In 2024, India experienced home loan rejection rates increasing dramatically, a trend that left potential homeowners confused and worried. Despite a favorable economic environment characterized by declining interest rates, the increase in loan rejections indicated problems at the housing finance level.
So, before you start hunting for trusted housing finance companies, let’s walk you through the common reasons for home loan application rejections and how you can guarantee your loan approval.
Falling Interest Rates and Increasing Rejections: The Paradox
Early in 2024, the Reserve Bank of India (RBI) initiated a series of repo rate cuts, collectively reducing the rate by 50 basis points or more. This monetary policy shift was anticipated to increase borrowing as loans became more affordable. Much to everyone's surprise, the period saw the outright rejection of home loans increase drastically. This paradoxical situation is attributed to several interrelated factors.
Stricter Lending Criteria Amid Economic Uncertainties
While lower interest rates tend to encourage borrowing, they also encourage lenders to reassess risk management strategies. In 2024, economic uncertainties like global market volatility and domestic fiscal concerns led banks and financial institutions to tighten lending standards. Lenders became more cautious, scrutinizing applicants' creditworthiness more rigorously to prevent possible defaults. This added caution resulted in a higher number of loan rejections, particularly among marginal applicants.
Increase in Property Prices Resulting in Greater Loan Values
2024 saw a very high appreciation in property prices in key Indian cities. With this increase, the borrowers were forced to apply for greater loan values to meet the cost of houses, which translated into greater LTV ratios. Lenders, fearful of overexposure, hesitated to approve loans with higher LTV ratios, particularly where the applicant's income did not proportionally support the higher loan. As a result, many applications were rejected on the grounds of perceived repayment risk from exaggerated property valuations.
Increasing Occurrences of Insufficient Documentation
In spite of technological advancements in banking, an important percentage of loan applications were turned down as a result of inadequate or faulty documentation.
To ascertain the creditworthiness of the applicant and repayment capability, lenders require detailed documentation. The most frequent issues were discrepancies in proof of income, absence of proper identification, and incomplete documentation for property. All these deficiencies slowed the verification process and increased rejections.
Greater Emphasis on Credit Score and Financial Prudence
Lenders in 2024 heavily depended on the credit scores of applicants as an indicator of financial responsibility. Hence, applicants with low or fluctuating credit scores were more likely to be rejected.
Reasons for low credit scores were late payments, high credit utilization levels, and the presence of multiple debts. Such applicants were viewed as high-risk lenders and were denied loan approvals.
Employment Instability and Its Effect on Loan Approval
The fluctuating employment economy of 2024, with recurrent job switchovers and increased gig economy employment, caused perceptions of employment uncertainty among candidates.
Lenders prefer candidates with an unbroken work history because regular income is the most important determinant of potential repayment. Candidates with irregular patterns of employment or applying for non-conventional job positions were tested more and, consequently, were rejected at higher rates.
Strategies to Improve Chances of Home Loan Approval
Knowing why loans are rejected is the key to getting approved. Potential borrowers can use the following measures to enhance their chances of eligibility:
Have a Healthy Credit Score
A strong credit score plays a crucial role in loan approval procedures. To become more creditworthy:
- Timely Bill Payments: Pay all credit card dues, bills, and current loan EMIs on time.
- Credit Utilization Ratio: Maintain your credit utilization at less than 30% of your available credit limit.
- Regular Credit Report Checks: Check your credit report for errors and correct discrepancies early.
Provide Complete and Correct Documentation
Proper documentation ensures the loan processing is smooth:
- Income Proof: Provide periodic and verifiable income proofs, such as salary slips and bank statements.
- Property Documents: Ensure property documents like title deeds and approvals are present and in proper condition.
- Identification Proof: Furnish valid and recent identification and address proofs.
Evaluate and Improve Your Debt-to-Income Ratio
Your debt-to-income (DTI) ratio is analyzed by lenders to determine repayment ability:
- Calculate Your DTI: Calculate your total monthly debt payments and divide by your gross monthly income.
- Reduce Outstanding Debts: Reduce outstanding debts prior to taking out a new loan.
- Increase Income: Seek additional income sources to enhance your DTI ratio.
Maintain a Stable Work History
Showing job stability increases lender confidence. It would be great if you could hold the same job for a minimum of two years prior to applying. Also, you can highlight promotions or career advancements in your work history.
Choose Pre-Approval and Know Eligibility Requirements
Going through pre-approval procedures can give you an idea of your loan eligibility. Know the loan amount you are eligible for and catch potential problems early so you can boost the approval chances of your loan application.
Include Co-Applicants
Including a co-applicant with a robust financial history can support your loan application:
- Combined Income: A greater combined income can enhance loan eligibility.
- Shared Liability: Lenders might prefer shared repayment obligations.
Select Properties that Comply with Lender Requirements
The nature of the property can affect loan approval:
- Approved Projects: Make sure the property is within an RERA-registered project or approved by major financial institutions to prevent legal issues.
- Clear Ownership Titles: Properties with ambiguous ownership or questionable land titles are rejected more frequently.
- Structural Integrity: Banks prefer properties that are safe and compliant with regulatory requirements.
Conclusion: Guarantee Your Home Loan Approval!
The peak surge in the rates of rejection of home loans in 2024 points to the necessity for good planning and foresight in application strategy. Economic fluctuations and lending policies can, of course, play their part in approval rates, but borrowers themselves can take solid action to increase their likelihood of approval.
Follow the strategies mentioned above to guarantee the approval of your home loan application.
