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What banks look at before approving a home loan

While credit history is an important factor, age and income are vital too


You feel settled in your professional and personal life. Now, all that you need is your own dream home. For this you may have to take a bank loan. Having a home loan approved is a daunting task as banks have a rigorous procedure of risk assessment. Grahak Sathi gives you an insight into the criteria banks consider.

Credit history: Your credit report is maintained by different bureaus (like CIBIL). It reveals whether you pay off in time your credit card bills and EMIs (equated monthly instalments) for any other loans you may have. Banks pass on the applicants’ documents to agencies who calculate the credit score. Generally, 700-800 is considered a good credit score. If your score is less than 300, your loan application is likely to be rejected. Nowadays, there are online agencies who calculate a person’s credit score for free.

A good credit score may not get you a lower interest rate, but it will definitely make the loan approval process faster with fewer checks by the lender. Basically, banks are assessing the potential borrower’s character. Banks also check account transactions. A steady bank balance and ensuring cheques don’t bounce would help you get into a bank’s good books.

Age: Applicants in the age group of 30-50 years are preferred as they are considered financially stable. They also have sufficient number of working years left to repay their loans. 

Employment history: Nationalised banks prefer government and PSU employees as they are perceived to have stable jobs. Next come people employed by blue-chip companies and doctors, followed by chartered accountants, engineers and lawyers. People who are self-employed are the least preferred. A potential borrower switching jobs frequently is considered a poor risk. Banks prefer people who have been serving in the same company for at least three years. 

Income: Banks will consider your total monthly income from all sources – salary and bonuses as well as income from dividends and interest. This will be compared with your living expenses and EMIs. If your spouse is working, his or her income will also be considered to determine repayment capacity.

Collateral: Collateral is simply defined as property that secures a loan or other debt which the lender may seize if the borrower fails to pay the EMIs regularly. Collateral could be real estate or financial assets such as stocks and bonds.

Loan to value ratio: This refers to the ratio between the loan amount to the value of the asset being purchased with the loan. The lower the ratio, the lower the risk for the bank.

Liquid assests: If you have assets that can be converted into cash quickly to pay the EMIs in the event of a financial setback, banks are likely to consider you as less risky. Most lenders will also require you to have savings to cover two to six months’ of EMIs.pi23

Other current loans: If you are already paying back a car or student loan, lenders will assess your ability to pay the EMIs for the home loan.

Down payment: The lower your loan amount, the less risk to the bank. Home buyers ready to put down 20% as down payment stand a better chance of receiving a loan.

Loan term: Banks assume that a shorter loan means the borrower’s ability to pay is less likely to change over the life of the loan. They give maximum score to people who opt for a repayment period of up to five years.

Relationship with bank: The older your relationship with the bank, the higher are your chances of getting the loan approved.

Particulars of house: It is easier to get a loan for a ready-to-move house. An under-construction house is considered more risky as there is a chance of the builder delaying possession. The location of the property and reputation of the builder may also impact the bank’s decision.

Banks tell the applicant the reasons for rejection of a loan. He can then approach another bank or an NBFC (non-bank finance company). Usually, it is easier to get a home loan from an NBFC but the interest rate is higher.

What all lenders are really looking for is proof that you have the earnings and self-discipline to repay your loan. You need to demonstrate that by your financial details and behaviour.

Sources: India Today, Business Standard, www.discover.com, www.mortgagechoice.com.au

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