Secure a loan before you can own a home

Before embarking on your housing plans, be mindful of possible loan-rejection scenarios

Having a house of one’s own is a dream for most people. Amol Dethe is no different. Two years ago, this 28-year-old’s excitement knew no bounds when he spotted his dream house, which was also within his budget.

“Two years into work and I could buy a house — what more could I have asked for?” says Dethe.

But he was in for a rude shock when his home loan application was rejected by a leading public sector bank as he could not furnish three years’ income tax returns.

Reason 1: Salary and tax statements
“Income statements of salaried individuals and three years’ income tax statements (or tax deduction at source certificates on Form 16) are crucial for getting a home loan,” says S Govindan, general manager, personal banking and operations, Union Bank of India.

The quantum of housing loan depends on your take-home salary. Typically, banks give five times your net salary, according to bankers, as long as your monthly instalment does not exceed 60 per cent of the take-home pay. This is only for existing customers.

Along with salary and tax documents, new customers may need to furnish proof of age, residence, identity and employment, besides investment details.

“Self-employed individuals should produce their balance sheet and profit and loss account, along with income-tax statements for three years,” says a senior executive of State Bank of India. Photocopies of challans for advance tax payments are also required.

New customers also have to produce a registration certificate of the establishment, personal asset and liability statements, and details of other bank loans and life-insurance policies.

Reason 2: Creditworthiness
Having all the crucial documents does not necessarily mean your loan application will be approved. A good credit history is important as banks conduct mandatory scrutiny of your credit profile.

“Banks check your average bank balance, cheque returns and details of period payments to establish your liability status,” says a senior official of Oriental Bank of Commerce.

Lenders also check with Credit Information Bureau of India (Cibil), as it keeps a record of an individual’s credit history from credit givers and creates a credit information report. This report presents the applicant’s payment history from disparate institutional data. Today, there are other credit information agencies also, such as Equifax and Experia.

Reason 3: Type of property
Approval of your loan application also depends on the builder’s reputation. The bank’s tie-up with the builder works in your favour.

“If not, many banks may not sanction the loan. Or, you may be asked for additional documents based on the property type being purchased,” says the Oriental Bank of Commerce official.

For instance, if you buy a flat from a builder, a copy of your sale agreement with the builder is crucial. This also applies if you build a house on your own land. You may also need to show an estimate of the cost of construction certified by an architect. If the property being purchased is in a cooperative society, the original share certificate of the society and an allotment letter in your name are mandatory.

Some banks may also ask for collaterals like your life insurance policy or details of your assets (other properties) or investments in shares, National Savings Certificate, Kisan Vikas Patra, mutual funds, etc.

Reason 4: Industry you work with
In a few cases, a person’s profession can spoil his chances. For instance, Sumit Awasthi’s auto loan application was rejected by a private sector lender for no apparent reason. Later, he found out that the bank was wary of lending to media professionals.

“All banks do not have such mandates. But, some banks do not lend to media professionals, lawyers, policemen, etc,” says a senior banker.

However, auto and personal loans are more a function of your salary and your/your company’s relationship with the bank, say experts. Therefore, the document requirement is not as stringent as in housing loans.

“Education loans purely depend on the institution the person is being admitted to and the salary of the guarantor or the parent,” says Govindan. Mostly, banks seek an additional guarantee for loans of more than Rs 4 lakh, many times because the parent’s salary is proportionate to the loan amount applied for.