The Role of Credit Score in Securing a Home Loan

The Role of Credit Score in Securing a Home Loan
The process of buying a house is one of the most important phases of a person’s life and Home Loan comes as an efficient aid in achieving this. However, one of the things that, for instance, influence the Home Loan qualification, the interest rate that you are likely to be given is the credit score. In this guide, 
The Role of Credit Score in Securing a Home Loan
It is always a great achievement for anyone to own a home and Home Loan helps in achieving this goal easily. However, the credit score is a crucial factor when it comes to the approval of Home Loan as well as the rate of interest to be levied on it. This paper aims at discuss the role of credit scores in Home Loan approvals and the ways that could be taken to enhance credit profiles for the approval of a Home Loan.

1. What is a Credit Score?
Credit score is another term that can be defined as the numerical rating of a person’s credit reliability ranging from three to three hundred and fifty. Credit score or rating is computed through your records of credit conduct, your pattern of repaying the loan, and your economical behaviour. It is also common to find most lenders in India using credit scores from agencies such as CIBIL, Experian, Equifax and others. It is an arithmetic scale in which higher figure is generally beneficial to the credit seekers, with the scale ranging from 300 to 900.

■ 750 and above: It is impressive; meaning that the company’s financial position is robust.

● 700-749: Good; has a positive impact to the approval of Home Loan.

● 650 to 699: Average; sometimes it is possible to get a loan but it will cost more than at ordinary interest rates.

● Less than 650: For such credit score number it’s considered poor and you stand a chance of being denied credit or qualify for a costly one.

2. As to why a credit score is crucial when it comes to getting a home loan, the following is notable:
Credit score is a tool used by the lenders so as to measure your ability to repay the mortgage. This writer also posited that, for a high score to be achieved, the applicant demonstrates financial discipline which enhance loan approval. On the other hand, a low score gives out warning signs of your capacity to faithfully repay the loan.

B. Affects Interest Rates
One thing your credit score affects is the interest rate given to you when borrowing a loan. Another important factor is that eligible and creditworthy customers will be in a position to access Home Loan at lower interest rates which can be cheaper than the total purchasing cost of the loan.

C. Influences Loan Amount
High credit score also increases the chances of being able to access a larger amount of loan and therefore qualify for better property or any other need that you may require.

D. Ensures Faster Processing
Lenders are inclined to grant a ‘fast approval’ to the contract to applicants with good credit scores as it is considered low risk.

3. A credit score and its impact on the EMI in case of home loan is also an important factor in the list of things that should be kept in mind.
This means that interest rates obtained depending on one’s credit score alters the Home Loan EMI.

For instance, let’s assume:

● Loan Amount: ₹50 lakh

● Loan Tenure: 20 years

● Interest Rate for a high credit score: 9%

● Interest Rate for a low credit score: 10%

Thus using Home Loan EMI calculator the estimate of the monthly installments in detail are:

● EMI for 9% interest: ₹44,986

● EMI for 10% interest: ₹48,251

EMI difference of ₹3,265 a month and total of more than ₹65,300 for the entire loan period!

This kind of examples demonstrate that a good credit rating could be very helpful in avoiding great expenses.

4. Learn the process through which you can follow to know your credit score.
Most of the financial institutions along with ICICI Bank provide free credit score checks on its webpage. Some services can be obtained using credit bureaus or through some third party services as well. Monitoring the credit score is essential as it enables one to notice other oddities that need to be rectified.

5. Tips to Improve Your Credit Score Before Applying for a Home Loan
Below are the necessary procedures to follow in case your credit score is not perfect:

A. Pay Your Dues on Time
Making payments on a timely basis for the credit card debts and other outstanding loan installments is must to have a great credit score. To avoid postponing payments ensure that one sets an alert or arranges auto payment for them.

B. Bring down your credit utilisation ratio
Always ensure that the credit utilization ratio is below 30%. Therefore, if the credit limit is ₹ 1 Lakh, one should ensure a monthly credit use of not more than ₹ 30 Thousand.

C. Avoid Multiple Loan Applications
Applying for a loan with some sort of frequency could be as a result of some sort of financial difficulties and will therefore affect the credit score. Only apply when necessary.

D. Build a Healthy Credit Mix
Ensure there is good blend between fixed credit such as Home Loan and non-fixed credit like credit card to demonstrate the company’s financial reliability.

E. Check Your Credit Report for Errors
Sometimes the score of credit is reduced by some inaccuracies which are present in the credit reports. Dispute any errors on the credit bureau before it becomes an issue for later discussion.

6. How Lenders Evaluate Credit Scores Along with Other Factors?
Nonetheless, besides the credit score, other things are considered by the lenders as explained in the next segment.

● Income Stability: This is about the ability to repay the loan and any consistent inflow of cash flow alerts the financier.

● Debt-to-Income (DTI) Ratio: The figure decreases indicates higher chances of approval for the credit application.

● Employment history: Duration of time they have served their employers gives an indication of their stability in terms of finance.

Today, Home Loan lenders such as ICICI Bank do not restrict appraisals to your score on the credit report to appraise your eligibility but they even consider the following.

7. How a Home Loan EMI Calculator Can Help?
A home loan EMI calculator is rather essential for anyone who is about to or is currently paying the home loan installments. Some of the ways to modify them are as follows: Through the provision of loan details such as the amount, the duration, and interest rates.

● Estimate your monthly payments.

● Compare EMIs for different loan amounts and tenures.

● Notably, do not be surprised when the interest rates go high because of your credit score.

All the leading banks including the ICICI Bank provide precise EMI calculators on their websites making the borrowing procedure easy and efficient.

8. Common Credit Score Myths DebunkedA. Delton dares not check on his credit score for fear of lowering it.
Information: Checking one’s credit score is termed as a credit check whereby information on it can be got online and does not influence your score.

B. On the Same Note, Social Credit Score Beneficially Rises With the Closure of Old Credits
Truth: While it is true that closing old accounts may lower your total credit history which can have a potential effect your credit rating.

C. A High Income Equals a High Credit Score
FACT: LOANS payers’ notice that income stability is good but it is one’s repayment behaviour that determines one’s credit score.