ASSESS YOUR FINANCIAL HEALTH

AMIT SETHI TIMESPROPERTY

Buying a home in a leading metro is no easy feat, especially because it turns out to be an expensive purchase. Therefore, a lot of people opt for a home loan to realise their home-buying dream.

So, if you are looking to opt for a home loan it is extremely important that you bear in mind the ‘consequences of a good credit score’. In fact, if you do not have an ideal credit score, you may also be refused loan from most of the leading banks in the city.

HOW CAN YOU SECURE A HOME LOAN DESPITE A LOW CREDIT SCORE?

If you have a low credit score by a few points, then you can opt for the following steps to get the home loan:

Provide additional security to the lender;

Improve the credit score by disciplined use of existing debts and credit cards;

Apply for a home loan jointly with spouse/relative;

Try to get a loan from NBFC.

In conclusion:

A good credit score is an extremely important tool to assess an individual’s risk profile. The better the credit score, the higher are the chances for the approval of the home loan. Hence, it is imperative that individuals make timely EMI payments and credit card payments to maintain a high credit score.

What is a credit score?

The credit score is your financial health indicator. Normally, banks look for a credit score of 750 points or more to grant a loan. "The score is arrived at from various credit report information available from credit bureaus. Over the past decade, the participating financial institutions and the data sanctity have evolved drastically. Hence, this information forms a very vital tool to ascertain the credit behaviour of the customer,” says R Govind, vice-president - head, consumer lending & retail, Lakshmi Vilas Bank.

The score is used widely across banks and financial institutions while assessing the repayment discipline of potential borrowers.

How does credit score impact your home loan application ?

“The credit score of the individual lists out all the loans that the individual has availed in addition to lines of credit via credit cards or personal loans. The credit score helps determine the individual’s performance on previous or current loans. The credit score advises if the loans are getting paid on time or if there is any short or prolonged delays in repayment. Overall, the lender can make a decision if it must make a lending to the particular borrower on the basis of his credit score,” suggests Nitesh Punjabi, general manager - capital markets & investment services, Colliers International India.

The credit score of the borrower also, effectively represents how likely he or she will repay the loan in time. Poorer the credit score of the borrower, higher is the risk that the lender carries on the borrower. Accordingly, since the borrower is risky, the lender will charge a higher interest rate to mitigate that risk and balance its risk return matrix.

Shubika Bilkha, business head, The Real Estate Management Institute, explains, “Individuals with a better credit score do tend to benefit from preferential interest rates. A credit score of an individual is the credit record held by the borrower over a period of time that also includes his/her income, any overdrafts applied for and the set of repayment records of the borrower.”

Key reasons for a low credit score

The main reasons for a low credit score are irregular payment history, write-offs, settlements, high current balances and a high number of loan enquiries. A lack of financial discipline when using unsecured loan like personal loan, also negatively impacts the credit score. Similarly, non-payment of EMIs on time and loan default can bring down your credit score significantly.