Home loan & repayment ability
A home loan helps one to achieve one of the biggest dreams of his life; that is buying his dream home. A home is much more than just four walls for a common man; it’s one’s biggest asset, security for family and a shelter for life. For an end user, lot of emotions are involved with a house, hence for every common man purchasing a house is a big decision.
A home loan comes as an aid to fulfill one’s home buying dream but at the same time, one needs to plan his finance meticulously to be able to repay the loan within the predetermined time. Therefore, it’s very important for everyone who’s taking a home loan to assess his repayment ability. Repayment ability is mainly governed by a number of criteria such as one’s income, age, expenses, assets, number of dependents, repayment history etc. Credit score which reflects one’s repayment history is a decisive factor for one’s loan eligibility.
What is a Credit score?
A Credit score is an indicator of one’s creditworthiness. Roughly it reflects the willingness of one to repay the loan in time. The value of a Credit score normally varies between 300 and 900. Credit score is calculated on the basis of one’s all time Credit history, all secured and/or unsecured loans and any other debts if any.
A high Credit score of a customer is an assurance for a lender that he can comfortably repay the home loan. Different lenders have different cut-off of score for deciding the home loan eligibility. For example, for a 50 lacs home loan amount, HDFC and ICICI bank have cut-offs of 640+ while non-banking financial Institutions (NBFCs) are more flexible and lenders like Indiabulls or DHFL has cut-offs of 550+.
Though cut-off rates vary largely depending on various other factors, it can safely be said that scores in the range of 700-750 are regarded as pretty good and scores above 750 are considered to be excellent. CIBIL data says 80 per cent of the loans that get approved have a score above 750.
Source for credit-score cut-off data: Paisabazaar.com | the numbers are purely indicative
Benefits of a good Credit score
Other deciding factors
Interestingly though, Credit score is not the only parameter lenders consider before loan approvals. Loan approval and the interest rate also depend on loan amount, payback tenure and the borrower’s employment status. One’s current income source and employer make a good difference even if he has a relatively lower Credit score based on past records.
For a low Credit score the lender may reduce the loan to value ratio (LTV) and may settle for a higher interest rate. Typically NBFCs would be a better idea for someone who has a low Credit score and is seeking for a home loan; however one should note that NBFCs charge higher interest rates as compared to banks.
Improving loan eligibility
It’s a better idea not to go to a mainstream bank if one’s Credit score is below than 650 before working out a recovery plan. Once can always better his score by