A loan against property is one of the most sought-after financial instruments in the market, offering borrowers the benefit of leveraging their property to raise funds for personal or business needs. Known for its relatively lower interest rates and substantial loan amounts, it remains an ideal solution for many financial challenges. However, obtaining approval for a loan against property application isn’t always straightforward, as rejection can occur due to various reasons. Understanding the common pitfalls can help borrowers navigate the application process effectively and maximize their chances of success.
Below, we discuss the primary reasons why loan against property applications get rejected and offer insights into how they can be avoided.
1. Insufficient Property Value
The cornerstone of a property loan is the value of the pledged property. Lending institutions depend primarily on property valuation to determine the loan amount. If the market value of your property is deemed insufficient, your application may be rejected or sanctioned for a smaller loan amount than anticipated.
What Borrowers Can Do:
- Ensure your property is well-maintained and free from legal complications.
- Stay updated on the property’s current market value and work with certified valuation experts before applying.
- Understand that banks typically provide loans up to 60%-70% of the property’s market value, so manage your expectations accordingly.
2. Incomplete Loan Against Property Documents
Documentation plays a crucial role in the loan approval process. Missing or incorrect loan against property documents can lead to outright rejection of the application. Lenders require comprehensive paperwork to assess your property ownership, financial background, and eligibility.
Common Documents Required:
- Property-related documents such as sale deed, ownership proof, and tax receipts.
- Income proof (salary slips or IT returns for salaried individuals and audited financial statements for self-employed applicants).
- Identity and address proofs (Aadhar card, Passport, or other government-recognized ID).
- Bank statements detailing transactions over the past few months.
What Borrowers Can Do:
- Prepare all essential documents in advance and double-check for accuracy and completion.
- Consult with the lender to confirm their requirements to avoid delays.
- Address any discrepancies in property ownership documents immediately, such as outdated names or partial ownership issues.
3. Poor Credit Score
Your credit score serves as a benchmark of your financial discipline and repayment ability. Lenders typically check your credit history to assess risk, and a low credit score (below 650) is a red flag that can result in application rejection. Despite the secured nature of a property loan, a poor payment track record significantly impacts your eligibility.
What Borrowers Can Do:
- Regularly monitor your credit score and resolve any inaccuracies in the credit report well before applying.
- Maintain timely repayment of existing loans or credit card dues to improve your score.
- Avoid multiple loan inquiries at once, as they can lower your credit rating further.
4. Unstable Income Source
An unstable or insufficient income source poses a challenge for lenders considering the borrower’s repayment capability. Whether you’re a salaried employee, business owner, or self-employed professional, a consistent income is necessary to secure approval for a loan against property.
Lenders analyse your debt-to-income ratio to ensure that the EMI payments won’t overwhelm your finances. If this ratio is unfavourable, your application may not meet approval criteria.
What Borrowers Can Do:
- Prepare detailed proof of income, such as recent salary slips, bank statements, or audited financial reports.
- Ensure you’ve been employed or running your business for a considerable period, showcasing stability.
- Avoid applying for a loan during financial downturns, such as job loss or business losses.
5. Discrepancies in Property Ownership
Lenders prioritize properties with clear ownership records and legal compliance. If the ownership of the property is disputed, or if the property has been mortgaged in another loan and isn’t free of encumbrances, the application may likely get rejected.
Also, properties built without necessary approvals or those located on disputed land are generally not accepted by legitimate financial institutions.
What Borrowers Can Do:
- Ensure that the property ownership is undisputed and registered correctly under your name.
- Clear existing encumbrances or liabilities on the property before applying for a loan against property.
- Verify that the building or land has all required documentation, including approvals from local authorities and adherence to zoning laws.
6. Age Restrictions
Age plays a significant role in eligibility for a loan against property. If the borrower is nearing retirement, lenders may view them as a high-risk applicant due to concerns about long-term repayment stability. Applications from individuals below 18 years of age or those over 60 (depending on the lender’s terms) often face rejection.
What Borrowers Can Do:
- If you’re nearing retirement, strengthen your application with income proofs from alternate sources (e.g., rental income).
- Partner with co-applicants who are younger and have stable financial backgrounds to offset age-related risks.
- Opt for shorter tenures for repayment to boost approval chances.
7. Unsuitable Property Type
Not all types of properties qualify for loans against property. For instance, agricultural land, dilapidated or obsolete structures, properties with encroachment, or those located in remote areas often get rejected. Lenders prefer properties with strong resale value in urban or semi-urban locations.
What Borrowers Can Do:
- Verify the type of property that qualifies for loans against property with your chosen lender.
- Choose the most eligible property to pledge based on location, type, and condition.
- Address renovation or construction needs to improve the property’s appeal before applying.
8. High Existing Financial Liabilities
If you’re already burdened with multiple loans or debts, lenders may consider you high-risk, regardless of the collateral you offer. A high debt-to-income ratio signals that you may struggle with additional financial commitments.
What Borrowers Can Do:
- Reduce existing liabilities before applying for a new loan against property.
- Clear overdue payments and ensure accounts are up-to-date.
- Opt for debt consolidation if managing multiple loans becomes challenging.
9. Application and Processing Errors
A poorly filled application form with missing or incorrect details can lead to unnecessary delays or outright rejection. Additionally, not responding promptly to the lender’s queries or document requisitions can work against you.
What Borrowers Can Do:
- Always fill out forms meticulously and confirm that all details match supporting documents.
- Respond promptly to lender requests for clarification or additional paperwork.
- Choose communication channels that ensure timely correspondence with the lender.
Conclusion
A loan against property remains a valuable financing option, provided applicants meticulously adhere to lender requirements. Issues such as incomplete loan against property documents, poor credit scores, discrepancies in property ownership, or insufficient property value are key factors behind application rejection.
Understanding these common reasons while preparing a strong application can go a long way in improving your chances of approval. Before applying, consult with financial experts, compare lenders, and ensure both your property and financial profile meet the respective eligibility criteria. This proactive approach will help you leverage your property as a solid financial resource without unnecessary hurdles.
