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10 MAY, 2022
Irrespective of the type, lending money as a loan is a risky business for lenders. Significant time and money are spent to recover the loan if borrowers do not pay the due amount. Therefore, lenders need to ensure that the applicant has enough repayment capacity and will not default in making EMI payments. To judge the reliability of the applicants, lenders ask them to fulfill some eligibility criteria. The credit score is one such crucial determinant that helps lenders decide if they want to lend a home loan to the applicant.
However, your credit score is not limited to ascertaining the approval or rejection of your application. It can also determine the home loan rates. Confused? Read on.
What is a credit score?
A credit score is a numerical representation of your creditworthiness and repayment capacity. It is a three-digit number that ranges from 300 to 900, where 300 is the lowest and 900 is the highest. If you have a high credit score, you are a reliable borrower. A credit score can be called the summary of your financial habits. Credit bureaus like TransUnion CIBIL calculate your credit score after considering factors like repayment history, debt, credit inquiries, EMI payments, etc. You preferably need a credit score of 750 and above to avail a home loan.
You are considered a reliable and financially responsible borrower when you have a score of 750 and above. Your credit score is an overall report card of your financial performance. It has a pivotal role as lenders review your credit score before processing your loan application. They also determine your interest rates based on your credit score. Moreover, many insurance companies review your credit score before determining your insurance policy premium.
How credit score range affects home loan interest rates
Your credit score is a crucial eligibility criterion. If you have no or poor credit score, the lender has the right to reject your loan application. Even if they accept, your interest rate will be impacted. The reason is the lender’s risk. If you have a poor credit score, it could mean that you have a poor history of repaying your debts and poor financial habits. This reduces the trust they have in you as a borrower. For such borrowers, lenders charge higher interest rates to cover the risk and collect more money in a short duration. On the other hand, if you have a high credit score, they have reduced risk and offer affordable interest rates.
Every financial institution has different criteria for charging housing loan interest rates for applicants with a certain credit score. However, typically, if you have a credit score of 800, you could get the lowest interest rates from them. The lower the credit score, the higher would be your interest rates. Moreover, some lenders also consider the reduction in your credit score closely. They might increase the interest rates only when there is a drop of 50 basis points or more in your credit score.
To sum up
Having a high credit score is an indispensable requirement for availing a housing loan. Therefore, experts suggest checking the credit score before applying for a home loan. If you have a low score, you must take steps to increase it and then apply.
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