Home Loans: How Banks Decide If You're Worth The Risk
If you think getting a home loan is just about having a decent credit score and a steady job, think again
If you think getting a home loan is just about having a decent credit score and a steady job, think again. Banks and NBFCs have a whole playbook of evaluation criteria – some you know about, many you don't. This festive season, as you prepare to make that dream home purchase, let me pull back the curtain on how lenders really assess whether you're a worthy risk or not.
The Obvious Stuff
Banks evaluate home loans using many criteria – some standard, some not so obvious or known. Initially, banks consider factors such as a credit score that typically hovers around 750, a consistent source and flow of income, the borrower's employment history, an age range ideally between 23 and 60, the borrower's debt-to-income ratio, and the market value of the property.
So far, so good. Most of us know this. But here's where it gets tricky.
The Not-So-Obvious Stuff
However, they also look at the developer's and project's approval status and whether the project's location is in good standing. In fact, some areas are quietly blacklisted, and many banks maintain an internal risk assessment of specific locations and housing societies. Yes, that's right. Your dream apartment could be in a location that banks have quietly red-flagged.
Also, banks might know about payment defaults by previous buyers in the project you're interested in (you obviously have no clue about that), and it affects how favourably they see it.
They will also look for:
- Defaults by previous tenants in that project and property
- Whether your spouse is also earning, how much, and how much it contributes to the household income
- The number of dependants you have
- Your educational qualifications, and
- The reputation and financial standing of the company you work for.
When The Economy Speaks
During times of economic downturns, banks tend to become less willing to lend due to an increased risk of defaults. The state of the economy also affects factors like inter bank liquidity and funding costs, non-performing asset levels in different sectors, including housing, current residential market sentiment, employment trends, and consumer confidence scores. Depending on global events and their impact on India, banks will also consider geopolitical risks and how these factors influence the internal stress-test projections of the bank or non-banking financial companies (NBFCs).
In other words, your loan application isn't being evaluated in isolation. The bank is looking at global economic trends and what's happening in the housing sector overall and even running stress tests on their portfolios. You could be a perfect borrower on paper, but if the timing isn't right from a macroeconomic perspective, you might face hurdles.
What's In Your Control (And What Isn't)
Many of these factors are beyond your control. You can't change where a property is located if you've already fallen in love with it. You can't control global economic conditions or your builder's reputation with banks. You cannot suddenly transform your employer into a blue-chip company, or decrease the number of family members who rely on you.
But there's still plenty you CAN control. For that, the scout's motto – Be Prepared – is of utmost importance.
Your Home Loan Readiness Checklist
Before you apply for that home loan this festive season, tick these boxes:
Financial Health Check
- Credit score – is it 750 or above? (check your CIBIL score online.)
- Your debt-to-income ratio – is it below 40%? (your EMIs shouldn't exceed 40% of your monthly income.)
- Have at least 3-6 months of salary slips and bank statements ready
- Also keep your income tax returns for the last 2-3 years filed and available
- Existing loans and credit card dues – have they been paid on time for at least 6 months?
Property Due Diligence
- RERA registration verified for the project
- The developer's track record researched (delivery timelines, quality, approvals)
- Property location checked with multiple banks (ask your relationship manager informally)
- Society's maintenance and payment history reviewed
Documentation Readiness
- Identity and address proofs
- Employment proof and appointment letter
- Property documents (sale agreement, NOC, approvals)
- Bank statements showing healthy cash flow
The Dos and Don'ts
DO:
- Maintain a clean credit history for at least 6-12 months before applying
- Close unnecessary credit cards and loans to improve your debt-to-income ratio
- Choose properties from reputable developers with RERA-approved projects
- Research the property location thoroughly – talk to residents, check online forums, use a pro version AI chat tool to dig deeper
- Include your spouse's income if applicable and possible – dual incomes strengthen applications
- Apply during stable economic periods when interest rates are favorable (such as this festive season!)
- Maintain steady employment for at least 2 years before applying
DON'T:
- Switch jobs just before applying for a loan
- Make multiple loan inquiries at once – it hurts your credit score
- Try to hide existing debts or liabilities – you can't hide such facts from banks, and trying to is a red flag for them
- Exceed your budget just because the bank approves a higher amount
- Ignore the property's micro-market reputation
- Apply for new credit cards or loans during your home loan process
- Assume everything is okay before you get final sanction
The Bottom Line
Understanding how banks think gives you a strategic advantage. While you can't control everything, knowing what matters helps you prepare better, choose smarter, and increase your chances of approval. This festive season, go into your home loan application with your eyes wide open, your documentation ready, and a realistic understanding of what banks are really looking for.
After all, buying a home may be the biggest financial decision in your life. You owe it to yourself to get it right.
[The writer, Akash Pharande, is Managing Director - Pharande Spaces, a leading real estate construction and development firm famous for its township projects in Greater Pune and beyond. Pharande Promoters & Builders, the flagship company of Pharande Spaces and an ISO 9001-2000 certified company, is a pioneer of townships in the region. With the recent inclusion of Puneville Commercial into one of its most iconic townships, Pharande Spaces taken a major step towards addressing Pune's current and future requirements for fully integrated residential-commercial convenience.]
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