Owning a home is among the top aspirations of individuals. Investment in real estate is often for life and costs a lot, making it difficult to own them just out of your personal funds/ savings. Availability of a home loan comes as a big savior here.
However, as home loan is a big-ticket and long-term commitment, there is a big risk involved in lending. In addition, the lack of transparency in real estate dealings makes matters worse. Though lending for buying real estate constitutes among the priority sector lending, lenders go through a lot of due diligence before taking the decision to lend.
As a famous saying goes " There is a slip between the cup and the lip", the same can be true for home loans as well.
The normal steps followed in a home loan application process (in short) are as follows:
Borrower approaches the bank/ financial institution after finalizing the property
Submission of required documents like home loan application, income proof, income tax returns, identity proof and the documents pertaining to the property
Due diligence of the property documents and the personal documents of the borrower by the lender
Sanction for home loan
You must have noticed that the bank gives a sanction for the home loan at first and then goes forward for disbursal. However, at times, it is quite possible that your application for home loan is rejected at the last moment in spite of a sanction being issued earlier. The same may be the case for a pre-approved home loan, where the lender already has an agreement with the developer for lending loans for buyers of the project which may subsequently be denied.
What might be the reason to withdraw an approval? It is very important for you to know the reasons due to which a home loan might be rejected after a sanction so that you can be well-informed about the do's and don'ts while applying for a home loan.
Additional Reading: The Credit Mantri Guide for Home Loans
Top 5 Reasons Why Home Loan Can Be Rejected After Sanction
It is very important for the aspirants of a home loan to understand that a pre-approval is not an obligation on the part of the buyer to lend you the loan. It is possible there may arise conditions due to which a sanction or a pre-approval may end up being canceled.
Problems with Approvals for the Project
Any construction that you plan to do requires a lot of approvals from the civic authorities and also from other authorities like Airport Authorities if the proposed structure is high enough or is close to an airport or in the flight path, environmental agencies , the fire dept, etc. depending upon the location of the building and other prescribed norms.
Sometimes, the project gets an approval from the lender while the other clearances are in the pipeline. However, they may end up getting rejected by the authorities if there are some discrepancies in the project details submitted or the project is not feasible according to existing rules and regulations.
Unless all approvals are in order, lenders do not like to go ahead with the project financing. Hence a pre-approval on your home loan may be withdrawn if all the required permissions/ approvals for construction of the project are not obtained on time.
Lender Not Funding the Project Anymore
Often obtaining funding for a project also matters on the funding that the promoters brings in to the project. It may so happen, that due to various reasons the promoters may not fund the project adequately.
This is akin to home loan buyers being asked to bring the down-payment while buying a house. This demonstrates that the borrower is also committed to the idea of buying the property. On the similar lines, promoters would have to bring in a certain amount of funds to show their commitment to development of the real estate project, failing which the lender may choose not to fund the project.
Pre-Approval Not Applying for the Said Project
Often promoters have running arrangements with one single bank/ financial institutions for obtaining funding arrangements for all their projects. Even then, it is essential that funding is approved for each and every project individually and cannot be assumed.
Many a times, in spite of the blanket funding arrangements, banks may choose to not approve/ fund a particular project if they are not satisfied with their due diligence of the project or due to certain approval issues.
In this case, the promoters may have advertised as the project as being pre-approved by the bankers which may end up as otherwise.
Additional Reading: Top 10 Reasons for Home Loan Rejection
Change in Lender/ Government policies
A bank/ financial institution has its own rules and policies for operations. Each bank/ financial institution generally earmarks a portion of the deposit it raises from the public towards lending to home loan/ real estate sector. Due to a change in general economic scenario in the country or any other reasons, the banks may decide to lower their lending to the sector and hence, may go back on the approval granted earlier.
Government policies in respect to real estate are also an important governing factor for pre-approvals being rejected at a later date. Certain government policies regarding GST or other taxes/ levies affecting the real estate sector may cause the banks/ financial institutions to withdraw approval on loans.
Changed Borrower Dynamics
Each pre-approval is based on certain figures as regards to the applicant like the credit score, income level, employment status, etc.
Post-pre-approval, there is a possibility that there might be a drastic change in the borrower dynamics like a settlement of a debt which is reported after the pre-approval was given. Or the company in which the applicant was working ends up getting shut-down or the applicant ends up getting another big-ticket loan which ends up compromising his repayment ability on this loan.
When there is drastic change in borrower dynamics, the lenders may decide to take back the pre-approval and may not get to the disbursement stage.
Investing in real estate is very often an investment for life. It is important that you do a thorough due diligence of the property, the promoters to ensure you are investing in a sound project. At the same time ensure your creditworthiness remains high at all times by being responsible with credit each time and every time.