Though there are other parameters besides repayment history which makes you eligible for a home loan, timely re-payment of funds is of great importance.
If you have applied to a Bank or NBFC to obtain a personal loan, credit card, auto loan, business loan; you may have come across the term “Credit Report” or “Credit Score”. Although, you might not have paid much attention to the term then, the implication of credit score could be significant on your 20 year (approximately) home loan obligation. It is time you paid good attention to it and understand its repercussions.
For your home loan eligibility appraisal, in addition to your income, employment and property, your credit report/ credit score plays a crucial role. A credit bureau acts as a repository of loan repayment history of all borrowers in India. It collates your credit history disclosed from your existing and past lender and disseminates this information to your prospective lenders. Credit bureaus have been set up by RBI to inform banks about the borrower’s past lending history and in turn reward the ‘good borrower’ and penalize the ‘bad ones’. Presently, there are four credit bureaus in India — TransUnion CIBIL , Equifax Credit Information Services, Experian Credit Information Company of India and High Mark Credit Information Services. CIBIL is the oldest (2004) and most widely used credit bureau.
Therefore, it is important to know whether:
Have you missed out negotiating a better interest rate despite having a good credit history?
Is your banker penalizing you too much for a brief repayment failure in the past?
Even if you were getting a home loan based on your not so good credit report, are there any additional riders that you can bank on?
It is important to know where you stand in credit bureau records and how do bankers interpret these reports before you apply for home loan. Credit bureau is also very important for those who are not eligible of getting a home loan due to poor credit bureau history.
What is credit report & credit score?Every time you apply for a home loan, lending institutions pull a credit report, along with credit score from one or more of these credit bureaus. The credit report details your individual loan repayment history, month on month for last three years in case of banks and from 2002 in case of NBFC.
How it works?
RBI requires banks to classify loans as good /current or bad / non-performing asset-NPA (Sub-standard, Doubtful & Loss Asset). It is imperative for you to know that when you do not pay any loan for three months, it gets classified as bad/ non-performing asset-NPA. Or sometimes may also be flagged as willful defaulter. These factors increases collection efforts and are ‘red-flags’ for lenders.
Besides good and bad status, credit bureaus also compile and share, with a prospective lender, details of any loan restructuring, settlement, write-offs (recording that customer is not able to pay and therefore loss is recognized in their books) & suit filed/non-suit filed status. These statuses are even more serious and may considerably reduce your chance of getting a loan at all.
Advantages of good credit history and high credit score
Though there are other parameters besides repayment history which makes you eligible for a home loan, timely re-payment of funds is of great importance. If you are a borrower with sound credit history:
You will be prime target of top brands in home loan market which not only offers lowest rates and terms but also provides best customer experience
You may find yourself in better position to negotiate rate of interest and processing fee
You can leverage your credit score to talk through with lender on riders like personal guarantee, requirement of additional collateral like other immovable property or pledge of liquid asset like FD, LIC policy, etc.
Further, you may expect a fast disposal of your home loan request with lesser query, lesser documentation /non-penetrative verifications by lender and with minimum hassles.
Now, if your score is not above 800, the lender knows you have missed payment(s) sometime in the past. It is therefore relevant for you to know what lender look for while scrolling through a credit report.
What about aspiring home borrowers with no credit score of low credit score
Credit penetration in India is still very low, so a huge percentage of home loan applicants are expected to have no credit history. If you had never borrowed money, then it does not mean that your application will not be processed or declined. It will be still evaluated objectively by lender; however, the lender may conduct additional checks which may increase processing time or may choose to add riders to your loan application.
Further, you may add a guarantor with good credit history to your loan application or additional collateral to increase your credit score. You may increase your equity contribution in the property cost which enhances confidence of lender. Since rate of interest also has risk-return implications, a few lenders may consider your application at a higher–than standard rate.
It is also worth noting that credit score has no relation with the income level of an individual. If one makes small, regular transactions on a credit card, which are paid regularly and timely, it can lead to a healthy credit score. To reap full benefits of high score, it is advisable to have a credit history by availing small manageable loans before applying and committing for a long-term home loan.
If you are planning to apply for a home loan, it is advisable to pull out your bureau report six months in advance and check your score. In case you find any errors, you can raise a bureau dispute.
How to improve your credit score?
Pay your credit dues on time: Ensure you pay the EMIs on your loans and your credit card bills by the due day every month. Your payment history has a significant impact on your CIBIL Score.
Keep a control on your credit card limits: While increased spending on your credit cards may not necessarily negatively affect your credit score, an increase in the current balance on the card over time is an indication of an increased repayment burden.
Limit credit exposure: The total size of your debt reflects on your credit report and has an impact on your credit score. Having many loans or credit cards increases the total amount of debt you owe. If you have many loans running ensure that you close some of them so that your total credit exposure is reduced, before you apply for new loans.
Maintain a healthy mix of credit: A higher concentration of home loans or auto loans is likely to be more favorable for your credit score than a large number of unsecured loans. More the number of unsecured loans with high utilization, larger are the payments resulting from its high rate of interest.
Monitor: You should co-sign joint accounts monthly as these also form a part of your credit history and impact your credit score. Monitor the loan accounts for which you have stood as a ' guarantor '. It is important to understand that by pledging as a guarantor on the loan, you are also legally responsible towards the timely repayment of the loan. In case of defaults the credit score of the guarantor will also get negatively impacted.
Finally, review your credit score and credit history regularly in order to track your financial standing and be "loan ready" always.The writer is Chief Risk Officer of India Mortgage Guarantee Corporation