Get your house in order before applying for home loan

Even unused credit cards and non-filing of income-tax returns can be the main reasons for rejection

After Ratnesh Tripathi (name changed on request), an engineer, had finally identified a property, he approached a bank with a printout of the pre-approved loan document for a Rs 70-lakh loan. He was told the loan would get approved in three working days. After a week of no contact, he went to the manager and was told the application had been rejected.

A little more digging revealed his CIBIL (Credit Information Bureau) report showed three late payments in the past six months on credit card bills. Says Gaurav Mashruwala, financial planner: "Before approaching a bank or a housing finance company for a home loan, it is important to stop defaulting or making late payments well in advance. Lenders are quite uneasy with such things."

There are several lessons from this. A pre-approved loan means nothing. Banks often send you these emails but once you actually apply for the loan, the due-diligence begins. Also, if planning to take a home loan, start cleaning up your books early.

Here are a few don'ts before applying for a loan:

Don't default or pay late: High credit card bills are not appreciated anyway but if you have borrowed aggressively in the past year, bankers are uncomfortable. Add defaults or late payments and it gets worse. Typically, a lender is comfortable if you have a 40-50 per cent ratio of loan to take-home salary or debt to income. For example, if your take-home salary is Rs 1.5 lakh a month, the lender would be happy with an equated monthly instalment of Rs 75,000, at best. But it is inclusive of all loans. So, if there is a credit card bill monthly payment of Rs 20,000 and a personal loan of another Rs 20,000, your loan eligibility will get limited to Rs 35,000.

Since the loan-to-value is limited to 80 per cent and does not include registration and stamp duty fees for banks, you will be under pressure to raise a lot of additional cash. Housing finance companies, in such a case, might be a better option - they are allowed club registration and stamp duty, and give 80 per cent of the total amount.

Solution: If the credit card bill is too high and you're short of cash, it would make sense to take a longer-term personal loan and wipe it out completely. Taking the same example, Even if the EMI of the personal loan goes up by Rs 10,000, it will increase your home loan eligibility to Rs 45,000. Also, personal loan rates are cheaper at 14-18 per cent compared to the 40-plus per cent interest rates on credit cards.

Don't collect cards, close unused ones: Many people collect several credit cards over the years, many of which might not have been used for years and have zero dues. Even so, a large number of existing cards worries the lender. "This happens because many banks do not close the account despite the fact that there is no due or, sometimes, a small amount of Rs 15-20 remains. In such circumstances, the credit agency's report shows zero or little outstanding but is a negative remark," says a banker, who recently closed three credit cards with no dues.

Solution: Before applying for a home loan, get your credit information report from the agency. To do this, you have fill a CIBIL form and pay Rs 470 through credit card or net banking, to get the report online. Once you have this report in hand, you can approach the banks where your loan or credit card account have not been closed despite no dues. This will help clean your credit history.

File income tax returns regularly: Employees need not worry too much because they get a Form-16 but filing of I-T returns is anyway mandatory over an annual income of Rs 5 lakh. I-T returns become important if you have too much of other income. For instance, if you have traded in the stock market aggressively or have consultancy income, the bank would like see your I-T returns. Also, if eligible for advance tax payment, the returns' document is important.

Solution: Keep at least two years of I-T returns' papers ready. Even if you have not done it till now, get in touch with a chartered accountant and get the returns filed before applying for a home loan.

There are several other minor points to keep in mind. Beside the financial numbers, lenders seek stability. So, address verification is an important process and if the bank sees you have changed the house too many times, it will not be very sure. The same applies for jobs. Many banks put a lot of stress on stability and some have internal policies of providing home loans only to people who have stayed in a particular job for two-three years. "Shifting jobs frequently to increase your loan eligibility is a fallacy; it might be seen as a problem while going for a loan," says Suresh Sadagopan, financial planner.

In addition, if you have guaranteed a loan that had since defaulted, the bank is likely to hold you responsible and reject your application. If staying in an area in the negative list of the bank, it will not give you a loan. A banker explains: "In some of these situations, the prospective borrower is not at fault. But if the bank has had a bad experience with people staying in a particular area, they tend to reject the application."

Remember that buying a house requires a lot of planning. It is all about ensuring you have enough money to pay the initial amount and keeping your books clean to raise the rest.