It is a dream for many to buy a home. But not many have the capacity to buy a home without home loans. Some may have low incomes. Some may have large, fixed monthly obligations. Some may have defaulted on their previous loans. Some may be nearing their retirement age. All these factors can affect your home loan eligibility and borrowing capacity.
Here are the top 10 tips to improve your credit score for home loan eligibility and increased borrowing capacity.
Tip 1: Add a co-applicant:
If you have a family member who is earning and has a good credit score, add them as a co-applicant. This increases the home loan eligibility and borrowing capacity. The best option is to apply for a home loan with your spouse and/or parents.
Adding co-applicants will not only be a good way to increase home loan eligibility but also a good way to avail of an income tax deduction for home loan interest up to INR 2 lakh each and principal repayment under Section 80C up to INR 1.5 lakh each in their tax returns.
Tip 2: Maintain excellent credit score:
You may have heard bankers discussing credit scores when applying for loans. The credit score is usually between 300 and 900. In India, there are four licensed credit bureaus that prepare credit scores – TransUnion CIBIL, Experian, CRIF High Mark, and Equifax.
The credit score represents an individual’s ability to repay the borrowed credit. While a credit score of 700 is considered good for several types of loans, banks expect a higher credit score of 750 for home loan distribution.
Tip 3: Declare additional incomes:
Many salaried employees do not declare their additional income while filing income tax returns. Non-declaration of additional income may prove to be counter-productive if such an additional income is sizeable. It could prove to be a deal-clincher for several homebuyers who has a low salary or a low credit score or are aged above 45 at the time of availing of a home loan.
Tip 4: Close existing loans:
Many people may have taken a personal loan or a vehicle loan or an education loan. These loans shall reduce your borrowing capacity. Plan to close all these loans at least 1 quarter before you apply for a home loan. Once you close other loans, it may take a quarter or so to reflect on your credit history.
Tip 5: Low Fixed Obligation to Income Ratio (FOIR):
Bankers evaluate your fixed obligations in your take-home salary. These obligations may include expenses for rent, groceries, education fees, loan EMIs, insurance premiums, etc. Keep these fixed obligations to around 40% of take-home salary. A higher FOIR shall reduce your borrowing capacity.
Tip 6: Avoid frequent job changes:
People of this generation frequently change their jobs in search of higher salary packages instead of sticking with a company for a good number of years. They are not aware that frequent job changes shall impact their home loan eligibility. Bankers may categorize disbursing home loans to such people under a risk category. Bankers may either reduce the borrowing capacity or increase the home loan interest rates to counter the risk.
Tip 7: Opt for a longer loan tenure:
Typical home loan tenures are between 12 years to 20 years, while one can avail home loan for a tenure of up to 30 years.
When FOIR is above 50%, bankers may find it difficult to disburse home loans for shorter tenures. Instead, opt for longer loan tenures. Though longer loan tenures shall reduce EMI, it shall also increase the total interest payable over the loan tenure.
Tip 8: Buy a home at the right age:
There was a time when people built a dream home with a retirement amount. Gone are those days. People are now expected to own immovable property even at the time of marriage. But not many earn big salaries at the beginning of their professional career. Their loan borrowing capacities may be lower. Therefore, one must plan to buy a home at the right age.
While there is no written rule on the right age, the age between 27 and 40 is considered the most ideal age as one earns a decent salary for home buying.
Tip 9: Save money for a down payment:
This is a no-brainer for homebuyers. Plan to save a fixed amount from your salary every month. Do this saving for at least 3-5 years before purchasing a home. The more the money one saves, the less the money one needs to borrow from bankers for a home loan.
Tip 10: Choose approved projects by the lenders:
Last but not the least, buy properties that are approved by the lenders. Lenders carry out due diligence on the land title and the project approvals to approve a project. Lenders provide an APF number to the developer for the project.
Home buyers can quote this APF number while applying for a home loan. APF number saves home buyers from the hassle of collecting the legal documents of the project from the developer and verification.
Hope you implement above tips to improve your credit score in order to increase your home loan eligibility. Happy homebuying!
