Creditworthiness of a person depends on credit scores , which is determined as a relatively new concept in India, but has emerged as a highly used concept by lenders. So it’s imperative to focus on one’s credit scores and if necessary , improve it, before planning to buy a house.
What is a credit score?
A credit score is a three-digit number used as an indicator of your creditworthiness. It ranges between 300 to 900, with 900 depicting the maximum creditworthiness. The evaluation is performed based on your previous credit repayment data and overall credit management.
The four RBI licensed credit information companies in India who can provide credit score are:
- Credit Information Bureau (India) Limited (CIBIL)
- Equifax and
- Crif High mark
Amongst these four, CIBIL is the most popular and widely accepted.
How does it affect the home buying process?
We all know that the home buying process begins with a home loan application, as home loan provides you with tax benefits, secured financing, ability to purchase the property of your choice and that too, without exhausting your hard earned savings. Whether you are planning to buy a new property, constructing a house or going for renovation of your old Property, home loans come handy.
But all this can not be done if your credit score is on the lower side. Lenders, nowadays, pay close attention to your credit score before lending money for home buying.
So if your credit score is low, the loan can be rejected or approved even if it’s for a smaller amount and, if approved, still fetch a higher rate of interest. Due to which it may directly impact the home buying process, as you will now have to adjust with a small property or cancel the purchase entirely.
Whereas, if the credit score is good, your loan will be approved quickly for the required amount. The interest rates for you will be lower, and the entire home buying process will be swift and hassle-free.
Minimum credit scores and loan types
Loan eligibility depends on credit score. It must be at least above 600, with a debt-to-income (DTI) ratio of 40% or lower. You require a minimum CIBIL score of 620 to qualify for home loans and a minimum between 720 to 750 to be eligible for personal loans. Individuals with a CIBIL score above 740 get the lowest interest rates and prompt approvals from lenders. So the higher the score is, the better it is for you.
How can you improve your credit score?
Improving your credit score is a long-term process where your credit score gradually improves with proper debt management. Here are a few tips:
- Pay bills on time
- Track your EMI deadlines and make payments on time
- Take loans for a longer tenure and make regular on-time payments.
- Create a credit history if you don’t have any. Start by getting a credit card
- Improve credit history by proper management of all credit cards. Always pay the minimum payment due on time.
With the guidance of the above tips, you can expect a significant improvement in your credit score within a year or two. So the best option is to plan and raise your credit score well before you begin with your home buying process.