So, you are planning to take the final plunge into home buying for the first time. You might be nervous as this is your first purchase in real estate. If your credit is on the shaky ground, then you are very likely to be doubtful about the sanction of the home loan. The process could be a little harder (more expensive), but it is not impossible to secure a home loan with a bad credit score.
It has been noticed on many occasions that home buyers with bad credit are often faced denial from banks and non-banking financial companies on their home loan application. Sadly enough, this is the truth of the financial world. Applicants with good credit score (700 onwards) are considered trustworthy prospects by banks and other financial companies.
If you are not in a rush to buy the home, it makes sense to improve your credit score. But, if your home buying decision is an urgent need, you would have to opt for the various options available for a borrower with a low credit score.
Below are the things you must take into account before submitting a loan application with the bank.
Check Your Credit Reports and Scores
You are advised to check your credit score and report in the early phase of your home hunting process. It will help you gain realistic options for a home loan. In India, most of the banks tend to access your loan eligibility depending on CIBIL (Credit Information Bureau Limited) score. CIBIL serves as a benchmark for Banks and NBFCs.
CIBIL score usually ranges between 300 to 900.
Very Poor: 300-579
Very Good: 740-799
The higher your CIBIL score or credit score, the more options will be for home loans. If your score is below 500, you might have to focus on building your credit first. With a middle score of 500 and above, a government-backed loan could be an option if you can afford a 10% down payment.
Having bad credit is not the end of the world. There are some possible ways where you can secure a home loan even with a low/bad credit score.
Go for Lower FOIR
The Fixed Obligations to Income Ratio (FOIR) is the total amount of fixed obligations one can have in a month as a ratio to your monthly income. Bank requires FOIR and the limit of loan amount such that the EMI payment necessitates a FOIR which is lower as compared to what was prescribed by the bank. If a bank refuses to approve a higher loan amount, you can go for a lower FOIR which implies a lower loan amount.
Choose for a Lesser LTV
Apart from FOIR, another ration prescribed by the bank is LTV (Loan to Value), which establish the loan amount as a ration to the total property value. As per RBI instruction, banks cannot grant more than 80-85% LTV. Nevertheless, individual banks have their own specified benchmarks.
Include a Guarantor
You have the freedom to include a personal guarantee from a third person (having a good financial reputation). This may prove more manageable for you to get a home loan. The healthy credit score of the guarantor will outweigh our financial difficulties.
Now that you know the tricks and ways to overcome your financial obstacles while buying a home, you can still easily fulfill your dream of owning one with a bad credit score.