When you apply for a home loan, lenders check your home loan eligibility. One of the first eligibility criteria they consider while processing your home loan is your credit score. Your credit score plays an important role in determining your repayment capacity. Therefore, lenders prefer applicants who have a high credit score. But, what if you have a low credit score? Can you get a home loan? Read on to find out.
First, learn more about credit score.
What Is a Credit Score?
A credit score is the representation of your creditworthiness. It is a three-digit numerical representation of your creditworthiness, which is measured between 300-900. The higher your credit score, the better. A credit score of 700 or above is considered ideal for a home loan.
How Is Credit Score Determined?
Your credit score is calculated based on various factors like:
- Your debt repayment history of loans and credit cards
- The number of loans and credit cards you hold
- Credit utilization
- Total credit balance
- Credit inquiries
Also, factors such as a balanced mix of secured and unsecured loans and their repayment, low credit utilization ratio, etc., have a positive impact on your score.
Can You Get a Home Loan with a Low Credit Score?
Typically, lenders do not approve the loan application if you have a low credit score. However, it also depends on how much score you have. If it is around 650, they might approve the loan, possibly at a higher rate of interest. If it is lower than that, the lender is most likely to reject your loan application. Once the lender rejects your application, you shouldn’t apply again with the same credit score. Instead, you can take steps to improve your credit score first and then re-apply.
However, if you need to avail a loan despite your bad credit, you can do the following –
- Take a joint home loan to increase your eligibility
- Avail the loan with from an existing lender who is aware of your repayment capability
- Talk to your lender and negotiate with them
- Clear all your outstanding debts.
How to Improve Credit Score?
You can have a poor credit score due to multiple reasons. It could be due to delay in payment of EMI or credit card outstanding bills, or using credit cards to their maximum limit, etc. However, there are ways through which you can improve your score –
- Pay all your EMIs, bills and dues on time. You can start automatic payment to avoid default.
- Do not use credit cards a lot and ensure to maintain a low credit utilization ratio.
- Do not avail credit unnecessarily.
- Avoid applying for loans with multiple lenders at the same time.
- Check your co-signed, guaranteed and joint accounts, if any, and ensure that their EMI is being paid. You are equally liable for any defaults in those accounts.
- Review your credit report regularly. Ask for rectification if you find any discrepancies or inaccuracies.
To fulfil your financial goals efficiently, you must have a good credit score. A high credit score allows you to negotiate with the lender for better terms and get a lower interest rate. To avail home loans, you must maintain your credit score and avoid defaulting on your debt repayments. Regularly check your credit score and start building it from today.