Banks use several parameters to evaluate a loan application. Lenders look at the sector and company in which the applicant works, as well as their age, income, existing loans, credit score, and so on. "They are re-evaluating the repayment capacity of the borrowers. There is greater scrutiny of income sources compared with earlier," said Adhil Shetty, CEO and co-founder, BankBazaar.com, an online marketplace for financial instruments.
According to the industry experts, lenders are also looking at applicants with a higher credit score than before, and they prefer someone who doesn't have any ongoing loans or the monthly outgo for existing loans is low. They are also looking at lending to employees of top companies and avoiding applicants in sectors such as travel and tourism as well as aviation.
To avoid facing rejection from lenders due to stricter lending criteria, there are a few steps borrowers can take to increase their eligibility, especially if they are planning to take an asset-backed loan such as a home loan.
CLEAR EXISTING DUES
Earlier, if an applicant had an ongoing loan, which was about to end in six months, lenders would not consider its equated monthly instalment (EMI) when looking at the eligibility. Now, they do.
Lenders look at a parameter called fixed obligation to income ratio (FOIR). Under FOIR, a lender considers the applicant's fixed obligations such as current EMIs to determine eligibility. If a lender would give a loan to someone with a FOIR of up to 60% of their net salary, now they have reduced it. If you have the last few EMIs left to pay in an ongoing personal or consumer durable loan, prepay it before applying for a new loan.
CHECK CREDIT REPORT
Download a copy of our credit report to check the credit score and if there are any problem areas. Public sector banks usually prefer to lend to people with a credit score of 700 or more. The private sector’s credit score requirement is higher.
You cannot do much immediately if your credit score is low due to default or missing payments. But check your credit utilization rate. "Credit utilization reflects the percentage of available credit being used. For example, if the credit limit on your credit card it ₹1 lakh and your average monthly spend comes to ₹40,000, your credit utilization is 40%. However, if you had two cards with limits of ₹75,000 each, and your total utilization is ₹40,000, your utilization is 27%. Very high utilization is considered as a potential risk. The lower your credit utilization, the higher your eligibility," said Shetty.
Most lenders typically prefer a credit utilization rate of around 30%. Clearing your card due to bring down the credit utilization rate that lenders prefer.
Your credit score can also fall if you apply for a loan with multiple lenders. This is reflected in the credit report. Check the inquiries made on your report. "Frequent requests give the impression of being credit-hungry and can bring down your credit score. Opening several new credit accounts in a short period of time can signify greater risk—especially for borrowers with a short credit history. So, do not apply for credit arbitrarily," said Shetty.
TAKE A JOINT LOAN
One of the easier ways to increase the chances of getting a home loan is to apply for the loan with your spouse jointly. Some banks allow relatives such as father, mother, son, or daughter as co-applicant if they are working. A co-applicant could help in increasing your loan eligibility.
CHECK IF A LENDER IS OFFERING STEP-UP LOAN
Under this scheme, banks offer loans at lower EMIs in the initial years and gradually increase the EMI as you start repaying the loan. It is typically meant for younger borrowers. The lender increases the EMI as the borrower progresses in their careers and earn a higher income.
The interest outgo in a step-up loan is higher than in a loan with a fixed EMI. Use step-up EMI only if you are sure of better earnings potential in the future.
APPROACH BANK THAT HAS TIE-UP WITH MORTGAGE GUARANTOR
The eligibility criteria for home loans offered in a tie-up with a mortgage guarantee company is more relaxed. "A mortgage guarantee firm ties up with lenders to offer loan products. Both partners work out the eligibility criteria and other modalities related to the loan. As mortgage guarantor can take more risk than a bank, the loan products that lenders offer in a tie-up with them have relaxed eligibility criteria. A borrower can get 20-30% higher loan amount in such a loan," said Sovan Mandal, chief business officer, India Mortgage Guarantee Corporation (IMGC).
According to Mandal, a loan product in partnership with a mortgage guarantee company could have a higher loan tenure, higher FOIR, relaxed income criteria, and so on.
IMGC has tied up with the State Bank of India (SBI), Axis Bank, ICICI Bank, HDFC Ltd, Bank of Baroda, LIC Housing Finance, among others for a home loan product. Among these, SBI offers the product only to self-employed.
Before applying for a loan, it's best to understand your current situation and approach a lender who is most likely to lend to someone with your profile.