Why are credit scores important for Home Loans? How to improve them?

[Kanika Shelatkar]

No matter the loan type you apply for, banks and other financial institutes need to make sure they can repay them. For confirming the repayment capacity, lenders ask you to submit some documents right from salary slips to bank statements to Income Tax Returns. They also consider the credit score. This is a three-figure number that helps lenders understand how often you borrow the sum and whether you repay frequently.

Credit ratings are essential primarily when you apply for Home Loan. Here are why lenders ask for your credit score during the loan application process:

Understand your credit behaviour

From different loan types you have applied for in the past to the ones you are repaying now, lenders check how well you handle them. The ratings get calculated not only by loans but also by how you have used the Credit Cards. Lenders gain insight into Credit Card utilisation ratio, and whether you have repaid both Credit Card bills, and previous and current loans timely.

As such, the credit report provides lenders with a detailed look into how well you manage your obligations.

Check your repayment capacity
When it comes to Home Loan in India, eligibility plays an important role. The best way to check your Home Loan eligibility is through your income source. Lenders need you to comply with the minimum salary requirement. If you do not draw a specific sum monthly, you are not eligible for the loan. Your income and credit score help lenders decide if you repay the loan timely, and hence lenders emphasise on the credit report.

Check other ongoing loans
If you have other ongoing loans besides Home Loan, you are considered risky by lenders. A new loan means an added financial responsibility while your income remains the same. Through the credit ratings, lenders calculate if you can repay the high-value loan.

They check your loan-to-value ratio, i.e., the monthly income drawn, and the money spent repaying the Credit Card bills and other EMIs. If the loan value ratio exceeds 60%, they consider you ineligible for the loan.

Ways to improve credit scores
The credit score required for House Loans are 750 and above out of 900. Here is how you can improve them:

Clear outstanding dues
Whether it is loans or your latest Credit Card bill, make sure you have paid them off before applying for Housing Loans. Not have any outstanding before the following Credit Card cycle helps get the loan passed.

Avoid exhausting credit limit
The other way to improve the scores is to make sure you never utilise the entire credit limit. Lenders prefer sanctioning loans to those who do not use more than 30% of the credit limit.

Timely debt repayment
The best way is by repaying the debts without defaulting. Ensure not to miss any EMIs and avoid delays.

https://www.bankofbaroda.in/home-loan-eligibility-calculator.htm