Importance Of Credit Score In Purchasing A House

While applying for a home loan at any financial institution whether it is a bank or a NBFC, the first thing they will check for is your credit score.

Having a good credit score is the most important factor that decides the interest rate you are offered on a home loan. “A credit score between 750 and 900 is considered as very good. The closer your score is to 900, the better your chances will be of getting your home loan approved. Additionally, a higher credit score will also mean that you will be able to get more attractive loan offers, including, lower rates of interest, higher loan amounts and longer repayment periods,” said Deo Shankar Tripathi, MD and CEO, Aadhar Housing Finance Limited ( AHFL). Even a small percent change in interest rates would mean lower EMIs, therefore making it even more important to have a good credit score.

A credit score basically informs a lending institution of your credit worthiness based on your repayment track record of various loans. RBI licensed bureaus- Trans Union Cibil, Equifax, Experian and CRIF Highmark collect consumer data from customers and lending institutions to provide details about your credit history and credit worthiness.

“If your score is below 675, you may need to improve the credit score before applying for a home loan,” said Tripathi.

He further listed down some factors that you need to look up at to perk up your credit score before applying for a home loan.

Keep checking your credit report

The first step is to request a credit report and evaluate it for any prospective mistakes. Even if you have been making all your payments on time, it could be possible that there is inaccurate information on your credit report, which will affect your score negatively. You must ensure that you have been paying your bills on time at least 5-6 months before you apply for a home loan to help fix your credit history.

Pay your credit card bills on time

Before you apply for your home loan ensure that you have been paying your credit card bills on time for at least the past 6 months. If you are constantly late in paying your credit card bills or are maxing out your credit limit, this might be viewed as financially irresponsible behavior. Also try to follow the “30 per cent rule”, which means spending up to only 30 per cent of your credit card limit. This helps in increasing your credit score significantly.

Pay your EMIs on time

In order to have a good credit score, ensure that you have been paying your EMIs or mortgages on time. Banks and lending institutions will not look at you favourably to approve a home loan if you are already defaulting on other financial obligations. If your other loans are having a significant burden on you, try talking to your bank or lender to restructure your loan to allow you to pay EMIs on time.

Avoid obtaining new loans

The anticipation of buying a new home also comes with a lot of new costs, such as furniture and perhaps even the desire to buy a new car. However, refrain from taking out any loans on such products until after you have obtained your home loan.

Keep check of your co-applicants

If you are applying for a loan with a co-applicant,  be sure to keep track of their payment and credit history, as well as loans to ensure that this does not hurt your credit score.

Tripathi advised that there is nothing to worry about if you have a low credit score. All that needs to be done is plan out and make your payments on time for a few months and you will see your credit score increase exponentially.