rebate and deductions being granted for home loans, today most of the younger people are buying homes by picking home loan. Over years the loan process has become smoother and undergone standardization. However contrary to popular belief that all home loan applications get approved, there is a substantial number that actually gets rejected for some reason or the other. The most common reasons pertain to documentation, low financial credibility or failure to disclose certain specific mandatory information. We are laying important criterion that banks and lenders use to evaluate a home loan application and assess the applicant, so that next time you walk in with loan application, you come out with an approval and key to your dream home.
Income versus Loan
This is obviously the first criteria banks would look into. Your income helps in giving visibility into your repayment capacity. No one will blindly offer and approve a loan that is far beyond your repayment capability. One can dream of a house that costs in Crores but there should be an income that justifies the affordability and purchase of such property.
Young applicants with decent income are more likely to get a home loan as compared to somebody old who has a good income. The reason is simple, younger age means longer life expectancy and sizeable working years ahead. The income, particularly in salaried job shows a gradual upward trend over years. Any loan that is given based on present income is a safe bet for the lenders as they know that income will only increase with time and therefore servicing loan EMI will keep becoming easier for the borrower as the time passes.
Credit score is an important factor that banks and lenders look into. Credit score is built on your credit history and past financial track record. Whenever you pick a credit card, take a loan or enter into any financial transaction you tend to create a track record which becomes the backbone of your credit score. Credit Score is affected by factors like payment history, freshness of credit, type of credit and credit utilization ratio. If a borrower has a really short or insufficient credit history then that also works against him or her. New credit applications and loans affect your credit score adversely; same is the case where credit utilization is high.
Documentation is not only an extremely important step towards making application but also one of the easiest. Make sure you understand the documents that are being asked for and their purpose. Take an exhaustive list so that even if you do not have one document, you can refer to the list and provide some sort of substitute that is admissible. Common and standard documents required with application form for home loans are:
- Duly filled application form with recent passport sized photographs
- Know Your Customer form (KYC)
- Identity proof like PAN Card, Aadhaar card, Voter’s Id, driver license etc
- Address proof
- Income proof- Income tax returns or Salary slip
- Bank statements or cancelled cheque for signature verification.
- Home purchase agreement or deed
Bank can call for any other additional documents as it may require to complete the application verification satisfactorily.
Usually in case of home loan, collateral or security is the house property. In case there is a default in the repayment, bank can take possession and dispose off the property to recover the dues. Now when it comes to a new house, it is easy for the banks to assess the value and thus justify the amount of loan sought. However the challenge is in case of a used or old property that is changing hands on account of sale. The value of property in such case has to be deduced by a qualified valuer who considers factors like size, area, age and condition of the property amongst others. This is to ensure that the loan sought is justifiable and in case of default bank will be able to recover the dues by disposing the property.
Other Loans and liabilities
Bank may seek details of other loans and outstanding amount on your credit cards. Your income may be high enough to repay the EMIs on home loan sought but combined with other liabilities and loan repayments, your financial capability may be impaired drastically. This is why if you are neck deep in other loans or liabilities; there is a high chance of application rejection.
By now you would have concluded how important your credit score and repayment capability is as far as home loan process is concerned. This is why it is strongly advised that you begin to clear your debts, make timely payments on your credit card bills and refrain from applying for fresh loan or credit instruments closer to the time of applying for a home loan. You can also check your Experian powered credit score for free on www.letzbank.com . If the score is low, then move on to our practical guide on how to improve your credit score. You can also evaluate and assess various home loan offers from the known names in the lending sector and avail the best one right here at our portal!