Understanding loans and their underwriting rules in 2024
Loan underwriting is a vital step in the loan approval process, whether you’re applying for a home loan, business loan, car loan, or personal loan.
During underwriting, the lender carefully evaluates the creditworthiness of the borrower and determines whether the applicant meets the eligibility criteria for the loan.
Understanding the intricacies of loan underwriting can significantly improve your chances of loan approval and prevent rejection.
Factors That Impact Loan Underwriting
Several key factors influence the loan underwriting process:
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Credit Score
Your credit score is one of the most critical factors in loan underwriting. It reflects your creditworthiness and demonstrates how responsibly you’ve managed and repaid previous loans.
A high credit score, typically 750 or above, indicates that you are a reliable borrower. This enhances your creditworthiness and allows you to secure a loan at competitive interest rates.
Conversely, a low credit score can derail your borrowing plans. To maintain a good credit score, it’s essential to pay bills on time and service existing EMIs without defaults.
By law, you can check your credit score for free once a year from any of India’s four credit information companies: TransUnion CIBIL, Equifax, High Mark, and My Account.
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Income
Your income is another crucial element considered during underwriting. Most lenders set a minimum income threshold below which they typically do not approve loans.
Since loan repayment is a top priority for lenders, they want to ensure that you have a sufficient income to comfortably manage the EMIs.
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Current Debt and Liabilities
The level of your current debt and liabilities is also a significant underwriting factor. If you already have a substantial amount of debt and financial obligations, it affects your capacity to repay the loan.
Underwriters want to confirm that you have enough income left after servicing your debts to meet the requirements of the new loan.
Ideally, your total monthly EMIs, including all existing and past loans, should not exceed 30-35% of your monthly income.
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Value of Collateral
For secured loans like home loans and car loans, you must provide an asset as collateral. Underwriters assess the value of this collateral to ensure that it is sufficient to cover the loan amount in case of default. If the collateral’s value is less than the loan amount, it becomes less effective as security.
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Property Appraisal
In the case of home loans, property appraisal is a critical part of the underwriting process. Lenders engage underwriters to verify that the property’s price is in line with comparable properties in the market.
This step helps prevent borrowers from inflating property values to secure larger loans. Once the underwriter is satisfied with all aspects, the loan amount is disbursed into your bank account.
Thanks to pre-approved offers from Bajaj Finserv, obtaining financing for home loans, business loans, and personal loans is a straightforward process.
All you need to do is provide your basic details to discover your pre-approved offer, simplifying the loan application process.
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