Are you approaching your 30s and dreaming of owning a home, yet find yourself held back by your current financial commitments? If yes, then to make this dream a reality, home loans can be your saviour. However, the terms of your home loan, including interest rates and loan amount, largely depend on your credit score. A higher credit score adds to your chances of loan approval and also gets you better terms. Let’s explore smart ways to improve your credit score for favourable home loan terms.
Home Loan: An Overview
A home loan is a financial tool that enables individuals to purchase, construct, or renovate a house by borrowing funds from a financial institution. This type of loan is typically categorised as a secured loan, where the property being acquired or constructed serves as collateral. The borrower agrees to pay back the borrowed amount, along with interest, over a predetermined period known as the loan tenure.
The key components of a home loan include the principal amount, which is the actual amount borrowed, and the interest rate, which can be either fixed or variable. The interest rate directly influences the Equated Monthly Instalments (EMIs) – the regular payments made by the borrower to repay the loan.
Home loan tenures can vary and often extend up to 20 or 30 years, offering borrowers flexibility in managing their repayment schedule. The longer the tenure, the lower the EMI, but this also means paying more in interest over time.
Lenders evaluate various factors before approving a home loan, such as the borrower’s credit score, income stability, age, and property value. A high credit score can help get better interest rates and terms.
Home loans also offer tax benefits under various sections of the Income Tax Act in India, making them a financially attractive option for acquiring property. These loans have revolutionised the way people invest in real estate, making homeownership accessible to a broader segment of society.
Ways to Improve Credit Scores to Avail Home Loans
Here are the things you must consider availing yourself of a home loan:
- Understanding Your Credit Score
Before diving into improvement strategies, it’s essential to understand what a credit score is. It’s a numerical representation of your creditworthiness depending on your past financial behaviour. The score ranges from 300 – 900, with anything above 750 considered good.
- Review Your Credit Report Regularly
Regularly checking your credit report is crucial. It helps you identify any discrepancies that might be pulling down your score. Rectifying these errors can give your score an immediate boost.
- Timely Payments Are Key
Your payment history significantly impacts your credit score. Late payments, defaults, and missed payments can harm your score. Setting up reminders or automated payments can ensure you get all the due dates.
- Maintain a Healthy Credit Utilisation Ratio
The credit utilisation ratio refers to the amount of credit you are using compared to your total credit limit. Ideally, this should be at most 30%. High credit utilisation can be seen as a sign of credit dependency, negatively impacting your score.
- Avoid Unnecessary Credit Inquiries
Each time you apply for credit, it results in a hard enquiry on your credit report, lowering your score. Apply for new credit accounts only when necessary.
- Diversify Your Credit Portfolio
A mix of secured (like home loans) and unsecured loans (like credit cards) can positively impact your credit score. However, it’s important to manage them responsibly.
- Longer Credit History Helps
The duration of your credit history contributes to your credit score. Maintaining long-standing credit accounts with good payment histories can positively impact your score.
- Clear High-Interest Debts First
Prioritise paying off high-interest debts like credit card balances. This not only improves your credit score but also reduces the amount you pay in interest.
- Increase Your Credit Limit Responsibly
A higher credit limit can reduce your credit utilisation ratio, provided you keep your spending the same. However, this should be approached with caution and responsibility.
- Seek Professional Help if Needed
If you need help managing your credit, consider consulting with a financial advisor. They can provide personalised advice and strategies to improve your credit score.
A good credit score is your passport to favourable home loan terms. It reflects your financial discipline and creditworthiness, making you a preferred candidate for lenders. If you’re planning to apply for a home loan, Tata Capital offers tailor-made solutions with attractive interest rates and flexible terms. Their home loans are designed to cater to unique needs, ensuring a smooth journey towards owning your dream home. Connect with Tata Capital today to explore housing loan options and step into your new home with confidence.
