A bank judges a loan applicant’s ability to repay through various measures—age, income, job stability and credit report, a reflection of true creditworthiness. A loan applicant needs to understand why these factors are important in order to submit a good application and ensure a strong credit profile that will help obtain a loan without much trouble. My views are based on standard underwriting principles as applicable in the US, European and Indian markets and are not a reflection on any particular institution in any country.
Age factor is critical
Home loans are generally available for a maximum tenor of around 20-25 years. However, whether you can avail the maximum loan tenor or not depends on the age at which you avail the loan. The age factor plays a key role in your available loan tenor especially if you are closer to your retirement which is typically assumed to be 60-65 years. Our research indicates that around 90% of individuals applying for home loan are in the age group of under 50 while only around 10% are in the above 50 category.
Tip: If you are approaching your 50s but feel you need a 20-year tenor in order to repay the loan comfortably, you could apply for the loan with your son or daughter as a co-applicant which will help you increase your loan eligibility and loan tenor.
Place of employment and job stability
Banks give a lot of importance to job stability and certain banks even insist that an applicant needs to be employed with a particular concern for at least one year or more to be eligible for a home loan. Also, in cases where a company’s future appears unstable, the bank can reserve its right to not provide a loan to an applicant from that company.
Tip: Remember, constant job shifts may affect your creditworthiness. Try to stick to a company for a minimum period of one year if you plan to apply for a loan or change jobs after your loan is sanctioned. Even this time period only holds during the initial years of your career. As you gain experience, it augurs well for you to have a longer stint at the companies you work for to show job stability.
Does gender play a role?
Till a few years back, banks were reluctant to provide loans to single women. The main reason for this was the fear of the loss of income after marriage. Today, this perception has changed with women continuing to pursue their career after marriage and double income families becoming very common. So many lenders are keen to tap this potential emerging segment and gender plays a less important role in loan approvals now. However, in certain cases, banks still ask for a guarantor in case of individual women applicants. It should be the husband if she is married, parents or siblings if single.
Our in-house statistics show that among those who successfully apply for a home loan on our website, around 6-8% are women as primary loan applicant, while 50% of co-applicants on home loans are women. Most married couples opt for this route since two earning applicants increases the loan eligibility as well.
Tip: It is better to opt for a home loan with a co-applicant irrespective of gender. Banks anyway insist that co-owners need to be co-applicants, though they do not stress the opposite. This ensures a higher loan amount and better finance management in a double-income household as the responsibility of the commitment lies with both individuals.
Past repayment track record
This is another critical aspect for your loan application to be processed smoothly.
Have you been accumulating credit card dues over the years resulting in a huge pending payment, which is well past the due date? Or slipped up on your instalments for a car loan a couple of times? In these instances, your name would have been reported to credit bureaus. When a bank looks up your credit card or loan repayment track record, this information will show up and mar your credit profile making loan sanction fairly difficult. Even if you are granted a loan, it will come at a steep interest rate. Also, telephone bills and insurance premiums are likely to join this list, so do keep a strict vigil on your entire bill and credit repayments.
Tip: You can now access your credit report by making an online payment at the credit bureau website. The report will then be physically dispatched to you. Get a copy of this every year for an annual review, if you are using a credit card or repaying a loan. This will help you prepare ahead if you need to apply for a loan.
Here are some points to help you prepare for your loan:
• Gauge your repayment ability. Calculate your net worth and evaluate if you are ready for a loan commitment.
• Keep a tab on your credit score and review your credit report periodically and address discrepancies immediately.
• Ensure you have back-up funds to pay your instalments for a few months in case of emergencies such as job loss.
• Make as much down payment as possible and prepare to close the loan as quickly as you can in order to maintain a good repayment track record.
Illustration by Jayachandran/Mint
Adhil Shetty is CEO, BankBazaar.com.
We welcome your comments at email@example.com