In the present day and age that we live in, it is very important to have a healthy credit score before you think of applying for any fresh credit line. Especially when you are opting for a long-term loan such as a home loan your CIBIL score plays a very important role. With the Reserve Bank of India having made it mandatory for banks to look at the credit score of an individual as a part of their credit assessment process, banks must use your credit score as one of the barometers of your credit health. But does this mean that an individual with bad credit cannot dream of purchasing property with the aid of a home loan? The good news is that loans for bad credit score are available and here is how you can get one. Here’s how:
Don’t opt for traditional lenders
If your CIBIL score has dipped below 650 it is best not to go to a traditional lender like a bank. NBFCs are known to be a little more flexible than banks as they look at other measures of creditworthiness such as job profile and scope of future income, and even accept collaterals such as large premiums or gold jewellery, but even then, such loans come at a higher rate of interest that you will find difficult to negotiate if your score is low. The other option is to approach a P2P or a peer to peer lender if you are looking for a loan for a shorter tenure. The advantage of P2P platforms is that it connects the borrower to the lender, because of which you, the borrower, can save the intermediation cost that you would have otherwise paid to a traditional lender. Like NBFCs P2P lenders also look at a host of soft data such as social media footprint through LinkedIn and Facebook, job stability and family background to assess your creditworthiness. Assessment of this nature enhances your chances of getting a home loan even with a bad credit score.
Opt for a lesser LTV and lower FOIR
The LTV is an important ratio that is taken into consideration in a home loan. Irrespective of the lender, SBI home loans, HDFC home loans or DHFL home loans, it is the Loan to value ratio captures the amount of loan as a ratio of the total value of the property. According the RBI diktat a bank cannot lend more than 85% of the LTV, but banks usually follow their own set of guidelines while deciding the LTV. If you have a lower credit score you can opt for a lesser LTV which will enhance your down payment but make you eligible for a home loan at a decent home loan interest rate.
While assessing you creditworthiness, banks also consider another ratio called the Fixed obligations to income ratio or FOIR which essentially is a measure of the total amount of “fixed obligations” or payments you must make in a month (inclusive of your home loan EMI) as against the salary you draw. Banks fix the EMI of an individual in a manner which is lower than the actual FOIR, even when a prospective borrower has a good CIBIL score. In case of poor credit score, you could request the lender to consider an even lesser FOIR, which will then translate into a lower loan amount.
Introduce a guarantor
A bank may agree to sanction a home loan to you even if you have a bad credit score if you can assure the presence of a guarantor. Needless to say, the guarantor must have robust finances and a healthy credit score. He must also be aware of his responsibilities in case you are unable to make a repayment on the loan because of some binding that you may face later.
Improve your credit score
If none of the above options seem plausible to you, you can take a step back and decide to improve your credit score before making a fresh application for a home loan. In fact, if you have the option to do this, this should indeed be considered seriously. The reason for this being that though a person with a bad credit is eligible for a home loan, he must make a compromise either on the interest rate or tenure front, eligibility ratios and even the lender. A good and healthy credit score and a robust credit record on the other hand may help one clear the initial hurdle of eligibility and help him access cheap and timely credit. If you are in a similar position and are at a loss about how to improve your credit score, you can always seek the help of credit repair or a credit improvement agency. Such an outfit will not only help you repair your credit score, but will also put you on a path that will not lead to similar credit related issues in the future.
Deciding to get a home loan to purchase one’s first property is perhaps the largest life altering decision that one is called upon to take in a lifetime. Doing so with a good CIBIL score is a prudent move.
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