How Home Loan Rejection Can Affect Your Credit Score: What to Know

For many people, owning a home is a lifelong dream often acquired through a home loan. But what happens when your home loan application is rejected? It not only brings disappointment but can also impact your credit score and future borrowing ability.

Let us delve into how a home loan rejection can impact your credit score, reasons behind rejections and how you can minimize the damage.

Understanding Credit Score and Its Importance

A credit score is a three-digit number that reflects your creditworthiness based on your financial history. These scores, typically ranging between 300 and 900, are issued by credit bureaus like CIBIL, Equifax, Experian and CRIF High Mark. A score of 750 or above is generally considered good.

This score plays a crucial role in loan approvals, interest rates and even your chances of getting a credit card. When you apply for a home loan, the lender finds your credit report to assess your ability to repay. This process is known as a hard inquiry.

Also Read: Know the Difference Between Credit Score and CIBIL Score

How Loan Rejection Affects Your Credit Score

The home loan application rejection itself does not directly lower your credit score, but certain events related to the application process can negatively impact your score.

1. Hard Inquiries Reduce Score

When an NBFC checks your credit score, it leaves a hard inquiry. Multiple such inquiries in a short span of time can reduce your credit score by 5-10 points each. If you apply to many lenders at once, it indicates financial distress.

2. Repeated Rejections Hurt Creditworthiness

Every time your loan application is rejected, it is recorded in your credit history. For lenders, frequent denials would mean you are struggling to secure credit, even if your score has not dropped drastically. This can create a vicious cycle, in which your application gets rejected, leading you to apply elsewhere, resulting in more hard inquiries and further damage.

3. Underlying Reasons Can Be More Damaging

The reasons behind your rejection, such as a high credit utilisation ratio, too many unsecured loans, poor repayment history or a low income-to-loan ratio, are often more harmful to your credit health than the rejection itself.

Common Reasons for Home Loan Rejection

Understanding why your application might get rejected can help you avoid mistakes.

• Credit score below 700
• High existing debts like personal loans or credit card dues
• Unstable employment history
• Mismatch between declared and verified name
• Property titles and legal issues
• Incomplete documentation
• Co-applicant's poor credit history

All these are common reasons that can lead to loan rejection.

What to Do After a Home Loan Rejection

1. Request for the Reason

Always ask the lender why your loan was rejected. Financial services are required to share this information under RBI guidelines.

2. Check Your Credit Report

You can always get your free credit report once a year by visiting any credit bureau website like CIBIL. When you receive your report, look for errors in repayment history, incorrect personal details and outdated account status.

3. Avoid Reapplying Immediately

Keep a gap of 3-6 months before applying for loan again. Use this time to improve your credit profile and address red flags.

4. Work on Your Credit Score

Under this process, you can repay overdue EMIs or credit card dues, maintain a credit utilisation ratio under 30% and do not close old credit cards if they have a good repayment record.

5. Try Non-Banking Financial Companies

You can always explore NBFCs such as Godrej Capital over traditional banks that might still offer you a loan, under certain conditions.

How to Prevent Loan Rejection in the First Place

• Always use a home loan eligibility calculator to know if you are eligible for the loan.
• Some lenders allow pre-qualification using a soft credit check, which does not impact your score.
• Apply only to the most relevant lender based on your profile.
• Always submit consistent and accurate documentation.
• If you are applying with a spouse or family member, make sure they have a clean credit history.

Also Read: 7 Ways to Improve CIBIL Score

Final Thoughts

Home loan rejection may feel like a major setback, but with awareness, planning and disciplined credit behavior, you can bounce back stronger and improve your chances in the future. Always treat your credit score like a financial passport as it opens or closes doors depending on how well you manage it.

Apply now for a home loan.

FAQs

Q1. Does home loan rejection show up on my credit report?

A. No, the rejection itself is not recorded. But the hard inquiry made by the lender will be visible and multiple inquiries can hint at repeated rejections.

Q2. How many points can a hard inquiry lower my credit score?

A. Typically, a single hard inquiry may lower your credit score by 5–10 points, but multiple inquiries within a short time can have a compounded effect.

Q3. Can I dispute a rejection with the bank?

A. While you cannot dispute a bank’s decision, you can raise disputes for errors in your credit report with the credit bureau if you believe they influenced the decision.

Q4. How long should I wait before applying again?

A. Ideally, 3 to 6 months. Use this time to improve your financial profile, close unsecured loans or boost your income.

Q5. Does applying with multiple banks hurt my score more?

A. Yes. Each application triggers a separate hard inquiry. Multiple inquiries in a short time can drag your score down and make it seem like you are in financial distress.

Disclaimer:

The contents of this article are for information purposes only & not a financial advisory. For more details, please refer to the product or service document and/ or connect with our customer representative prior to making any financial decision. The information is subject to update, completion, revision, and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements. Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.

Financing through Godrej Finance/Godrej Housing Finance Limited. Product Terms & Conditions apply, for details visit www.godrejcapital.com