When you apply for a home loan, you would invariably come across certain jargon that you would hear again and again. One such term is ‘credit score.’
What is a credit score?
In simple words, a credit score indicates your ability to repay the loan you borrow. That it lets the lenders know about your creditworthiness. It is represented as a three-digit number ranging from 300 to 900. The higher and closer your credit score is to 900, the better your chances of getting the home loan application approved.
However, if your credit score is low, there is a great risk that the lender will reject your loan application. And if they sanction your loan, chances are high that they may charge a higher interest on your house loan than others who have a high score or at least meet the minimum credit score requirement.
How is your credit score determined?
There are many credit bureaus that are authorised to keep a track of all your credit-related transactions. These agencies keep a tab on the amount you borrow, your repayment pattern, the EMI payments you have missed, etc. The lenders and credit card companies share this data to the credit agencies for future verification.
In India, the most popular credit agencies that are allowed to keep track of your transactions include CIBIL, Equifax, Experian, and Highmark. These agencies are authorised by the RBI (Reserve Bank of India). Based on your credit consumption and repayment pattern, these agencies assign you a score, which is termed as credit score.
Your credit score keeps changing based on your credit-based transactions. If you keep paying your debts on time and never miss any EMI payment, your credit score automatically increases overtime. But, if you fail to repay the amount, or delay the payment even by a single day, it will have a negative impact on the score.
So, when it comes to maintaining a high credit score, especially if you want to avail of a home loan in the future, you must do your due diligence and maintain a high score for at least one year before applying for the loan.
What is a good credit score for a home loan?
Every lender has a minimum credit score requirement to approve home loans, and this requirement varies from lender to lender. Generally, financial institutions consider a credit score of 720 or more as a good score to approve a home loan.
If you meet the lender’s minimum credit score requirement, you can get your loan approved without any hassles. However, if you have a high score of more than 800, you can be in a better position to negotiate with the lender and get a better offer on home loan interest rate.
Generally, the lenders have an affinity to borrowers that have a high credit score. This is mainly because based on their credit repayment history, the lenders have the confidence that they have better chances of recovering the money and the chances of default by the lender is minimal.
Thus, the credit score is an important aspect of the home loan borrowing process. Make sure that you know the lender-specific minimum credit score requirement and meet the same before submitting your application. This will minimise the risk of rejection and you can get the desired amount faster.