Home Loan Application Rejected Despite Good Credit Score? Know Why!

Imagine that you have invested a lot of time and effort in increasing your credit score. You are now assured that the banks will accept your loan application and provide you with favourable interest rates. But sadly, your application is turned down. 

It’s disappointing, right? After all, you have learned over the years that the choice of the lender to lend you money is greatly influenced by your credit score. What went wrong then? 

Risk managers are responsible for protecting a bank’s risks against bad debts. At this point, variables that are not considered in the overall evaluation of a loan application, might be considered.

Even if you are only slightly off the margin, this could result in the rejection of your application. Keep these factors in mind as we discuss how to increase the chances of loan acceptance.

Why Do Banks Reject Home Loans Despite Having Good Credit Scores?

There can be several reasons why your home loan application got rejected despite having a high credit score. Some of them have been discussed below: 

• Status of Employment and Monthly Income

Having stable employment and making enough money to satisfy your loan payback obligations are essential requirements for being approved for a loan. Numerous questions about your money and job are asked as part of the loan application and all of these answers are statistically used to define your overall profile. Applicants with a high debt-to-income ratio are automatically rejected.

The debt-to-income ratio is computed by dividing all of your monthly debt payments, which include the minimum credit card payments and all other loan instalments by your monthly net income.

• Guarantor to a Defaulted Loan

If a loan gets defaulted, it affects both the borrower’s and the guarantor’s credit score. So, even if you were a guarantor to a loan, your next loan approval may be rejected if the said loan was defaulted. It’s better to make a background check on the loan payment capability of a person before being the guarantor of his/her loan.

• Repayment History

Your loan repayment history in the past also afects the chances of approval of your home loan application. If you have always been punctual with regard to your obligations, it is very much likely that the bank would approve your loan application easily.

• Bank’s Internal Policies

There is a limit to giving out loans for each bank over a particular period of time. Your loan application may get rejected despite no fault on your part as the bank’s limit of giving credit may have been exceeded. 

• Frequent Borrowing

It is bad for a borrower to borrow frequently from banks or other financial institutions. Despite paying the instalments on time, your engagement with too many financial bodies at the same time may lead to over-diversification and may not look good on your credit report. 

This might not allow you to take a new loan as the institution might question your ability to pay back in time due to too much credit dependency. The bank may take you as a risky candidate for a loan.

• Error in a Credit Report

Your credit report must stay updated. There may be cases where you have cleared off the loan, but it may not reflect so in the credit report. In that case, due to an error, your home loan application may get rejected. If you are facing similar issue, it is best to contact your bank/ lender and get your credit report sorted.

• Age while applying for a Loan

Applying for a home loan during the late stages of or after retirement may not be fruitful as the bank will question your ability to pay back in time. So, it’s better to apply early for loans, especially loans of large amounts such as home loans, as these loans are taken for a longer tenure..

However, if the lender finds you have enough assets and savings to repay the loan, your request for the loan may still be granted.

• Property Issues

Banks generally do not provide home loans for properties that are either in a legal dispute or highly over/under valued. In both cases, a bank might have to necessarily classify them as high risk assets.

Further, existing encumbrance on the property on which loan is being proposed to be taken could pose a challenge. If the previous owner of the property had taken a home loan on the same property, the bank asks for a No Objection Certificate (NOC) to check that the previous dues have been cleared off. The bank also checks if there are any legal obligations against the property before permitting a home loan. 

• Poor Credit Score of Co-applicant

When taking a home loan with your partner, it is advisable to check the credit scores of both applicants. The application may get rejected if either of you has a poor credit score.

• Failure to Pay Income Tax

Failure to file Income Tax returns in time may also result in rejection of your home loan. A financial institution generally checks the reports of the last three years of IT returns before giving your home loan application a nod. One should also check if there are any other statutory dues (dues payable to different government/ regulatory bodies) overdue in their account.

• Multiple Hard Inquiries

To examine someone’s credit score or credit report, a soft inquiry is conducted. Your credit score is unaffected by these inquiries. On the other hand, a hard inquiry is when a lender obtains a copy of your credit report to check your credit history. 

Lenders may reject your loan application if you have a high number of hard inquiries since it suggests that you have applied for a loan more than once.

• Imbalance between Secured and Unsecured Loans

Collateral serves as security for secured loans, which the lender considers to be less risky. Unsecured loans, on the other hand, lack collateral and are therefore seen as higher risk. Therefore, even if you have a high credit score, your loan application may still be denied if the ratio of secured to unsecured loans that you have availed is unfavourable.

• Error in Loan Application

When applying for a home loan, all the details filled in by the applicant must be genuine. In case the bank authorities find material error(s) in the application, the request for a home loan may get disapproved.

• Absence of proper  Income Documents

In case there are no proper documents showcasing your income or savings, it becomes difficult for a lender to approve the home loan application. As improper documents can show a lack of consistency in your income. 

• Previously Rejected Loan Request

When checking the credit report of a borrower, a lender also checks for any previously rejected loan applications, which can also become a reason for rejection of new applications.

What to do if my Home Loan Application gets rejected?

Here are some things that you can consider doing if your home loan application gets rejected: 

• Update your credit score and try to improve it if it is low before applying for a home loan again. 
• Check your details minutely before filling out the application form. Also, be sure of the genuineness of the documents submitted with it.
• Ensure that the property does not have any pending legal cases or other issues that may result in the rejection of your home loan.
• Apply for a home loan with a guarantor having a good credit score. This will improve your possibility of getting a loan.

Final Word

Everyone dreams of having their own home. So, it can get really frustrating when your home loan applications get rejected. Before approving your home loan application, financial institutions consider multiple factors. By keeping the factors discussed above in mind, you can increase the chances of loan approval on your next home loan.

Frequently Asked Questions