If you are planning to apply for a home loan, you must have come across the word credit score a lot of times. Its importance cannot be undermined in the home loan process. All lenders check the borrower’s credit score to understand the risk involved in lending money to the borrower. But what is a credit score?
The credit score is a three-digit number between 300 and 900 assigned to credit users by credit information agencies. It gives lenders a clear idea of an individual’s creditworthiness and their ability to repay loan money on time.
Credit information agencies assign credit scores based on factors, such as the borrower’s payment history, credit utilization ratio, the number of hard enquiries under their name, the credit mix they are handling and the age of their credit history. Before we understand the impact of credit scores on home loan eligibility, let us look at the different credit score ranges and what they mean for home loan borrowers.
Credit Score Ranges and What They Say About a Credit User
- Excellent (800 to 900): If you have an excellent credit score, you are someone who always pays loan EMIs on time. You have never missed a credit card bill or loan EMI in the past. Your credit utilization ratio is below 30% and you have a healthy mix of both secured and unsecured loans. More importantly, you are not excessively dependent on credit. If you apply for a housing loan or any other loan, your lender will know that they can trust you with timely repayment of loan EMIs. Therefore, they will not only sanction you a home loan but may also be open to negotiations regarding the terms and conditions of the loan.
- Good (700 to 800): If your credit score lies in this range, you are someone who has almost always paid their loan EMIs on time. You may have missed an EMI or two in the past but barring that your repayment history is clean. Your credit utilization ratio is good and does not raise any red flags. You have a healthy mix of credit, and you are not dependent on credit more than you should be.
- Fair (650 to 700): If your credit score is fair, you are someone who has missed some EMI payments and credit card bills in the past. Therefore, your lender may not trust you entirely with the repayment of loan money. Further, you may not have an excellent credit utilisation ratio. These reasons may turn out to be a risk to lenders. Therefore, borrowers with a fair credit score can get approved for a loan but lenders may charge a high rate of interest from such borrowers.
- Bad (300 to 650): If your credit score lies in this range, you are excessively dependent on credit and lenders may not lend you the loan amount. Borrowers with such a credit score can find it difficult to get approved for a home loan.
Let us now understand how credit score affects home loan eligibility.
Credit Scores and Their Impact on Home Loan Eligibility
One of the key factors that determines eligibility for a home loan is the loan applicant’s credit score. The credit score helps borrowers understand whether the borrower will repay their loan on time or not.
The lenders prefer a high credit score, usually over 750. Borrowers who have such a credit score can be trusted with loan repayment and therefore may be sanctioned a loan easily. Not only does loan approval come easy for these credit users, but they are also able to negotiate for better terms and conditions. Borrowers whose credit score ranges from 700 to 750 can also get approved for a loan but may not be offered the best terms and conditions on their loan. They are often sanctioned a home loan at a slightly higher home loan interest rate as compared to borrowers with a higher credit score.
Applicants whose credit score ranges below 700 have lower home loan eligibility. Such borrowers may find it difficult to get approved for a home loan. Lenders may either deny housing loan applications for such borrowers or may sanction a loan when the applicant adds a co-borrower with an excellent credit score or a loan guarantor with excellent creditworthiness.
Further, when an individual applies for a home loan, lenders check several things, such as age, income, job stability, debt-to-income ratio, and credit score to ascertain the borrower’s repayment capacity. This assures the lenders that eligible individuals not only get the loan they want but also one they can repay easily. Several online eligibility calculators are available for potential borrowers to check their loan eligibility before applying for a home loan. For instance, a Home Loan Eligibility Calculator by Bajaj Housing Finance assists you in making sensible financial decisions based on eligibility.
So, if you are planning to avail of a home loan, check your credit score and home loan eligibility beforehand. If your credit score is below 750, better your credit score first and then apply for a home loan. Improving the credit score takes some time but is an easy process. Always pay your loan EMIs and credit card bills on time. Never miss an EMI or bill due date and if you do, make it a point to clear the payment before the next due date. Use your credit cards wisely and maintain your credit utilisation ratio under 30%. Make sure to not close old credit cards with good repayment history and not have too many hard enquiries under your name. Doing these simple things will help you better your credit score and enhance your home loan eligibility.
