Thinking about buying a home? Congratulations! This is a big life moment, one that will require a lot of attention to detail, responsibility and research. And good for you for already beginning your research. But while you might feel ready to make the leap and invest, there still are factors that can hold back even the most qualified of potential homeowners. One of the most common of these hurdles is bad credit. Having a bad credit score can make mortgage lenders weary of offering you money and cause your interest rates to soar through the roof. But if you're just getting acclimated to the idea of buying a home and don't think your credit is where you want it to be, don't worry, there are things you can do to improve your score, whether you're looking to change from bad to good, or good to better. Here, everything you need to know about your credit score if you're looking to buy a house.
Put in a nutshell it is the way TransUnion CIBIL maintains records of an individual’s payments and loans. It helps the credit institutions judge the risk, if the loan or credit is granted and the likelihood of paybacks. This in turn decides the approval or rejection of applications. Essentially, a CIBIL score is an indicator of your credit health summarized into a three digit number
If only it were that simple. When trying to answer the question, What credit score is needed to buy a house? there is no hard-and-fast-rule. Here’s what we can say: if your score is good, let’s say higher than a 700, then you’ll probably qualify. Of course, that assumes you’re buying a house you can afford and applying for a mortgage that makes sense for you. Assuming that’s all true, and you’re within the realm of financial reason, a 700 should be enough to get you a loan.
Anything lower than 700 and all bets are off. That’s not to say that you definitely won’t qualify, In these cases, lenders rely on other criteria — reliable source of income, solid assets — to override the low credit score.
If we had to name the absolute lowest credit score to buy a house, it would likely be somewhere around a 500 credit score. It is very rare for borrowers with that kind of credit history to receive mortgages. So, while it may be technically possible for you to get a loan with a score of, say, 470, you would probably be better off focusing your financial energy on shoring up your credit report first, and then trying to get your loan. In fact, when using SmartAsset tools to answer the question, What credit score is needed to buy a house?, we will tell anyone who has a score below 700 to wait to get a home loan.
When you are planning on investing in a new property it goes without saying that you must have also considered in which institution you would apply for a home loan. Presently, 80% of the approved home loans are based on CIBIL, which is trusted to be a pivotal index of an individual’s financial disciplines over the past 36 months. CIBIL has access to data on 400 million bank customers, which it uses to generate scores ranging from 300 to 900. And home loans are generally sanctioned for applicants with scores greater than 750.
Clear pricing brings in transparency.
We started giving discounted pricing based on the bureau score of the applicant since April 2016. Only few banks are providing such benefit. Some banks offer a discounted price up to their MCLR (marginal cost of lending rate) on their card rates to select customers. In such cases, the applicant has to bargain to get a lower rate on card rates.
To implement risk-based pricing, we analysed our delinquency data. The delinquency rate was only 0.07% of the accounts having a credit score above 760, while 0.35% delinquency was seen in accounts with a score below 760.
Also, around 19% of our loan customers had a score of less than 725 before April 2016. After we launched risk-based pricing, this share has come down to only 1%. Before April 2016, our sourcing for customers with a score above 760 was 31%, which is now up at 56%. At present, we are offering risk-based pricing in all retail loans, except education loans.
Risk associated with a customer goes down with a good credit score. Clear pricing brings transparency.
There is no clear answer on why this type of risk-based pricing started only recently. But what needs to be noted is that things have been improving over time and banks have been focussing on credit discipline of borrowers and chasing customers with a good credit score. This is why it is becoming more pronounced now. Also, public sector banks are competing with private sector banks for the retail lending space.
What we are trying to do is give an instant discount on the card rate of a loan to a disciplined customer. I think this will be an instant gratification to the customer. That is the philosophy behind this move. This offering is only applicable to home loans and I think this will further give a boost to our retail lending. But this is the first step in the risk-based lending direction. Anyway credit score is a vital parameter to look at while giving a loan, so we are thinking about personal loans as well.
It will become a norm across the industry in some time. Ultimately, a customer with low risk will get low rate of interest.
Risk-based pricing is a reality across the globe. Lending institutions offer better terms to customers with good credit score and would charge a higher rate on trade lines that carry a higher risk to mitigate the probable losses. In fact, the Reserve Bank of India in the past has issued a notification that suggests banks to levy interest based on the associated risk. Eventually, all lending institutions should be extending risk- based pricing to retail customers.
Borrowers with a good credit profile get significant benefit since while generally there is no direct correlation between the interest rate and credit score, interest range is a reality even now. For example, an unsecured personal loan interest can vary from 12% to 24%. Consumers are today far more informed. The awareness on maintaining a good credit profile is helping them negotiate lower rates. If a person is able to secure a loan with a lower rate of interest, it will result in a large saving. Even a small change of about 50 basis points can lead to substantial restraint on interest being paid.
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