Try to improve your credit score even if you get a loan with a higher rate at the beginning so that the risk premium gradually gets lowered during the course of the loan
The credit score has now become an integral part of the home loan process. Maintaining a high credit score, i.e., at least 750, can help you in getting loans at the lowest interest rates. But what happens when your credit score is low? You might still get a loan but at a higher interest rate at best, or your loan application maybe rejected outright at worst. Here are the things to keep in mind if you are planning to take a home loan when your credit score is poor:
Be ready to pay a higher interest rate
Some lenders allow home loans to borrowers with poor credit scores, but they are likely to charge a risk premium. So, if you’re eligible for such a loan, it’s critical to assess the affordability of the EMIs with the higher applicable interest rate. Banks usually recheck the credit scores of borrowers once a year and reset the risk premiums if required. The point being, you should aim to improve your credit score even if you get a loan with a higher rate at the beginning so that the risk premium gradually gets lowered during the course of the loan.
See if you could reduce your LTV
Reducing your loan to value (LTV) ratio can also help in getting a home loan when you have a poor credit score. Lowering the loan amount with a lower LTV reduces risk for the lender as it will have less skin in the game. However, that would also mean higher out-of-pocket expenses for the borrower. That being said, if your credit score is way below the lender’s comfort level, it may not sanction a loan even if you lower the LTV.
Consider getting a co-applicant
Having a co-applicant with a good credit score can significantly improve the chances of getting a home loan application approved if one of the borrowers has a low credit score. The co-applicant’s income and credit score are also considered to determine the combined repayment capacity; therefore, it can also help if the income of one of the borrowers isn’t up to the mark. You can include your spouse, parents, or an earning brother as a co-applicant in your home loan. Keep in mind, brother-sister, sister-sister, a parent with an unmarried daughter are a few relationships that are usually not allowed as co-applicants in a home loan.
Check for a loan with an HFC
Banks usually have more stringent norms in terms of borrowers’ credit scores than housing finance companies. So, if you’re not getting a home loan from the banks because of your low credit score, you can always check with an HFC. Home loan interest rates are usually slightly higher with HFCs compared to banks; however, many HFCs have lowered their interest rates in the recent past to remain competitive.
HFCs are also known for hassle-free paperwork, but they might take longer to pass on the benefit of any interest rate fall than banks as their rates are benchmarked internally as opposed to the latter.
Negotiate with your existing lender
Sometimes negotiating with your existing lender can help you in getting a home loan even if you have a sub-par credit score. During the negotiations, you may offer a lower LTV resulting in a lower loan amount or any other eligible collateral or proof of increased income or have a co-applicant to strengthen your case. However, if your credit score is way below the bank’s requirement, such negotiations may not work at all.
Reduce your existing small debts
If you have existing small debts, repaying them before applying for a home loan can also help in improving your credit score. You should ideally wait for your credit score to get updated before applying for a home loan. Repaying existing debts would also increase your repayment capacity and help you to get a bigger loan amount.
The writer is CEO of BankBazaar.com