Effects of Bad Credit History on Your Home Loan
Last Updated : Nov. 12, 2020, 8:07 p.m.
Defaulting on your ongoing loan or credit card payment can worsen your credit history and decrease your creditworthiness. The credit score will most likely be poor and make lenders reject your credit applications. But does it hold true for all the credits? Maybe not! Home loans can be approved for individuals with a bad credit history too. It’s because a home loan is a secured loan that comes against an equitable mortgage of the property you buy.
In case you default on loan payments, the lender can seize your home and sell it to recover the pending dues. Despite all these, a bad credit history is not warranted for home loan customers. Their cost will rise along with less disbursal in such a situation. Let’s talk about these in detail.
How Will the Home Loan Cost Rise for Individuals with a Bad Credit History?
The sad part for individuals seeking a home loan with a bad credit history is the higher interest rate that lenders will charge. Higher rates will not only push up the monthly obligation i.e. EMI but also the overall interest outgo. And when you talk about a home loan that runs for as long as 30 years, an increased rate could lead to outgo beyond your imagination!
But How Much Will the Interest Rate Rise for Such Individuals?
It will depend from lender to lender and how they perceive different credit scores. While some lenders could hike the interest rate to the maximum extent for individuals with a credit score below 650, others could have the maximum rates for individuals with scores of less than 600. So, we have shown you below the lowest and highest home loan interest rate for individuals with a good and bad credit score, respectively. This will help you get an idea of how the home loan interest rate works based on your credit score .
| Lenders | Lowest Interest Rate (In Per Annum) | Highest Interest Rate (In Per Annum) |
|---|---|---|
| LIC Housing Finance (LIC HFL) | 6.90%-7.30% (For individuals having a credit score of 700 and above) | 7.60%-7.90% (For individuals having a credit score of less than 600) |
| PNB Housing Finance (PNBHFL) | 7.50%-7.95% (For individuals having a credit score of 800 and above) | 8.80%-9.20% (For individuals having a credit score of 650 and less) |
| Bank of Baroda | 6.85%-6.90% (For individuals having a credit score of 775 and above) | 8.20%-8.25% (For individuals having a credit score of 700 and less) |
| Bank of India | 6.85% (For individuals having a credit score of 760 and above) | 7.15% for Salaried 7.75% for Self-employed (For individuals having a credit score of 675-724) |
Note – Almost every lender consider credit scores to set interest rates. But not all may specify the same on their website
Let’s Check the Difference of Cost for Borrowers Having a Good and Bad Credit History
The difference in interest rates shown above is a sign of the things to expect. But it does not show the eventual cost of your loan. Here, we will take an example and calculate the cost difference using the Home Loan EMI Calculator .
Example – Mihir and Akash apply for a home loan of INR 50 lakh for 20 years. While Mihir gets an interest rate of 7.35% for his credit score of 785, Akash is offered 8% as his credit score is below 650. So, how much more will Akash pay?
Well, Mihir will pay an EMI of INR 39,822, which will lead to a total interest outgo of INR 45,57,354 over 20 years. In contrast, the EMI and total interest outgo for Akash will amount to INR 41,822 and INR 50,37,281, respectively.
Akash is set to pay INR 4,79,927 more than Mihir over 20 years even as the difference in the interest rate is well below 1%.
It just goes to show the importance of a good credit history for borrowers.
Home Loan Disbursal Could be Less with a Poor Credit Score
Lenders disburse home loans to individuals based on the value of the property. Loans upto INR 30 lakh, above INR 30 lakh to 75 lakh and above INR 75 lakh are given upto 90%, 80% and 75% of the property cost. This means you need to pay 10-25% of the property cost. But there’s a word ‘Upto’, which means the maximum extent and not a flat disbursal amount. In case the credit score is bad or the lender finds a problem in your credit history, you could get less disbursal. This could happen despite you earning enough to pay the EMI for a higher loan amount.
If you have extra savings, no need to worry, in fact, it could be a blessing in disguise! The reduction in the loan amount will reduce your interest outgo too. But if you don’t have extra savings by the time you apply for a home loan , you may have to wait longer for your dream home! So, manage your ongoing credits efficiently, take your credit score to a high, and enhance your home loan eligibility.
Lenders Could Reject Home Loan Balance Transfer Applications for People with a Bad Credit History
Many home loan borrowers switch their existing outstanding balance to another lender at a lower interest rate. The process, which is known as balance transfer, results in enhanced savings for such borrowers. If you do within 2-5 years of taking a home loan and at an interest rate lower than the current one by even 0.50-1%, you could save more than INR 2 lakh. But a home loan balance transfer will require a good credit score and a sound credit history. And, if these are not good, the new lender could reject a balance transfer application.
Conclusion
A bad credit history does not stop you from accessing home loans. But the cost can be higher in such a case. Given the expected long home loan tenure, excess payment due to a higher rate of interest is not advisable. So, if you are eyeing a home loan after some time, pay your current loan or credit card dues without fail. A good credit history will ensure lower rates and lessen your obligations.