In an amazing turn of events, homebuyers are suddenly having their cakes and eating them too!
In addition to an environment of already low interest rates, several banks and housing finance institutions have further reduced the interest rate to eye-popping figures. Will homebuyers ever again enjoy such favourable environment for buying their chosen homes, once the opportunity goes away?
However, banks and home finance companies are favouring homebuyers who have excellent financial standing and repayment history, and these ultra-low rates are tied up with their credit scores.
Credit scores are increasingly being the determinant of the interest rate offered to the borrowers. If you are planning to apply for a home loan, you must know the following details about your credit score. You will also know how you can repair your credit score so that you become a preferred borrower of the financial institutions.
Credit Score? What is it?
A credit score is an indicator of a person’s creditworthiness, or their ability to repay debt.
It is usually expressed as a number based on the person’s repayment history and credit files across different loan types and credit institutions.
Your credit score is calculated by an algorithm that takes into account several factors. Each factor gets a different weightage in the calculation.
The factors that determine your CIBIL Score are:
- Your loan-repayment history (35% weightage)
- Loans outstanding (30%)
- Your experience with debt: the time frame for which you have re-payed your loans (15%)
- The type of loans you have taken or currently have (10%)
- Your credit mix-ratio of secured to unsecured loans (10%)
The credit score is also known as a credit rating.
In India, there are four credit information companies licensed by the Reserve Bank of India. These are Credit Information Bureau (India) Limited (CIBIL), Experian, Equifax, and Highmark. The most popular credit score in India is the CIBIL rating.
The CIBIL credit score is a three-digit number, which ranges from 300 to 900, with 900 being the best score. A good CIBIL credit score is considered to be 750 or higher.
How a Good Credit Score Helps You in Taking loans
Makes you eligible for loans
A high credit score gives you the ticket to be eligible for getting loans. If you have a good credit score, it suggests that you have been repaying your debt and are experienced in handling credit. It will give lenders a good reason to offer you a loan as you have a low probability of turning a defaulter.
Lower rate of interest
One of the benefits of having a healthy credit score is that banks might offer your loans at a lower interest rate. Considering your repayment history, there is a high possibility that you will get discounts on the interest rate for loans.
Quicker loan approvals
Several lenders offer pre-approved loans to consumers who have a long credit history and a high credit score. Quicker loan approval by banks is one of the biggest benefits of a high credit score. Your loan application gets approved immediately and it does not have a waiting period.
For the future
Even if you don’t see yourself applying for loans or credit cards in the near future, ensure that you still maintain a good credit score or credit history. A good credit score will come in handy when you apply for home loans, personal loans, credit cards, or any other kind of loan in the future. It is always better to have a credit history as it gives lenders something to measure your credit handling.
How Home Loans are Tied up with Credit Score
In the recent past, several banks and financial institutions have further reduced the home loan interest rates. However, they are placing higher importance on good credit scores now and even stressing on impeccable credit scores if the homebuyers want to avail of such low interest rates.
When you apply for a home loan, home loan lenders usually prefer that your minimum CIBIL Score be between 650 and 750. The higher, the better.
For example, HFDC has announced a festive offer on home loans at an interest rate of 6.70% for applicants with CIBIL score of 800 and above. LIC Housing Finance is offering an interest rate of 6.66% for salaries and professional borrowers with a CIBIL score of 700 and above. Different interest rates apply depending on the risk profile of the borrower.
SBI is offering an interest rate of 6.70% for homebuyers with a CIBIL score of 800 and above. For applicants with a CIBIL score of 751-800, the applicable interest rate is 6.80% and for a CIBIL score 700-750, 6.90% interest rate will apply.
It is clear that an impeccable credit score will immensely help you with superior terms and conditions while applying for a home loan. Therefore, it is of utmost importance that you must maintain a good credit score.
Here are seven definitive steps you must take to improve your credit score before applying for a home loan.