Buying a home is equivalent to fulfilling a massive aspiration in one’s life, but it also comes with its share of challenges and demands meticulous planning. While prepping up to apply for a home loan, it is imperative to maintain a high credit score.
Your credit score, a number between 350 – 800, depicts a statistical analysis of a consumer’s creditworthiness. A credit bureau (like CIBIL) evaluates the Credit Information Report (CIR) based on five primary factors, namely payment history, the total amount due, length of credit history, types of credit and new credit. The calculation rides on credit history: number of open accounts, level of debts, repayment history and other factors. Lenders refer to this score to estimate whether the individual is likely to repay the loan amount timely.
So how does credit score impact the home buying process?
Quicker loan approvals
As mentioned above, before disbursing any home loan, lenders (mainly banks and other financial institutions) check the credit score of every applicant as part of a mandate laid down by the Reserve Bank of India (RBI). This credit score quantifies the credit and financial health of the applicant. A score of at least 620 – 650 is usually a must to avail a home loan. Anything in-between 750 – 900 is considered healthy and can warrant not only easier loan approvals but also higher sanctioned amounts. The higher the credit score, the easier it is for an applicant to avail a home loan.
Lower rate of interest
A high credit score will enable the applicant to fetch a lower interest rate against the home loan. Even though the difference in rates might be marginally less, there is usually a significant reduction in the repayment through EMI’s.
Easier down payment options
A lower credit score usually results in the banks levying a higher amount as a down payment. This is to make sure the applicant has the financial ability to repay the loan on time. A higher score will enable the financial institution to perceive the applicant as low-risk and require a much lower amount to be paid upfront.
How do you improve your credit score?
It is always prudent to uplift your credit score (in case it is relatively low) to maximize the benefits out of your home loan.
Some of the ways suggested by experts in the domain include:
- Keep track of EMI deadlines to ensure you do not miss any payments that are due.
- Maintain old credit cards to boost your credit history
- Maintain a low credit utilization ratio. Aim for 30% credit utilization or even lesser.
- Opt for loans with a more extended payback period
- Increase your credit limit
- Employ credit monitoring to track your progress
- Dispute any inaccuracies immediately
Additionally, one must bear in mind that it takes a few months before credit scores start to reflect the new healthy numbers, so it is crucial to begin the process earlier if you are planning to apply for a home loan to purchase your dream office or living abode!