In India, many still fail to buy their dream home owing to denial of home loans by banks and housing finance companies. Rejections happen on several grounds such as insufficient income. And some don’t apply for a home loan as their credit scores are bad. But they do inquire – how to get a home loan with a bad credit? In a home loan, credit score does not hold that much relevance as in personal loan and other unsecured loans. However, having a good credit score only boosts your chances of a hassle-free loan approval. In this manner, you may be seen as a ‘trustworthy prospect’ by the bank towards which home loan is going to be sanctioned.
Let’s examine Akriti’s case:
Akriti wished to buy a property worth Rs. 90 lakhs in the suburbs of NCR region of Delhi. She contacted her bank for a home loan of Rs. 70 lakhs, which was 80% of the cost of the property. But she was in a shock as she was denied for such a big amount of home loan as she’s earning a low salary of Rs. 20,000 per month. She too comes from a simple, middle class and law abiding citizen of India.
The difficulties which Akriti has experienced:
Akriti had delayed her timely payments of her credit card bills many times about 2 years ago. She did not even remember this detail when she approached her bank for the loan. But her credit score had recorded this information and now she could not obtain a home loan for the amount she wanted.
But “how to get a home loan with a bad credit?” still remains a question. As explained above, home loan sanction is possible with a bad credit score. Even if the lender rejects your case, ensuring the following can still make it happen for you.
Choose for a lower FOIR
The Fixed Obligations to Income Ratio(FOIR) is calculated as the total amount of fixed obligations one can have in a month(inclusive of the EMI payment of the home loan applied for) as a ratio to your monthly income. Banks prescribe this ratio and limit the loan amount such that the EMI payment necessitate a FOIR which is lower as compared to what was prescribed by the bank. During the refusal of higher loan amount, you could go for a lower FOIR, which in effect implies a lower loan amount.
Choose for a lesser LTV
Another ratio prescribed by the banks is LTV(Loan to Value), which ascertains the loan amount as a ratio to the total property value. RBI specify that banks cannot grant more than 80-85% LTV. However, banks have their own prescribed benchmarks.Going by the above example, Akriti had approached for Rs. 70 lakhs loan, which worked out to be 80% LTV. She can instead choose for a lesser LTV, say, 65% or 70% and increase his own contribution.
Offer interim security
A home loan is sanctioned based on the purchase of your property, which acts as a primary security. One way of augmenting the loan amount you get is to provide another security as an additional interim security. This helps the bank in sanctioning you a loan amount higher than what you are eligible for and that too entirely based on your credit score.
Include a guarantor
You can add a personal guarantee from a third person, who has a good financial reputation. This may be easier for you to get a home loan. The healthy credit score of the guarantor can outweigh your difficulties, even if your score is a bit low.
Use clean track repayments for obtaining the loan
You can profoundly utilize your clear track record of repayments of other existing loans for obtaining the home loan. Many banks provide pre-approved loans if you have a history of clean track loan repayments. Similarly, some banks offer high LTV on specific loans if you show them your clean track record of repaying other existing loans. In the similar manner, if you have been meeting out the obligations of your other loans on time, still you can show it and use it to your own advantage of requesting for a higher home loan amount.
Compromise with rate or tenure
A borrower with an ideal credit score secures the best interest rate or the longest loan tenure. You can, however, bargain with the banks if you have a healthy credit background. If you have a bad credit score and the bank does not sanction you a loan on these terms, you can negotiate with your bank for availing you the home loan on a higher interest rate or for a shorter tenure.
After reading the above article, Can You still buy a home with a bad credit? Well, why not? It’s good to give your best shot in availing home loans.
However, if the bank rejects your home loan application, these techniques can be lifeguards. When you witness an improvement in your credit score, you can negotiate for a higher loan amount or for improved rates and longer tenure. Akriti has chosen for a reduced tenure, so what method did you choose?