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How To Get A Home Loan With Bad Credit?

Owning a house and having a stable life is a dream of many Indians. Besides a financial decision, it is an emotional investment. But, the soaring costs of residential properties like apartments, flats, and villas in several parts of the country make it hard for many to purchase a home with their income or savings alone.

As a result, applying for home loans has become necessary for those who want to have their dream house. Banks use CIBIL scores to decide whether to approve a home loan application. A low credit score or poor credit history will likely lead to rejection. A high CIBIL score will speed up the loan process. But if your CIBIL score is low, it cannot be easy to get a loan. However, you can still get a loan. Do you want to know the process? Let’s get started.

Ways To Get A Home Loan With Bad Credit

Having a good credit score is typically a requirement for getting home loans, but financial troubles can often lead to poor credit histories for many individuals. As a result, those with bad credit may find it challenging to secure a home loan as banks, and financial institutions consider them high-risk.

However, it is essential to note that despite the difficulties, it is not impossible to obtain a home loan with bad credit. There are alternative options available, such as:

Opt For Lower FOIR

Banks use the Fixed Obligations to Income Ratio (FOIR) to determine the maximum loan amount you can afford. It is calculated by dividing your total monthly fixed obligations, including the EMI payment for the applied property mortgage loan, by your monthly income.

Banks set a limit on FOIR, and the loan amount is limited to ensure that the EMI payment does not exceed the set limit. If your loan application is rejected due to a high loan amount, you can opt for a lower FOIR, which means a lower loan amount.

Applying For a Loan With Lesser LTV

Banks use the Loan Value (LTV) ratio to determine the loan amount based on the total value of the property. The Reserve Bank of India (RBI) has set a maximum LTV of 80-85% that banks cannot exceed. However, banks may have their benchmarks for the same. If your loan application is rejected due to a high loan amount, you can try and re-apply with a lesser LTV.

Offer An Interim Security

To secure a property mortgage loan, purchasing property is the primary security. However, to increase your loan amount, you can offer additional interim protection. This extra security can help the bank sanction a higher loan amount based on your credit score.

Get a Guarantor

One way to increase your chances of getting approved for a home loan is by getting a personal guarantee from a third party with a solid financial reputation. It could be anyone, like your friend, family member, or relative. Even if your credit score is not the strongest, having a guarantor with a healthy credit history can potentially offset any concerns the lender may have about your creditworthiness.

Opt For a High-interest Loan

Borrowers with excellent credit often receive the most attractive home loan interest rates and loan terms when applying for a home loan. If you have an excellent credit history, you may still be able to negotiate better loan conditions with lenders. If, on the other hand, your credit score is low and you are unable to obtain a loan on the most advantageous terms, you can try bargaining with the bank for a higher interest rate or a shorter loan tenure that fits within your budget.

Conclusion

Poor credit score and insufficient income are main reasons for loan rejections. It is important to remember that credit scores do not play a vital part when it comes to house loans.

You can still receive a home loan with a negative credit score by haggling with lenders for a loan.

Also Read: Secured Loans vs. Unsecured Loans: What’s the Difference?

It is important to note that having a strong credit score can increase your chances of hassle-free loan approval, but it does not mean that you can’t have a loan with a poor credit score. The dream of home ownership is still possible for you but with careful planning and good commitments with lenders.

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