It’s important to understand
the role of credit bureaus and your financial track record while applying for a
home loan to fund your property purchase
Buying a home is a common dream
for many Indians. Most us take a home loan as preferred financing option.
Before approving the home loan application, banks always check applicant’s
credit history. Your credit history is one of the several factors that lenders
review while taking a lending decision.
Credit Bureaus play an
important role in providing an individual’s credit record in the form of credit
reports and credit scores. A good credit history increases ones chances of
getting a home loan since existence of clean credit history has been known to
be predictor of better repayment. This will also most often the reflected in
your credit score.
This is the process explaining
the role of credit bureaus when a bank gets your home loan application
- When you apply for a home loan, as part of process of evaluating your application the bank will pull your credit report from a credit bureau.
- Your credit report will have your credit summary and repayment history in addition to your personal identification information.
- It may also have a “credit score” which is a measure of “riskiness” of any credit extended to you.
- The credit report and credit score is used by banks to understand your credit worthiness.
- Banks will have internal business policy which categorizes customers below a certain score threshold as “riskier”. These customers may be turned down for a home loan.
- Along with credit report and credit score, banks also look at the property being purchased, income documents, KYC detail verification to evaluate borrower’s application.
Remember the following aspects
- A Credit Bureau acts as the custodian of your credit information and payment history and does not decide whether you are a good or risky customer.
- It also does not decide whether your loan should be approved or rejected or even how much loan should be approved. This decision is the sole privilege of the bank.
- Different banks may take different decision about your home loan application based on their internal policies. For Example: Bank ‘X’ rejects home loan application of an applicant with 650 credit score whereas bank ‘Y’ lending criteria allowed the bank to approve the same home loan application.
- It is essential for the borrower to understand his or her credit responsibilities and the key things that he or she should be aware of before applying for a home loan:
- First and foremost, check your credit report and score at least six months before you are ready to apply.
- Your credit score is important because lenders use it to sanction your home loan.
- By checking it six months in advance, this will give you enough time to work to improve it or to raise a correction request in case there are any issues.
- Remember, your credit report only reflects the information as submitted by the banks to the bureau.
Keep in mind
- Be realistic. It is advisable for you to not exceed more than 40% (in metro cities)/ 30% (in non-metro cities) of your net income in your monthly installments.
- One great way to reduce your Equated Monthly Installment (EMI) is to put more money down initially on your loan. This may take some saving initially, but it will help to protect you from monthly payments that are difficult to keep up.
- The amount of home loan that you take may impact your debt to income ratio and ability to get further loans going forward.
- It is highly advisable to update all contact and address information with all lenders. This will ensure that your credit bills are addressed to your current address and key notifications are share on your current contact details (e-mail ids and mobile phone numbers, etc.) This will also enable banks to submit your latest details to bureaus and generate an accurate credit report for you.
- Once you have availed a home loan, it is especially important to pay your EMIs on time in order to maintain your good credit score. Regular payments and responsible usage of credit will be the key to financing the current property and also refinancing options in the future.
