A healthy credit score is the most important factor which decides the extent of home loan you can get. In fact, this would even determine if you are eligible to get a home loan at all or not. But you could get a home loan despite a poor score. Don’t believe us? Here’s the case of Purab.
Purab wished to buy a property worth Rs. 80 lakhs in the suburbs. He approached his bank for a home loan of Rs. 64 lakhs, which was 80% of the cost of the property. But he was in for a rude shock when his bank stated that he was not eligible for that high an amount. Purab was a simple, middle class, law abiding citizen of the country.
Why then was he finding it difficult to get funding for his property?
Purab had missed out on timely payment of his credit card bills a couple of times about 2 years ago. Purab had not even remembered this detail when he approached his bank for the loan. But his credit score had captured this information and now he could not get a home loan for the amount he wanted.
What then is the way out for Purab to fund his property?
Here are some ways you can get a home loan for people with bad credit score:
- Opt for a lower FOIR: The Fixed Obligations to Income Ratio (FOIR) calculates the total amount of fixed obligations you have in a month (including the EMI payment of the home loan you apply for) as a ratio to your monthly income. Banks fix this ratio and restrict the loan amount such that the EMI payment entails a FOIR which is lower than that prescribed by the bank. If the bank refuses a home loan of a high amount, you could opt for a lower FOIR, which in effect means a lower loan amount.
- Opt for a lesser LTV: The Loan to Value (LTV) is another ratio adopted by banks, which captures the loan amount as a ratio to the total property value. RBI stipulates that banks cannot lend more than 80-85% LTV. However, banks follow their own benchmarks. In the above example, Purab had asked for Rs. 64 lakhs loan, which worked out to be 80% LTV. He can instead opt for a lesser LTV at, say, 65% or 70% and increase his own contribution.
- Add a guarantor: Another way to obtain a home loan with a poor credit score is to add a personal guarantee of a third person, who has good financial standing. The healthy credit score of the guarantor can help you get a home loan, even if your score is a bit low.
- Offer interim security: A home loan is given based on the property you buy, which acts as a primary security. One way of increasing the loan amount you get is to offer another security as an additional interim security. This helps the bank to give you a loan amount which is higher than what you are eligible for solely based on your credit score.
- Use existing clean track repayment to get the loan: A clean track record of repayment of other existing loans can help a great deal in getting the home loan. Many banks offer preapproved loans if you have a clean track loan repayment history. Similarly, some banks offer a high LTV on certain loans if you demonstrate a clean track record of repaying other existing loans. In the same way, if you have been repaying your other loans or dues on time and can display a clean track record, you can use this as a leverage to request for a higher home loan amount.
- Compromise with rate or tenure: A borrower with an impeccable credit score gets the best interest rate or the longest loan tenure. Atleast, you can negotiate on such terms if you have a healthy credit background. If you have a poor credit score and the bank does not grant you a loan on these grounds, you an negotiate with your bank to grant you the home loan on a higher interest rate or for a shorter tenure.
All the above techniques, except the clean track repayment option, are drawbacks for the borrower in some way or the other.
For example, opting for a lower FOIR or LTV gives you a lower loan amount. Similarly, compromising on the interest rate or loan tenure will increase your cash outflows.
However, when your bank refuses you a loan, these techniques can be life savers for you. When your credit score improves, you can negotiate for a higher loan amount or for better interest rates and longer tenure. Purab chose to reduce his tenure, what route did you choose?
YOU MAY ALSO WANT TO: Figure out the best EMI for you before you approach the bank – Home Loan EMI Calculator