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A home loan is provided to customers to help them buy their long-time dream house. Though it is a secured loan where the home is the collateral banks still look for borrowers with good credit score to apply for the loan. This is because the home loans are a long-term loan which the banks invest on the borrower for a long time. If the borrower is not able to pay the loan the bank has to take up the tiresome and costly process of seizing and auctioning the property.
To avoid all this, banks approve most home loans for people with good credit score. But people with bad credit score need not get discouraged as there are ways you can still get home loans from banks if your underwriting process goes well.
The underwriter here will verify the risk the lender will take on providing you with a home loan. For their assessment the underwriter takes into consideration the following factors
1. Salary:Your salary is reviewed by the underwriter where the work you do, the company you work for, the salary you earn, the length of your employment and the scope of advancement in your job. All this is taken into consideration to determine your loan eligibility.
2. Other debts and liabilities: The underwriter will check your other debts and liabilities by accessing your credit score and credit report. The underwriter will get a very good idea and details about your debts and your payment history of debts from your credit report. If you had any defaults on payment even once will be taken into consideration.
3. Marital status: Your marital status ad if you have children, if your spouse is working and their jobs will also be under scrutiny if they are a joint applicant.
4. Other verifications: First the underwriter verifies if all the information you have provided in your application form. They will contact your place of work to verify if you really do work there as well as if your designation and if possible, salary also match. They will also check your address phone number etc.
5. Home appraisal: This is the stage where the underwriter assesses the home you are going to buy. They will scrutinize every inch of the property documentation, the property history to make sure no one else has claim on the property and also see if the property price tag is right comparing it with similar properties. This whole process is called home or property appraisal, which done to make sure the bank does not get into any trouble and there are no surprises.
If these factors are good and you are found to be capable of repaying your loan you still have a chance of getting a home loan.
1. Improve credit rating
Here Rupesh only missed 3 payments because he forgot to pay the EMI but if you have a loan or credit card account that says settled which means you and bank have to come to an agreement to write off your debt as you cannot continue paying it. More than missed payments, the “settled” remark on your credit report is more damaging. Get rid of such remarks by paying back the dues and change to “closed” account. This will improve your credit score very fast. This is to make sure you get a loan with lower interest rate as credit score is inversely proportionate to interest rate. i.e. More the credit score lesser the interest rate.
2. Look for alternate sources
If you are in Rupesh’s situation you could go for other non-conventional means for securing a loan. Like instead of a bank you could opt for NBFCs as the eligibility criteria defined by NBFCs are different from bank. NBFCs calculate the loan and approval based on different set of criteria apart from credit score.
3. Request lower Loan to Value (LTV)
LTV is the amount of loan you are requesting the bank based on the property value. RBI stipulates that banks should not give loans for more than 80% - 85% of the property. But, banks have their own limits and benchmarks where in some cases banks give loans for 90% to 95% of the home.
In Rupesh’s case he could ask for lower loan amount and increasing the down payment or his share which the bank will be satisfied.
4. Go for lower FOIR
The Fixed Obligations to Income Ratio (FOIR) calculates the total amount of fixed obligations you have in a month which includes the EMI payment of the home loan you apply for, as a ratio to your monthly income. Banks freeze this ratio and restrict the loan amount such that the EMI amount is less than the recommended or prescribed amount of the bank. It basically means you will be eligible for lower loan amount.
5. Joint application or reference
In the case of Rupesh his wife has a credit card for which she has been due diligent and paying the dues regularly. This in turn has her with a very healthy credit score. Rupesh can go for a home loan as a joint undertaking with his wife as the primary borrower. This way their income together is taken into consideration and his wife with a better credit score can get a better loan offer.
The other option is get references who are highly reputable who can vouch for you going a long way in helping you attain the home loan.
6. Offer interim security
Home loans are generally secured loans where the house bought will act as the collateral for the loan. Since Rupesh has ad credit history he can go for additional security like fixed deposits, another property jewels etc.
7. Go for a higher rate of tenure or lower tenure
This needs to be your last option as you are accepting a lot of disadvantage on your side where you are accepting higher rate of interest or a lower tenure where in both cases you will have to dish out extra cash each month.
The bank does not disturb the borrower after the first month default. But after the second month default the bank will send the borrower a reminder letter to pay the loan. Only after the third default that the bank has the right to enforce “The Securitization and reconstruction of financial assets and Enforcement of Security Interest act’2002” to auction the home.
Again, the bank will send a legal notice asking the borrower to pay the loan amount. If the borrower does not repay even after this they will send another letter detailing how much they have valued the property and when they are going to auction the home, which will be set after 1 month of the notice.
As you can see the bank gives the borrower 6 months before going for auctioning the property. This time can be utilized by the borrower to meet the bank officials to solve the issue.
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