What’s the role of Credit Score while taking a Home Loan?

How important is Credit Score for Home Loan? 

It’s common knowledge that credit score in fact plays a key role in determining your eligibility for a loan as well as the interest rate. If your credit score is on the higher side, then the lender is generally more comfortable offering you a loan at a lower interest rate while the opposite goes for when your credit score is low. Now, your credit score represents your credit history and reflects how you’ve dealt with your previous debts – if you’ve been regular in repaying your older debts, be it loans or credit card bills.

Does having a good credit score guarantee home loan? 

Interestingly, even if you have a positive credit score, lenders might not always approve the loan amount that you have applied for. Why, you ask? The answer is simple. Your credit history or score does not determine who well equipped you to service a loan in the present time. You may be burdened with multiple debt obligations such as credit card payments, auto loan, education loan that undermines the lender’s confidence in your ability to pay off an additional debt. A higher credit utilization ratio lowers your credit score. Get a free credit report to know your loan potential.

The lender typically uses the debt-to-income (DTI) ratio to calculate your current capacity to manage loan repayment while taking all your debts and net monthly income into account. Most lenders prefer a DTI threshold of 40% and below indicating that the borrower has enough balance between debt and income to handle the loan repayment. But if your DTI is high, a good way to increase your borrowing power is by using lump sum cash towards repayment of outstanding debts.  

Note: If your credit score is weak, you will not be eligible to be a co-applicant or guarantor for the home loan either.

Let’s look at the various score ranges and what they mean. 
 

760 & above: 

This is the most desirable credit score range and indicates that you don’t currently have heavy debts that can affect your home loan repayment. It is advisable to try and maintain this score and enjoy the nominal interest rate that comes with it. 

 700 to 760: 

This is a moderate credit score range and you are most likely to get a home loan with this score, but at a slightly higher interest rate. You can take measures to improve this score and in turn your creditworthiness; check if your previous loan accounts have been closed and try to keep your credit utilization ratio to a minimum. 

700 and below: 

A score of under 700 is considered low and somebody with no credit history or first-time borrowers fall in this category. A lender may still approve your loan in this case but at a relatively higher interest rate. In this case, to ensure that you get the loan, try to keep the Loan to Value Ratio (LTV) as low as possible. An LTV of 80% where you pay a downpayment of 20% increases your chances of getting the loan approved.  
 

Some quick practices that’ll help you improve your credit score are repaying loan EMIs on a timely basis, repaying credit card dues fully, avoid keeping higher debts and making too many loan enquiries before taking a home loan.

Check your loan eligibility with Fincity’s Loan Eligibility Calculator before you opt for a home loan from a lender that offers you the lowest interest rate possible with your credit score along with additional facilities. 
 

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