How does my credit score affect my home loan application?

A good credit score increases your chances of getting loans. Improving it is an important exercise for those seeking credit from lending institutions.

For a salaried or self-employed person with a regular income, it would seem like the easiest thing in the world would be to get a loan. One may need to borrow from the bank or a financial institution from time to time, and to fund a variety of personal and professional initiatives. With all lending institutions laying out the red carpet for customers looking for loans, it would appear that one merely needs to fill out the application form for the loan request to be processed.

But things are never as easy as this. There is an important factor known as the ‘credit score’ that is inherently at the root of all loan approvals. Even when one has the financial wherewithal to make repayments on a home or a business loan, lending institutions might reject the loan application or sanction far less funds. The applicant’s credit score is often to blame for this.

What is a credit score? It is a number derived based on a number of factors in a person’s credit history. These factors include the applicant’s age, the type of credit taken in the past, repayment history and patterns, if any new credit is being applied for, length of credit and total credit repaid. These determine the applicant’s credit score, which lending institutions examine in detail before deciding on approving the loan request. Hence, when you apply for a home loan, the lender will immediately pull out your credit score before proceeding further.

What weakens the credit score? A poor credit history is detrimental to your chances of securing a loan. Unpaid debts on loans and credit cards, erratic repayment patterns, property seizure in response to unpaid debts, etc. can all weaken your credit score. An applicant with a poor credit score is known as a ‘credit risk’ and lenders are cautious about extending credit to them. If the loan application is approved, one might be sanctioned a lower loan amount despite a high income, and at a higher rate of interest.

Can you improve your credit score? Remember that the credit score comes into play before the loan application is processed further, and it is often the starting point of the loan application process. Hence, it is important to clean up your credit history before you apply for a home loan. You can do this by repaying older loans before their tenure is up. Applicants who pre-pay loans are considered low risk individuals. Also take care to repay all credit card bills or cancel those cards that you no longer use – they are also counted in your credit history. Not defaulting on older loans is a key factor – lenders study repayment patterns and are satisfied when repayments are regular. The lender will also check if the applicant has any cheating or forgery cases lodged against him, or if there have been incidents of improper property papers being submitted, or if the documents submitted for the current loan request are genuine or not.

If you are applying for a home loan for the first time, the lending institution will examine if you have any owned assets that you can use as collateral, and what the quality of these assets is.