Importance of Credit Score for a Home loan
A Credit Score plays a major role when it comes to home loan approval. It is the major criterion based on which banks or other financial institutions gauge your eligibility and decide whether to approve your home loan application or not. If you have a good credit score, you will be more likely to get faster approval on home loans. On the other hand, having a low credit rating will increase the chances of loan rejection. The best credit score for a home loan is 750, or above.
Why do lenders check your Credit Score before sanctioning Home Loans?
Below given are some of the reasons why most of the banks and financial institutions evaluate your credit score-
Helps them to understand your credit behavior
Before approving your home loans, banks and NBFCs would like to know your previous credit history i.e. the loans and credit cards you have availed in the past. By checking your credit score, they can get an insight into how you have handled your credit payments. If you have maintained a good credit history, chances of your home loan approval will be higher.
Helps them to gauge your eligibility and repayment capacity
While applying for a home loan, you need to prove your eligibility to get quick approval. One of the best ways to know your eligibility is by checking your credit score. Financial institutions require you to comply with the minimum credit score which should be 750 and above. You can easily get approval on your loan application if you have such a credit score.
Helps lenders to know if you have any other ongoing loans
Borrowers who have ongoing loans while applying for home loans are considered risky. A new loan means an added financial responsibility. So, through your credit score, the lender calculates if you can repay a high-value home loan. They check your loan to value ratio i.e. the monthly income you draw, and the amount of money spent in repaying your credit card bills and your other loan EMIs. Make sure your loan to value ratio should not exceed 80%, in that case, you will become ineligible for the loan.
Tips to improve credit score for home loans
If you are aiming to improve your credit scores, you can follow the below-mentioned steps. This will boost your chances of loan approval.
Keep a check on your credit reports
When you apply for a housing loan, the lenders or housing finance companies will have a look at certain factors including your credit score. Hence, you need to review your credit report and scores consistently to see if there is an error that is responsible for lowering your credit rating. If you find any errors, you can contact your credit bureau or lender and get errors rectified at the earliest.
Ensure you do not have any outstanding debts
Whether it is your loan EMI or credit card bill, ensure you have paid them all off before applying for a home loan. Not having any outstanding debt can help you get your home loan approved easily and quickly.
Do not utilize your entire credit card limit
Another way to improve your credit score for getting a home loan is to ensure you never use up your entire credit limit. Try to limit your credit utilization ratio to up to 30%.
Repay your debts without defaulting
A quick way to improve your credit score is to repay your debts without making any default, be it loans or credit cards. Also, try not to pay just the minimum amount on your credit cards, instead, you should aim to pay off the entire amount. Home loan approval chances will increase if you do not default while repaying your outstanding debts.
Do not apply for loans frequently
Your credit score is also affected when you apply for multiple loans and credit cards simultaneously. If you do so, it will increase the credit risk and lower your overall credit rating. In such cases, lending institutions may become increasingly cautious while processing your home loan application.
