Various factors determine your home loan interest rates, like, your income, age, qualification, property value, etc. Among all of them, your credit score is a crucial factor that has a larger impact. Your credit score determines the approval of your loan application and also interest rates. Therefore, you must know what a credit score is and why you should try to maintain a healthy credit score. Here is a brief guide on credit score and its impact on your home loan interest rates.
What Is a Credit Score?
A credit score or CIBIL score is a three numerical figure that represents your creditworthiness and repayment capacity. In India, the credit score is measured on a scale of 300 to 900, where 300 is the lowest and 900 is the highest. Lenders check your credit score whenever you apply for loans or credit cards. In India, the ideal credit score for a home loan is considered to be 700 and above.
How Is Credit Score Determined?
Credit bureaus take into account various factors while determining your credit score. They collect information about your financial history, debt and current obligation for the score. They keep a month- to month record of your EMI payments and credit card bills. They also consider your credit utilisation ratio, that is, the usage of your credit card. They also consider the number of debts you have and the number of times you apply for loans.
Why Does Credit Score Matter for Lenders?
Lenders take a huge risk when they lend you lakhs of money as a home loan. However, a healthy credit score is an assurance for the lender that you are capable of repaying the loan timely. A low credit score could indicate that your debt management is weak, and you could default in making payments. Therefore, lenders prefer an applicant with a high credit score to ensure that they will be paid back.
Does Credit Score Impact Your Home Loan Interest Rates?
With your credit score, the lenders judge if you will be able to repay the loan. Therefore, yes, a credit score is a crucial determinant of your home loan interest rates. If you have a score below 600, lenders can outrightly reject your loan application. It is because they have doubts about your repayment capacity.
The higher your credit score, the higher is your credibility and creditworthiness. Therefore, a low credit score can increase your interest rate. Whereas, if you have an exceptional credit score, you can expect to get an offer of low-interest rates from the lender. Many lenders also offer to waive the home loan fees and quicken the loan process for applicants with a high credit score.
A credit score is an important determinant of your home loan approval and interest rates. Therefore, before you avail a housing loan, you must check your credit score and proceed when you have a score of at least 700. If not, it is suggested to take steps to improve it before you apply for a home loan.