Real estate concept

The home loan industry in India is all set to boom with the Modi government’s focus on providing affordable housing to everyone by 2020. Apart from this, the banking system is flush with funds received after the government’s demonetization drive, announced in November 2016. Consequently, the excess liquidity in the system is to be used to provide more home loans and allow more and more people to buy their own homes. But does this mean that getting home loans will become easier? Yes, but only if you fulfill the required criteria and have a good credit score.

Credit scores of loan applicants remain an important assessment criterion for the sanctioning of home loans. Several banks have already decided to link the rate of interest rates on their home loans to the credit scores of the applicant. This means that the equated monthly installments or EMIs for loan repayment are going to be determined by your credit score.

Role of Credit Scores in Sanctioning of Home Loans

Home loan sanctions and the interest rates on them are based on credit scores, which depict the credit worthiness of an applicant. The credit record or credit history of a person plays a crucial role in ensuring whether he is a safe bet to lend money to. It refers to the efficiency shown by a person in the repayment of his previous debts, credit card bills or any other borrowings. Even one default or delay can have a negative impact on a person’s score, so it is important to be disciplined in repaying your borrowings.

Lenders generally rely on the credit score given by the Credit Information Bureau of India or CIBIL, with scores above 760 considered to be very good, followed by scores in the range of 725 to 759 considered to be good. But this does not mean that a person not having a credit score or a first time borrower cannot get a loan. Lenders consider several other criteria too before they take a decision.

CIBIL score is a three-digit numeric summary of a person’s entire credit history and generally ranges between300 to 900. This score is prepared on the basis of a person’s credit history and includes all secured and unsecured loans and any other debts taken by him. Available for a nominal fee the CIBIL score is accompanied by a credit report that includes details like:

  • Total credit availed by you
  • Record of repayments and credit card bills
  • Any late payments or defaults on past credit
  • Current loans and credit cards
  • Any recent loan applications made by you.

The CIBIL collects and organizes all the data from various banks and financial institutions to calculate the credit score of a person. Lenders use these scores to check the ability and reliability of applicants and reject risky customers to reduce the default rate. Although there is no set benchmark for a minimum credit score required to receive approval, banks generally lend to borrowers with a good CIBIL score of above 700. Lenders may also change their CIBIL score requirements according to the overall economic conditions.

Credit Score is Not the Only Criterion

Having a very low credit score implies that getting a loan for your dream home is not going to be easy.  You may have to pay a higher interest rate, depending on the total amount of loan and its tenure.

However, lenders do know that a person’s credit score may be low because he has taken less loans or his credit history is relatively recent. So, they consider several other factors like the stability of the borrower’s job and yearly income to verify their ability to repay the borrowed amount. Apart from this, lenders also consider the area in which you are considering buying property, the reputation of the builder in completing projects on time and whether it has all the necessary clearances for the project before they take a decision about sanctioning a home loan.

How to Improve Your Credit Score?

Since credit scores play an important role in the sanctioning of housing loans and the rates at which they are available, applicants need to ensure that they have a good score. So, if you are looking to invest in a home and will require a loan to fund it, you need to ensure that:

  • You repay all your earlier loans on time and are punctual in making your credit card payments.
  • You don’t use your entire credit limit and keep a check on your outstanding balances.
  • You don’t rely solely on unsecured loans and instead use a balanced combination of secured and unsecured loans.
  • Your credit reports are correct and do not make incorrect observations.

A person with a low credit score can also improve his chances of getting a home loan by getting a co-applicant with a better score. Lenders calculate the total income of the co-applicants to determine their ability to repay the loan amount. Follow these tips to improve your credit score and thus the chances of getting the required home loan for funding your dream home.