810! This was the credit score of an investment banker from Hyderabad. Wow, isn’t it? Rightly so, Mr. Investment Banker kept bragging about it to his colleagues, until one day, when his home loan application was rejected!
How, why and what next? He always repaid his EMIs on time and has been a good borrower throughout his credit life cycle. More so, he kept hearing that 750 and above is considered to be a good credit score. Then what went wrong? He was way above this cut off, wasn’t he? So where is the catch? Why was his application rejected?
Let us list down the possible reasons:
Repayment capacity: It is said that your repayment capacity will decide how much loan you get. But, it is equally true that your repayment capacity will decide if you get a loan or not. So, for example, if your salary package is not adequate, the loan application could be rejected.
Over borrowed: If you already have a high outstanding balance on your loans and credit cards, then how would you repay an additional loan? Banks utilize the “Fixed Obligation to Income ratio” to determine the extent to which you are leveraged. Here, the bank takes into account your existing EMIs along with the proposed EMI. Higher the ratio, lower is the chances of approval of your loan application.
Property documents not clear: This is applicable only in the case of a home loan. Not all types of properties fall into the category of acceptable security for a home loan. May be in case of technical specifications or legal issues, your application could be rejected.
Damaging remarks on credit report: “Settled” or “Written off” remarks are “damaging” remarks. In its true sense, it can damage your image of being a good borrower. Don’t be surprised if banks maintain a distance from you. The bank would not like to take the risk of lending to you after you have warned them about your credit behaviour.
Guaranteed a loan: Agreeing to be a guarantor for a loan, could back fire on you sometimes. Your liability as a guarantor is no less than the liability of the borrower himself. If the borrower chooses not to repay, either willfully or due to genuine reasons, your future loan applications are surely gone for a toss.
Company profile: Availing a loan could be easier if you have been working for a well established company. If you are employed in a smaller company, despite a higher designation, your application could be rejected.
Job stability: Your job stability can affect your loan application too. The bank will check if you have job hopped too often. The longer you are at the same job, the more secure it seems. Hanging on to your job for at least 1 year would be advisable. This is also one reason why banks insist on salary slips or bank statements of the past 6 months. The bank would get confidence that you are receiving and will continue to receive your salary needed to pay back their loan.
No ITR or Form 16: Banks insist on at least 2 years of Income tax returns being filed. So, if you cannot produce the latest 2 years ITR, there are possibilities that your application might get rejected – this in spite of a score of 810.
In the case of Mr. Investment Banker, he agreed to guarantee a loan for his friend years back, not foreseeing the chances of facing a rejection. So 810 is good but….don’t forget all these other aspects.
ABOUT THE AUTHOR
Satish Mehta is the Founder and Director of www.credexpert.in – a credit and debt counselling company that provides end to end customized counselling to individuals by handholding them through their credit life cycle.