High-value home loans: Enhance your credit score to boost eligibility

Engage a property lawyer to carry out title and other checks for smooth approval

The average home loan size is growing bigger. A recent study by credit information company CRIF Highmark reveals that nearly 30 per cent of new home loans sanctioned between April and June 2023 were of above Rs 75 lakh. Loans between Rs 35 lakh and Rs 75 lakh constituted another 31.4 per cent while the balance was in the sub-Rs 35 lakh bracket.
 

Hurdles buyers must cross
 

Issuing loans of higher value entails more risk. “The lender has to bear concentration risk in such loans and hence undertakes a higher level of scrutiny,” says Ratan Chaudhary, head of home loans, Paisabazaar.
 

FOIR: Lenders assess a borrower’s income eligibility through the Fixed Obligations to Income Ratio (FOIR). “Your FOIR cannot exceed 40 per cent. Existing EMIs on various loans reduce the loan amount you are eligible for,” says Adhil Shetty, chief executive officer (CEO), BankBazaar.com.
 

Credit score: A borrower’s creditworthiness is evaluated based on their credit score and history, which reflect borrowing behaviour. A credit score of above 800 gets you the best rate.
 

Quality of collateral: The property serves as the collateral. “Lenders conduct extensive due diligence, examining documents such as Real Estate Regulatory Authority (RERA) registration, copy of the approved plan, occupation certificate, and possession certificate. They also vet the previous chain of title documents. In older properties, they verify the latest payment receipts for society maintenance, property tax, and utility bills. They also search at the registration office to see whether the property is affected by a mortgage, litigation or other encumbrances,” says Suresh Palav, partner, IndiaLaw LLP. These measures allow the lender to enforce its rights in case of a default.
 

LTV: For loans above Rs 75 lakh, the Loan-to-Value (LTV) ratio is capped at 75 per cent (property value does not include registration charges and stamp duty). “Various factors, including repayment tenure, credit score, and other checks by the bank, could lower the LTV,” says Shetty.
 

How to improve loan prospects
 

Enhancing your credit score is the key to improving loan eligibility and securing a favourable interest rate. “Repay existing loans on time. Do not overleverage and avoid seeking another loan for at least six months before applying for a home loan so that you do not appear credit hungry to lenders,” says Shetty.

 

Paying off outstanding credit improves your FOIR and increases the home loan amount you qualify for. Closing a loan, however, may cause your credit score to fall by a few points. Time such closures four to six months prior to the loan application to allow your credit score time to recover.  
 

Get a co-borrower to enhance eligibility. “This could be your spouse, parents, or unmarried siblings,” says Chaudhary. (Bear in mind, however, that you may not always remain double-income. Your spouse or you may stop working to have children, study further, take care of elderly parents, and so on, so borrow conservatively.)
 

Most banks give a five basis point (0.05 per cent) lower rate to women applicants, so having a woman co-applicant can be beneficial.
 

Palav recommends borrowers undertake similar due diligence as lenders to avoid legal issues that could hinder loan approval.
 

Precautions to exercise  
 

Before applying for a large ticket size loan, ensure you have at least 25 per cent of the property’s value as margin money, plus additional funds for registration, stamp duty, and furnishing costs.
 

Gauging the property’s resale prospects is crucial, especially for large loans, according to Chaudhary. It could be beneficial if you need to liquidate the house and exit the loan due to financial difficulties.
 

Finally, loan prepayment can help you lower your interest cost. Shetty suggests going with a lender whose terms and conditions for prepayment are liberal: it should allow frequent prepayments, even of small amounts.