Credit Strategies for Rejected Home Loan Applicants
Denied a home loan? Credit Dharma’s founders share what to do next
What to do when your home loan application is denied? Applying for a home loan is a significant milestone on the path to homeownership. However, facing a rejection can be disheartening and confusing.
India’s home loan market is experiencing unprecedented growth. Valued at USD 300 billion, it’s expected to register a Compound Annual Growth Rate (CAGR) of 22.5% during the forecasted period.
“The rising demand for housing loans reflects the underlying appetite for real estate,” says Akul Agarwal, co-founder of Credit Dharma. “However, with this surge comes increased scrutiny from lenders, and many individuals are facing rejections on their loan applications.”
Despite the booming market—with residential real estate sales witnessing 20% year-on-year growth in 2024 and new supply hitting an all-time high—loan rejections remain a hurdle for many aspiring homeowners.
“It’s important to understand that a rejected home loan application isn’t the end of the road,” emphasizes Rishu Garg, co-founder of Credit Dharma. “It’s an opportunity to reassess and strengthen your financial profile.”
Understanding the Rejection
First and foremost, you need to grasp why your application was rejected. Lenders are mandated to provide an adverse action notice detailing the specific reasons for denial. This becomes your roadmap for rectification.
Common reasons for home loan rejections include:
- Low Credit Score: A score below 650 can significantly reduce approval chances. The average approved applicant in recent years had a score above 750.
- High Debt-to-Income Ratio: Lenders in India prefer a ratio below 40%. Many rejected applications exceed this threshold.
- Insufficient Income or Employment History: Stable income is crucial. Frequent job changes or gaps in employment can raise red flags.
- Property Valuation Issues: Lenders may deny the loan if the property’s appraised value is lower than the sale price.
Immediate Steps to Take
- Don’t Panic: It might feel like the end of the world, but it’s not. “Stay calm and avoid making hasty decisions,” advises Akul.
- Review the Rejection Letter: Carefully read through the letter from the lender. They usually outline the reasons for the rejection. This information is your roadmap for what to tackle next.
- Check Your Credit Report: Obtain a copy of your credit report from agencies like CIBIL or Experian. Look for errors or discrepancies that might have negatively impacted your score.
“You’d be surprised how often credit reports contain mistakes,” says Rishu. “Correcting them can sometimes boost your score significantly.”
How to Improve Your Chances Next Time
Enhance Your Credit Score
- Timely Payments: Pay all bills and EMIs on time.
- Reduce Outstanding Debt: Lower your credit utilization ratio below 30%.
- Avoid Multiple Credit Inquiries: Limit new loan or credit card applications.
“Improving your credit score is one of the most effective ways to enhance your loan eligibility,” notes Rishu.
Stabilize Your Income
- Maintain Steady Employment: Stay in the same job for at least 12 months.
- Document All Income Sources: Include bonuses, freelance work, or rental income to show higher, stable income.
- Add a Co-borrower: Including a co-applicant with a strong credit profile can improve your eligibility.
Organise Your Documentation
- Double-Check Everything: Ensure all forms are correctly filled and all required documents are included.
- Seek Professional Help: Consider professional assistance if you’re unsure about the paperwork.
“Incomplete or incorrect documentation is a common but easily avoidable reason for rejection,” Akul emphasizes.
Explore Alternative Options
If traditional banks aren’t working out, don’t worry—you have other avenues to consider. For instance, Housing Finance Companies (HFCs) often have more flexible lending criteria than traditional banks.
In an exciting development, HFCs have recently proposed to the government a revamp of the Credit Risk Guarantee Fund Trust for Low-Income Housing (CRGFTLIH). They are advocating to increase the guarantee cover for home loans up to ₹25 thousand from the current ₹5 thousand.
“This proposal could be a game-changer for many aspiring homeowners,” says Rishu. “By increasing the guarantee cover to 75% on a ₹25 thousand home loan, HFCs aim to include a wider set of customers in the low-income housing category.”
Additionally, various government schemes and state housing programs aim to make homeownership more accessible.
The Pradhan Mantri Awas Yojana (PMAY), for example, offers credit-linked subsidies for first-time homebuyers belonging to economically weaker sections, lower-income groups, and middle-income groups. Under PMAY, you could receive an interest subsidy of up to ₹2.67 thousand, significantly reducing your loan burden and making your monthly installments more affordable.
Furthermore, various state housing programs provide additional options. For example, the Maharashtra Housing and Area Development Authority (MHADA) and Delhi Development Authority (DDA) provide housing initiatives that offer homes at subsidized rates.
“Exploring these alternatives might open doors you didn’t know were available,” Akul suggests. “They could bring you closer to owning your dream home.”