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Home Truths

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It may sound ironic, but getting a home loan is tougher than buying a house. Despite their intention to increase long-term collateralised lending, banks end up making the loan process complicated. There is a multitude of checks and filters, many of which could effectively nip your loan application in the bud.
 
Mumbai-based Shailendra Singh (name changed) applied for a home loan from a leading PSU bank about three months ago. After voluminous paper work and rigorous scrutiny, the bank agreed to a loan, but the amount was about 20 per cent lower than what was applied for. The credit executive explained: “The credit team is not really comfortable giving loans to people in certain jobs. Journalism is one of them.” 
 
Shashi Krishnan, an IT professional from Bangalore, faced a similar situation but for different reasons. His loan request was rejected because he was an employee on contract. The bank did not even consider Shashi’s significantly long tenure (and numerous renewals of contract) with the company. 
 
Banks, though similar in working styles, have different parameters to determine eligibility of potential borrowers. Their loan components also differ. So, it is in the best interest of a borrower to have a back-up option (another bank or a housing finance company) in the eventuality of his home loan application getting rejected. 
 
“Most salaried individuals, with limited financial liabilities and a decent job profile, get home loan assistance from banks and housing finance companies. It’s just that lenders do a lot of checks before giving out large sums of money. This should be seen as normal,” says G.S. Sundararajan, managing director of Shriram City Union Finance. 
 
Buying a house on loan is probably the biggest investment one ever makes. So, it’s important to know the factors or conditions that can create roadblocks.
 
‘Wrong’ professions: Journalists aren’t the only ones whom banks prefer to avoid. Lawyers and policemen, too, are considered ‘messy’ borrowers. Banks may not tell you this, but they almost always run a ‘rate-down’ screen while processing applications of customers in the ‘marked jobs’ list. 
 
“It will be wrong to say that lawyers, journalists and policemen are treated on a par with regular salaried borrowers. Lenders do have a mark-down structure for borrowers in the marked jobs list,” says Gurjodhpal Singh, head of loans at Policy Bazaar, an online financial product distribution portal.
 
Banks desisting from offering credit facilities to lawyers is almost an unwritten rule. A senior banker, on condition of anonymity, explains that this is done because banks have almost no legal recourse if a lawyer defaults on repayment — most lawyers do not want to file a suit (on behalf of the bank) against a fellow lawyer. Also, a lawyer’s income is unpredictable, and banks perceive irregular income as a credit risk. 
 
Lack of permanency: In fact, most banks are not comfortable giving loans to those who don’t have a ‘permanent’ job. Some PSU banks do not even entertain loan requests from contractual employees and temporary recruits. However, more and more private banks are waking up to the trend of companies hiring people on contract, and have started providing loans to such borrowers, albeit after lowering their overall loan eligibility. 
 
“A contractual employee may get a loan if he is well-qualified and experienced. Banks also look at continuity in employment. If the person’s association with a particular employer has been long and fruitful, he shouldn’t face any problem getting a home loan,” says Sumit Bali, executive vice-president at Kotak Mahindra Bank.
 
“Their loan eligibility, however, could get discounted as they are not expected to get continuous fixed income every month,” he adds. 
 
Who you work for: Customers working with scam-tainted employers or companies with a history of downsizing (or retrenchment) may also find it difficult to get home loans. In such cases, the borrower could opt for a joint loan — with siblings, parents or spouse, in a joint ownership structure.
 
On-off jobs: Another job-related impediment is frequent change of jobs. Job switches, in fact, also affect a person’s credit score. “The risk that a bank perceives in such customers is the sustainability of high salaries. Also, several job changes over a shorter time period could result in exorbitant salaries; re-employability of such customers could be difficult during tough times,” says Bali. 

An example is BPO jobs. In early 2000, many BPO employees were able to get big pay packages by hopping jobs. Their salaries rose even though they did not have adequate experience and educational qualifications. So, when BPOs went downhill, the same employees were struggling to get jobs at even half their earlier salaries.
 
“Banks would not really want their borrowers to be in such a situation. So they do not take frequent job switches lightly,” says Bali. 
 
The ideal profile of a home loan borrower is:  6-8 years’ experience, with 3-5 years with one employer, and a monthly package of over Rs 65,000.
 
Check the payslip: Borrowers in lower salary brackets are not usually given large loans. Lenders consider the take-home (or in-hand) salary to calculate home loan eligibility. So, more perks (rather than in-hand salary) are good from a tax point of view, but not when it comes to home loans. This is because allowances may not be the same (or stay stable) month after month, and this prevents banks from calculating the borrower’s exact repayment capacity. Low basic pay but higher allowances may be interpreted as inadequate stable income. 
 
A lower income could also indicate that the borrower does not have sufficient funds to pay part of the house’s value. As per Reserve Bank of India (RBI) norms, lenders can fund 75-80 per cent of the property’s value; the buyer has to pay the remaining 20-25 per cent. So, if someone is not able to ‘show’ funds (or equivalent assets) to make a down payment for the property, banks could deny the loan. 
 
Payment records: The other ‘low score’ that can work against you is a poor credit record. Credit score is a numerically derived expression that determines the creditworthiness of a borrower. It is historical in nature and is used by banks and other financial institutions while extending credit facilities to a customer. The ratings scale is normally 300-999 points — the higher the better.

Nobody gets a perfect score; but customers with scores over 700 are considered good for home loans. On the downside, a score below 600 could prevent you from getting a home loan. Be conscious of your credit card usage during the months preceding the home loan application. Rash purchases might indicate ‘irresponsible spending’, which could impact loan eligibility.

Limited by age: The one number that works when lower is age. Borrowers older than 50 are generally not given a home loan as most banks consider 58 to be the age of retirement from active service. So, if you are looking for a long-term loan — say, 20 years — you should be under 40. The ideal age to take a home loan is 30-35 years. Those above 40 do get loans, but their eligibility is lowered, and they need to show higher earnings. 
 
Location matters: If you are looking to buy property in certain areas in and around Najafgarh, Chhattarpur and Ashok Nagar (Delhi) or Mahim East, Nallasopara, Khar East, Mumbra or Chinchpokli in Mumbai or Vivek Nagar, Tanny Road and Gauri Palaya in Bangalore, your loan request could be rejected. Areas that have a ‘bad’ reputation or have high default rates are hot-listed as ‘out of geographical limits’. These places go off the negative list only when the overall credit repayment profile of the area improves. 
 
Banks are also not comfortable with places that have loose soil texture or are prone to landslides and earthquakes. Properties constructed on forest land will not get loans.
 
Lenders are not very keen to give loans against old, dilapidated structures. Banks lend only 65-70 per cent of the property value if the building’s ‘structural age’ is more than 15 years. If it is more than 25, the loan may even be rejected. 
 
“Buildings that are 10-15 years old are considered for loans by most banks; but loans for older buildings will only be given after proper structural checks,” says Sundararajan of Shriram City Union Finance.
 
Builder’s history: Banks also do not lend against property (or buildings) constructed by builders with a dubious track record. “Home buyers should check the credentials of the builder before applying for a loan. Banks also look at structural plans, quality of construction, title documents and property valuation before disbursing loans,” says Sundararajan.
 
Loan load: Banks lower eligibility of customers who have pre-existing personal loans. So, if a person is repaying a personal loan equated monthly instalment (EMI) of Rs 15,000 at 16.5 per cent per annum (at the time of applying for a home loan), his eligibility will come down by about Rs 14 lakh. Conservative banks lower loan eligibility by almost a lakh for every Rs 1,000 paid as EMI. 
Loan applicants can, however, negotiate with bankers for resetting eligibility limits.
 
Lenders also try to find out whether the borrower has stood guarantee for a loan taken by someone else because the guarantor is liable to repay the loan if the borrower defaults. So, the more loans you stand guarantee for, the lower your eligibility for a home loan.
 
Crime doesn’t pay: Borrowers with criminal records are not usually entertained by banks. Though banks do not conduct direct police verification, they will not take any ‘history of crime or criminal activity’ lightly. 
 
“Individuals looking to buy a house should plan their funding options well. They should have some decent savings to meet initial payments,” says Singh of Policy Bazaar. 
 
“Try to get pre-approved home loans; this will give you a fair idea of your loan eligibility. Go for bank-approved properties; doing so will reduce payment hassles. And, more importantly, be a good (bank) customer; it always helps,” he advises.
 
Happy house hunting!
 
shailesh(dot)menon(at)abp(dot)in
alertsmenon(at)gmail(dot)com
Twitter: (at)alertsmenon

(This story was published in BW | Businessworld Issue Dated 01-07-2013)