A good credit score has become an increasing necessity and unstated benchmark to get a hefty loan amount.
For an average person, buying their dream abode is the first big expensive purchase of their life. But what if your home loan is denied simply due to poor credit score?
Maintaining a high credit score of at least 750 can fetch you a home loan at the lowest possible interest rates. In some cases, the loan maybe approved at much higher interest rate or can be plain rejected too.
Some lenders allow home loans to borrowers with poor credit scores at the cost of an additional risk premium. If you're offered such a plan, make sure to analyse whether you can afford the high EMIs. Banks will periodically review your credit scores and reset the risk premiums if there's an uptick.
You can also look to lower the loan to value (LTV) ratio when you have a poor credit score attached to your home loan application. Lowering the loan amount with a lower LTV reduces the lender's stake in the contract but will increase the borrower's expenses manifold.
Adding a co-applicant (with a good credit score) to your home loan application can significantly improve the chances of getting it approved if the main borrower has a low credit score.
The co-applicant’s income and credit score are key factors which tend to determine the combined repayment capacity for the requested loan. Hence, if the co-applicant earns more than the primary borrower, it will only add to the credibility of the application in the eyes of the lender.
One can get their spouse, parents or earning son/daughter as co-applicant for the home loan application. Notably, brother-sister, sister-sister, a parent with an unmarried daughter are a few relationships considered invalid as co-applicants in a home loan.
If you're struggling with an average (not poor) credit score, a bit of smart negotiating with the lender of your choice may turn things in your favour. However, if the score is way below the basic requirement of the bank, your case may not stand at all.
While a housing finance company usually offers a higher interest rate than banks, one can look at it as the last resort for home loan. Recently, many HFCs have modified their interest rates to compete with conventional banks.
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