A home is not just a property; it’s much more. It’s a haven that offers you sanctuary from the troubles of the world. It’s a place where you build and raise a family. No wonder purchasing a home is filled with myriad emotions.
But, letting your emotions lead your purchase can blow a huge hole in your pocket. This is why experts recommend that you check your credit scores first before going house hunting. This guide explores the crucial relationship between home loans and individual credit scores, helping you understand why you need to work on your credit scores first before applying for a home loan.
Home loans play a crucial role in helping millions of Indians achieve their homeownership dreams. When you apply for a home loan – the first criterion that the lender checks is your creditworthiness. This is measured using a numerical indicator known as a credit score.
What is a credit score, and why do lenders check it?
As per the RBI’s mandates, all lending institutions – banks and NBFCs – have to check the borrower’s credit score before disbursing any loan. The credit score is a numerical indicator that determines your creditworthiness. By looking at this number, lenders get a fair picture of how likely the customer will repay the loan on time.
The credit score is calculated using several factors, the major of which are:
- Previous repayment history – how well you handled debts in the past
- Credit utilisation levels indicate how much credit you have used compared to your total available credit limits.
- Level of indebtedness – other ongoing debts
Credit scores generally range between 300 and 900. Higher the numerical value, the better is your credit score. To get a home loan smoothly, you need to have a credit score of more than 750.
Impact of Credit Scores on Home Loans
The Rule of Thumb here is that “higher your credit score, better are your loan prospects.” A good credit score means you enjoy lower interest rates on your home loan. This, in turn, translates to lower EMIs – which reduce your overall loan burden. Lenders prefer borrowers with good credit scores since they are trustworthy and have a higher probability of repaying the loan on time.
Low credit scores lead to higher interest rates, which, in turn, increase your monthly EMIs. Having a low credit score can even cause your home loan request to be turned down. This is why we highly recommend that you check your credit score and get it sorted before you apply for a home loan.
Why is a good credit score crucial when applying for a home loan?
When you hold a high credit score, it’s like holding an ace up your sleeve. Here are the top benefits:
- Higher chances of loan approval
When your credit score is high, the higher are the chances of your loan getting approved. This is because lenders prefer borrowers with high credit scores. High scores translate to higher creditworthiness and lower cases of loan defaults. This, in turn, reduces the risk borne by the lender. When you have a high credit score, the better are your chances of getting the loan granted, and you can also expect your home loans to be processed quicker.
- Increased loan amount
With a high credit score, you enjoy the trust of the lender. You can enjoy larger loan amounts, thereby increasing your borrowing ability.
- Enhanced negotiation power
With a healthy credit score, you enjoy higher negotiation power. You can negotiate with the lender to get lower interest rates, reduced processing fees, and waiver of other charges.
How does the credit score impact home loan interest rates?
Yes, you can get a home loan with a low credit score. But, the catch here is that you won’t get a good deal on the loan. Allow us to explain.
Borrowers with healthy credit scores enjoy a reduction in interest rates ranging from 0.25% to 1.5%. While this may appear minor, it can impact your overall home loan EMIs significantly in the long run.
Here’s an example to help you understand the importance of even a slight variation in interest rates. Consider a home loan of Rs. 30 lakhs for 20 years. Now, let’s calculate the monthly EMI for two different interest rates.
- At 9.5% – the monthly EMI works out to Rs. 27,964
- At 10.5% – the monthly EMI works out to Rs. 28,951
That’s a savings of Rs. 987 per month. It amounts to a significant savings of Rs. 2,36,880 during the entire tenure of the loan. As you can see, even slight variations in the home loan interest rate can lead to significant savings over the term of the loan.
So, how do I check my credit score?
You can check your latest credit score for free by visiting CreditMantri. Besides providing you with your current credit score, CreditMantri can also help you discover the best home loans matched to your credit profile. We can also help you get back your credit score on track with a personalised action plan.
A good credit score is what helps lenders separate trustworthy and disciplined borrowers from the rest. All lenders refer to your credit score and credit report before approving your home loan application.
The higher the credit score, the better are your chances of securing the loan, and better is the deal you are offered. So, make sure to check your credit score before you apply for a loan. Knowing where you stand can help you initiate the right remedial measures to get your scores on track if needed.