This time is the most exciting time for homebuyers. The rate of interest on home loans is low, and banks have made their home loan schemes even more attractive. However, to be eligible for such low home loans interest rates, homebuyers have to have impeccable credit scores as well as good credit scores. When applying for a home loan, it is clear that your credit score is imperative for receiving superior terms and conditions. Therefore, it is of utmost importance that you must maintain a good credit score.
But what is a credit score?
What is a credit score?
Essentially, a credit score measures how likely a person is to repay a debt based on their creditworthiness. Your credit score is a three-digit numeric representation of your credit history. A credit score is calculated based on the information in your credit report. It includes all secured and/or unsecured loans as well as any other debts you may have. Normally, your credit score will be between 300 to 900. How is it calculated? Several factors are taken into account when calculating your credit score. The calculation gives different weights to each factor.
Loan-repayment history (35%)
Loans outstanding (30%)
How much time you have spent repaying your loans (15%)
The type of loans you have taken or already have (10%)
Your credit mix-ratio of secured to unsecured loans (10%)
A license from the Reserve Bank of India allows four credit information companies to operate in India. They are: Credit Information Bureau (India) Limited (CIBIL), Experian, Equifax, and Highmark.
Credit bureaus calculate the credit history by collecting your data including current debts, repayment history, loan history, and credit utilization. How do they get this data? When you apply for housing loan, the bank or lender asks for your bank statements, pan card, etc. to get all the information they need.
How a good credit score helps you get a home loan
Improves your eligibility criteria
A high credit score means you are more likely to get a home loan. A good credit score indicates that you are responsible for your credit and have a good understanding of how to handle debt. This will give your lender confidence and a reason to trust you when it comes to repaying the loan giveme5.
Lower rate of interest
A high credit score also gives you a chance to get your home loan at a lower rate of interest. The interest rate for your loan is likely to be reduced based on your repayment history.
Fast and uncomplicated loan approvals
Many lenders offer pre-approved loans to people who have high credit scores and a long and healthy history of credit. Your home loan application is more likely to get approved immediately and there is no waiting period.
For the future perspective
Even if you do not have to apply for a home loan, it is always a good idea to maintain a good credit history and a high credit score. It will help you when you will need a home loan, education loan or credit card in the future.
How to improve your credit score
A credit score of750 and above is considered a very good score. The higher your score is, the more are the chances of getting your home loan approved. In case your score is below 675, it would be better if you improve your score before applying for a home loan.
Here are some tips that can help you improve your credit report:
The first thing that you should do is check your credit report properly and see if there is any wrong information that has reduced your credit score. At times, even if you are doing all your payments on time, there are chances of inaccurate info on your report.
Secondly, ensure that you pay all your credit card bills on time, at least 5-6 months before applying for a home loan. If you fail to do so, this will be considered as financially irresponsible behavior. Try to follow the “30% rule” as well, which means to only spend up to 30% of your credit card limit.
Thirdly, always pay your EMIs on time. If you have defaulted on other financial obligations, banks and lenders will not approve your home loan application. If you think your existing loans are creating a burden, try getting your EMIs restructured.
Then, avoid taking new loans. Till the time you have gotten your home loan approved, don’t apply for car loans or any other kind of loan.
Also, if you are applying for a home loan with a partner, keep a track of their payments and credit history too.
Just follow the above steps and you will be able to maintain a good credit score for your home loan application.