Posted on 29th April 2023
Not all of us have the luxury of buying a house with our savings money. And it is not the recommended way either. It is better to opt for a home loan from reputed banks and ease the process of owning a house.
But banks don’t offer loans to anyone right away. They have many formalities and procedures to scrutinize the borrower. Among those formalities, checking the credit score is one of the primary procedures.
In this article, we shall understand the importance of credit score and how it impacts your home buying.
When you approach a financial institution for a home loan, they will check your credit score first. If you have a higher credit score, then you are eligible for getting a loan. So, your ability to acquire a loan from an institution solely depends on your credit score. Also, it affects your ability to buy your dream house
To understand the importance of credit score, let us first get to know what credit score means and how it is calculated. This will help you to know your status before approaching a home loan.
The Credit score is a three-digit number that summarizes your credit history. Credit Bureaus like CIBIL, Equifax, Experian, etc. have information on the credit history of more than 600 million individuals in the country. Based on this information, they give a score between 300 to 900 which is known as the credit score.
Credit history shows how many times a borrower has obtained loans from various resources like banks, credit card companies, etc., and how the borrower repaid it. With this information, an algorithm makes a calculation that results in a score that determines your creditworthiness.
The most popular credit bureau in India is CIBIL. All the banks and Non-Banking Finance Companies (NBFC) use the CIBIL score to determine the credit history before offering loans. If you have a score closer to 900 then you are eligible for a loan. In general, a score higher than 750 is considered to be a good one.
CIBIL calculates your credit score based on the following parameters:
This contributes to more than 35% of the final CIBIL score. Repayment history shows how successful you were in repaying your debts. You need to repay your debts on time to maintain a higher score.
This contributes to more than 30% of the final score. This tells you how much you have utilized and the total credit in balance available for your utilization. You should not utilize all the credit provided to you since you may be considered a risky borrower. Therefore, it is good to maintain a 30% credit utilization ratio.
This contributes to 15% of the score and it denotes your timely repayment of the debts. This also includes the repayment duration you have chosen and how successfully you managed to pay it on the stipulated time.
This also contributes to 15% of the score. Whenever you inquire about your credit history, the score will be affected. Because too many inquiries will pose you as an individual seeking to get more loans and lenders might not feel safe with it.
This contributes to 10% of the score and denotes how you have a healthy mix of credit history. This means that an individual must not have a single type of credit in his history. Rather he should have a mix-up of home loan, credit card, personal loan, etc.
So, this is how your credit score or CIBIL score is calculated. You can calculate your credit score for free online and get to know your credit report right away.
Now that we have understood how credit score works and how it is calculated, let us understand the importance of this credit score in buying homes.
The acceptance or rejection of your home loan application depends on your credit score. Having a low credit score will not fetch you a loan anywhere in India. Because all financial institutions check your credit score primarily before proceeding with further verifications.
A low credit score means that you are a risky borrower, and you may not repay the loan on time. So, the lender will not feel safe in lending money. This will lead to the rejection of your home loan application right away.
This rejection of loan applications will also negatively impact your credit score and further reduces the chances of acquiring a loan.
But in certain scenarios, where you have a score around 600 to 750 with a good income source, then there are chances of approval. But this approval comes with higher interest rates. You might have to repay a lot as interest, and it may burden you.
Therefore, having a credit score of more than 750 is very important if you want to get a home loan with lower interest rates. You can also get higher principal amounts from the lender with a good credit score.
So, before proceeding to buy a home using a home loan, check your credit score and assess your financial status. This will avoid rejection of applications and protect your credit score from becoming low.
Understanding the importance of credit scores will help you to know your ability to acquire a loan. Before proceeding to buy your dream house, make sure to check your credit score to assure that you are creditworthy. Then you can approach a bank to get a home loan confidently.