Home Loan rates are at an all-time low. This might prompt a lot of you to just take the plunge and buy that property you’ve set your eyes on for so long. But if you’ve been thinking that your high Credit Score (you can check it here, if you’re not sure) is enough for Home Loan approval, you’re wrong! Read on to find out why.
Without a doubt, a good Credit Score will put to rest a lot of doubts that banks may have regarding your financial standing. But while it indicates how your earlier loans were serviced, it says very little about your ability to service more loans in the future, especially big-ticket loans of this nature.
Banks look at a range of factors while deciding the financial fitness of a borrower – Credit Score is just one of them but an important one, nevertheless. One of the factors also is the ability of the borrower to repay the debt that he’s taking on by way of the loan. So, for instance, if you’re already repaying an Education Loan coupled with a few other Personal Loans as well, banks will look at your debt-to-income ratio to gauge your ability to manage debt repayments. Debt-to-income ratio is arrived at by dividing your total monthly debt obligations, such as minimum Credit Card payments, Car Loan, etc. by your net monthly income. Issuers will calculate this ratio on a monthly basis to arrive at a realistic figure. Lenders refer to this ratio to determine how much additional debt you will be able to take on comfortably with respect to your existing debt burden. A low debt-to-income ratio means you have a good balance between debt and income. Generally, lenders consider 30% as the threshold limit.
A high debt-to-income ratio or a low Credit Score doesn’t mean that you can’t get a Home Loan though. If you have a high debt-to-income ratio, you can still get your spouse to apply for the Home Loan as the sole applicant. However, over a period of time, you can reduce your overall debt burden by utilising bonus or cash windfall towards making repayments. This would improve your borrowing power and also help you manage your financial situation better, especially during financial emergencies.
If you have a low Credit Score, here’s how you can enhance your chances of being approved for a Home Loan:
1. Opt For Lower LTV Ratio
LTV or loan-to-value ratio indicates the proportion of a property’s value sanctioned as loan by the lender. When lenders evaluate your Home Loan application, they fix this ratio on the basis of your credit profile and their risk assessment. If banks deem you low on creditworthiness, they will offer you a low LTV ratio, which essentially means that you have to shell out a larger amount in terms of down payment. The RBI has capped the upper limit of LTV ratio at 75-90% of the property’s value.
If you have a low Credit Score or a high debt-to-income ratio, one of the ways you can up your chances of Home Loan approval is by opting for a higher down payment. A higher contribution via down payment will not only lower your LTV ratio but will also improve your loan eligibility and approval chances.
2. Add A Guarantor Or Co-Applicant
When lenders evaluate Home Loan applications from individuals with a low Credit Score or a high debt-to-income ratio, they often put in the requirement of adding a co-applicant or guarantor to the loan to improve their chances of loan approval. You should consider adding a co-guarantor or co-applicant with a decent Credit Score and low debt-to-income ratio as that will not only enhance your loan approval chances, but will also increase your loan eligibility.
Remember, though, that a co-applicant or guarantor is equally liable for loan repayment. A loan default or delay won’t just adversely impact your Credit Score but theirs as well.
3. Approach NBFCs And HFCs
Compared to banks and other financial institutions, NBFCs and HFCs have relaxed parameters for evaluating Home Loan applications. Home Loan aspirants can, therefore, approach such institutions if they’ve faced rejection from banks as chances of loan approval from NBFCs or HFCs are higher. One thing to note here is that NBFCs/HFCs also charge higher interest rates than banks.
Moreover, when you submit multiple loan applications to several lenders, to evaluate your application, every lender will fetch your credit report from the concerned credit bureau, resulting in what is called a hard inquiry. These inquiries will reflect in your credit report and will even bring down your Credit Score. As an alternative, consider visiting an online neutral financial marketplace where you can compare offers across lenders and choose the one that suits your preferences the most. Credit report inquiries initiated are considered soft inquiries and will have zero impact on your Credit Score.
4. Opt For A Higher Interest Rate
Lenders follow the practice of linking their loan interest rates with the Credit Score of the applicant. So, if you have a low Credit Score, chances are high that your loan application will be rejected. In such a scenario, it is better to opt for a loan with a higher interest rate than risk facing multiple rejections.
Before opting for a loan with a high interest rate, consider visiting an online financial marketplace to compare offers across various lenders to ensure that you’re really settling for the best offer. While finalising your Home Loan EMI, ensure that your debt-to-income ratio including the new EMI doesn’t exceed 50-60%. Consider opting for a longer tenure to reduce your EMIs and try to foreclose your loan to reduce the overall interest payout.
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