The credit rating is now an integral part of the home loan process. Maintaining a high credit score of at least 750 can help you get loans at the lowest interest rates. But what happens when your credit score is low? You can still get a loan but at best a higher interest rate, or your loan application may be rejected at worst. Here are the points to keep in mind if you are considering taking out a mortgage with a bad credit rating:
Be prepared 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 are eligible for such a loan, it is essential to assess the affordability of IMEs with the highest applicable interest rate. Banks typically recheck borrowers’ credit scores once a year and reset risk premiums if necessary. The point is, you should aim to improve your credit score even if you get a loan with a higher rate early on so that the risk premium gradually decreases over the course of the loan.
See if you can lower your LTV
Reducing your loan-to-value (LTV) ratio can also help you get a home loan when you have a bad credit rating. Reducing the loan amount with a lower LTV reduces the risk for the lender as they will have less skin in the game. However, this would also mean higher personal expenses for the borrower. That being said, if your credit score is much lower than the lender’s comfort level, they may not sanction a loan even if you lower the LTV.
Consider having a co-applicant
Having a co-applicant with a good credit rating can dramatically improve the odds of getting approved for a home loan application if one of the borrowers has a low credit rating. The co-applicant’s income and credit rating are also taken into account in determining the combined repayment capacity; hence, it can also help if the income of one of the borrowers is not up to par. You can include your spouse, parents or an employed brother as a co-applicant in your mortgage. Keep in mind that sibling, sister-in-law, a parent with an unmarried daughter are some relationships that are generally not allowed as co-applicants in a home loan.
Check a loan with an HFC
Banks generally have stricter standards for borrower credit ratings than housing finance companies. So if you can’t get a home loan from banks because of your low credit rating, you can always check with an HFC. Interest rates on home loans are generally 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 their hassle-free paperwork, but it may take longer for them to pass on the benefit of lower interest rates than banks, as their rates are valued internally as opposed to these. last.
Negotiate with your current lender
Sometimes negotiating with your existing lender can help you get a home loan even if your credit score is below average. During negotiations, you can offer a lower LTV resulting in a lower loan amount or any other qualifying collateral or evidence of increased income or have a co-applicant to strengthen your case. However, if your credit score is much lower than the bank’s requirements, such negotiations may not work at all.
Reduce your existing small debts
If you already have small debts, paying them off before applying for a home loan can also help improve your credit score. You should ideally wait until your credit score is updated before applying for a home loan. Paying off existing debts would also increase your repayment capacity and help you get a larger loan amount.
The writer is CEO of BankBazaar.com