Understand your credit worth before applying for a home loan

We get it. Buying a property can be exciting. You cannot wait to be a homeowner. It’s understandable that you’d want to do everything as soon as possible. But unfortunately, buying a house is not something that can be rushed. Especially the financing, if you need to take a home loan. Whether you get a loan or not depends on your creditworthiness. So before you diving right into the home loan application process, take some time to understand what credit worth means and the value it carries to qualify for a home loan.

What is credit worthiness?

You credit worth is measured in a credit score. In general terms, a credit score is an indicator of your credit value. Or a report card that determines your ability to repay loans. In India CIBIL (Credit Information Bureau India Limited) is the first credit information company. Founded in the year 2000, CIBIL collects and maintains individual reports pertaining to credit and loans. CIBIL collects and keeps your financial data ready to present to the banks and financial institutions. The records are updated on a monthly basis. The banks refer to the CIBIL records before granting loans to individuals, to avoid any foreseeable losses.

What qualifies as a good credit score to get a home loan?

The credit score could lie somewhere between 300 and 900, 300 being the least and 900 being the best value to be in lenders’ good books. The passing benchmark or the minimum score lenders usually expect before granting loans is 750 or above. CIBIL data says 80% of loans that get approved have a score of 750 or above. If your credit score is lower than 750, it is still possible to get a loan but you may end up paying significantly higher interest. A low score may even mean that you get a smaller loan amount. For instance, a credit score of 750+ will get you 80-90% of property value as loan amount, while a low credit score of let’s say 600 will only get you ~60% of property value as loan. That means your overall financial burden increases – both as initial payout, and as monthly EMIs.

A step before applying for a loan is to obtain a credit report from CIBIL. A CIBIL report contains all information about your loan and credit status. Details on number of loans you are in debt of, your repayment status and ability, the defaults you have committed, credit cards under your name and your recent loan applications.

What factors impact your credit score?

Your credit score mainly depends on:

  • Your credit history – This factor considers your payment track record of loans you have taken in the past. One of the most important considerations this could weigh almost 30% in the CIBIL calculations. This includes records of last 3 years and considers your bill payments, EMIs, and credit card settlements. The credit history will be negatively affected by delayed payments and bad debts. To ensure you have a good credit history make timely payments for all loans and never leave any debt unsettled.
  • Your credit utilization – This considers how much loan you have already taken vs. the total amount you are eligible for. High credit utilization means a low credit score as you already have a significant loan burden. Credit utilization has around 25% weightage on your overall credit score. To maintain a balanced utilization avoid taking multiple loans at a time.
  • Your credit mix – This factor considers the ratio of secured and unsecured loans in your debt portfolio and had a weightage of 25%. If you have more unsecured loans such a credit cards, then your credit score will be negatively impacted.
  • Past rejections of your credit applications – If you have applied for multiple loans in a short term and they have been rejected, your credit score will drop. Lenders also do not want to give money to applicants who have been rejected by other lenders.

How to build a good credit score?

Even if you have a poor score credit, don’t give up on your dream just yet. There are ways you can improve your score to qualify for a home loan.

  1. Get a credit report from CIBIL and understand your credit score
  2. Settle all outstanding debt that is due
  3. Limit the number of credit cards to 2-3
  4. Make sure your credit payments are made on time and there are no overdues
  5. Check and limit credit transactions to reduce overall credit burden
  6. Limit unsecured loans to 30% of your loan portfolio
  7. Avoid taking multiple loans in a short span of time
  8. Thoroughly research a bank before making a loan application to ensure you have minimal rejections

With a great credit score, getting that home loan for your dream home should be a piece of cake. So what are you waiting for? Check your credit score now!

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