You wish to apply for a Home Loan to buy your dream home. You are wary of asking for one because you have recently faced rejection for a Credit Card application. On inquiry, you find out the reason for denial is a low credit score. How do you deal with the matter now? You need not worry because the banks have a different way of looking at credit scores while coping with mortgage loan applications. Let us not look at how lenders use the credit score for approving Home Loans. You can use the following tips to improve your credit score.

How Lenders Use Your Credit Score For Approving Mortgage Loans

Get your Credit Report and go through them

You can procure your credit report free of cost from any of the four credit bureaus. Mostly banks refer to the TransUnion CIBIL reports. Hence, it is better to obtain your credit report from CIBIL and go through it.

The first thing to look at in a credit report is your credit score. Remember, banks stipulate a minimum credit score of 750 while processing Personal Loans and Credit Cards. At the same time, a score of over 600 is acceptable for a Home Loan. Why is there such a massive difference in the outlook? The reason is straightforward. The Credit Cards and Personal Loans are unsecured loans whereas adequate collateral secures the mortgage loans.

What do the Lenders look for in a Credit Report?

The lender looks for three main things while processing a mortgage loan application.

  • Your income – It should be sufficient and steady/regular
  • Your down payment – It determines your contribution/margin
  • Your credit history – Your repayment record should be satisfactory

There are other factors in the credit report that play a role in the Home Loan approval.

  • The Credit Utilization Ratio (CUR) – It is the ratio of the outstanding balance in your account to the sanctioned limits. A high CUR is a sign that you utilize most of the credit given to you. Maintain the right balance, especially in the case of Credit Cards. The ideal CUR in case of Credit Cards should be around 25%.
  • Your defaults in payments – The credit report presents a detailed picture of your repayment history on a monthly basis. It shows the actual number of days of default. Lenders do not give much importance if the default is for a day or two. If the default is on a regular basis, the lenders become cautious.
  • The ratio of the unsecured loans to the secured loans – The lender is more concerned about how you repay the unsecured loans. A proper repayment history of unsecured loans can work in your favor.
  • The number of credit inquiries matter – Limit your credit inquiries to the minimum. You have faced one rejection of your Credit Card application. Applying again to another bank is not going to solve the problem. The chances of rejection are yet With every such inquiry, you lose valuable points thereby pulling your credit score down. On the other hand, try to make regular payments on your other loans and improve your credit score.

How do you improve the Credit Score?

  • Make your Credit Card and loan instalments on time
  • Maintain your CUR below 25%
  • Limit your number of credit inquiries
  • Maintain the right balance between the secured and unsecured debt
  • Check your credit report for inaccuracies and dispute them immediately
  • Maintain a gap of at least six months after your Credit Card rejection before you apply for the mortgage loan
  • Ensure that your closed accounts do not figure on your credit report

Ascertain your Debt to Income Ratio

Your repayment capacity is the primary requisite for the approval of any loan. Banks follow the concept of take-home pay. The take-home pay is the net payment you have in hand after accounting for all your loan instalments and other mandatory liabilities. The appropriate take-home pay should be in the region of around 50%. Banks are liberal with mortgage loans as they go up to even 40% if your other credit parameters are okay.

Note that banks do not give importance to factors like performance bonuses, increments, and so on. They are income of a variable nature. Check out your eligibility before you Apply for a Home Loan. You can make a more substantial down payment and reduce your Home Loan burden. You caneven consider closing some of the high-cost loans. It can have a positive effect on your credit rating.

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