Home Loan Rejections Are Increasing: It’s No Longer Just About Your Credit Score

For decades, the home loan approval process in India followed a familiar script. A good credit score, a stable job, and a reasonable income were usually enough to get an application through the door. That script has changed. Lenders across the country are now rejecting a larger share of applications than in recent memory, and the reasons go well beyond what appears on a CIBIL report.

Says Rohan Shah, national credit head, Easy Home Finance: “The scale of this shift becomes clear when looking at rejection rates across India’s largest lenders. Some of them are turning down close to 16-18 per cent of home loan applications they receive. These numbers mean that for every six or seven people who walk into a branch or apply online, at least one is turned away, often for reasons unrelated to a poor repayment history.”

Delinquency data offers a clue as to why lenders have become more cautious. India’s housing credit market has continued to expand, with the outstanding home loan book crossing Rs 36 lakh crore in the last financial year and growing by more than 13 per cent year-on-year (y-o-y). Yet the quality of that growth is becoming more important than the pace alone. Delinquency has risen alongside this expansion, climbing to 2.80 per cent from 2.50 per cent the year before, and on a book that size, this translates into a stressed portfolio of roughly Rs 1 lakh crore.

Early bucket delinquencies, loans that are 30-90 days overdue, are climbing faster than any other category, signalling that affordability stress is building well before a loan turns into a full default. This pattern shows up more sharply when housing credit is compared with the wider credit market, where delinquency has stayed higher at about 1.70 per cent against 1.20 per cent pan-India, even as overall housing credit growth has held broadly steady at around 9 per cent.

Says Shah: “The point is not that every lender is seeing the same stress, but that risk is unevenly distributed across borrower profiles, loan sizes, and lender models. There are different risk dynamics of salaried and self-employed borrowers, metro and non-metro markets, and secured retail housing portfolios.”

Location has surely become one of the most important factors in loan evaluation. Mumbai and Delhi-National Capital Region (Delhi-NCR) now show delinquency rates of around 5 per cent, noticeably higher than cities like Bengaluru, Pune, Hyderabad, and Chennai, where rates hover closer to 3.50 per cent. Lenders are responding by treating geography as a risk variable in its own right. Applications from high-stress zones face tighter scrutiny, and in some cases, sharper loan-to-value (LTV) limits, regardless of the applicant’s personal credit history.

Public sector banks have handled this environment more comfortably than their private and non-banking counterparts. Public banks currently report a delinquency rate of 2.20 per cent, the lowest among lender categories, helped in part by government-backed housing schemes and comparatively conservative lending practices.

“Private banks sit at around 3 per cent, while housing finance companies (HFCs) report the highest delinquency at 3.30 per cent, largely because of their exposure to smaller ticket loans and loan against property products. This gap in performance is shaping how aggressively each type of lender is willing to expand its book this year,” adds Shah.

Debt-to-income ratio has also emerged as a bigger factor in rejections than most borrowers realise. A ratio once considered safe, around 43 per cent, is no longer the ceiling lenders watch for. Recent analysis of underwriting data shows that once a borrower’s total debt obligations cross the halfway mark of their income, rejection probability rises sharply, even for applicants with strong credit scores. This is a meaningful shift from how eligibility was assessed even five years ago, when credit score carried most of the weight in a lender's decision.

LTV caps are also being tightened in higher-risk cities. For the under Rs 75 lakh loans in Mumbai and Delhi-NCR, many lenders are now capping LTV at 75 per cent. A shift like this means that buyers need to arrange a larger share of the property cost upfront. Unfortunately, this directly affects affordability for first-time buyers who often rely on higher LTV ratios to bridge the gap between savings and property price.

“Self-employed applicants are facing a distinct set of challenges. Traditional income documentation, such as income tax returns (ITRs) and bank statements, is increasingly being supplemented, and in some cases replaced, by alternate data sources. Goods and Services Tax (GST) filings and Unified Payments Interface (UPI) transaction histories are being used to build a more accurate picture of cash flow for borrowers whose income does not follow a fixed monthly pattern. This shift reflects a recognition that conventional documentation often fails to capture the real financial position of small business owners and gig economy workers, who make up a growing share of loan applicants,” Shah adds.

Repayment behaviour nudges have also entered the picture as a preventive measure rather than a reactive one. Some lenders have started sending SMS and WhatsApp reminders seven days before an equated monthly instalment (EMI) is due, a small intervention that has been shown to reduce early delinquency by close to 18 per cent. This kind of behavioural nudge illustrates how lenders are trying to manage risk before it becomes a formal default, rather than simply tightening approval criteria at the front end.

“When looked at from a macro level, these trends paint the picture of an industry recalibrating the definition of a safe borrower. Yes, the credit score still matters. But it is now not the only data point. Income stability, geography, debt load, and even digital payment behavior are many other such data points that have now become relevant,” says Shah.

For prospective borrowers, this means the path to loan approval now runs through a more layered evaluation process than it did even a couple of years ago. Understanding these shifts rather than focusing solely on credit score has become essential for anyone navigating the home loan process in India today.