The short answer is – Yes. Credit scores do have a role to play in processing of your home loan application. Even though the role might not be as big as in a personal loan, it still is an important factor for lenders.
A good credit history means that you have been repaying all your past loans on time and do not use very high levels of credit (in comparison to your current income).
The whole idea of credit score is to help lenders gauge borrower’s riskiness. It is an indicator of your credit-worthiness and is calculated based on borrower’s financial history. So higher the risk assessed (i.e. lower credit score), higher will be the interest rate offered to loan applicants. In fact, if the score is really poor, the lenders might reject the application in the first stage itself.
Some people feel that home loan is a secured loan and hence, credit scores should not play a role here. After all, lenders have recourse to the property in case of default. But problem with this is that even though lenders have collateral, there is no guarantee that the collateral will be sold easily in auction. This in turn leaves some risk on the table about not being able to recover the full amount with interest
So how do lenders decide what rate to charge from different home loan customers? There are several factors that are used to assess the risk – current income, income stability, profession, age, existing loan EMIs, credit history, etc.
Higher the risk lower will be the credit score and higher will be the interest rate. Similarly, lower the risk, higher will be the credit score and lower will be the loan rates.
So do make it a point to check your credit score before applying for a home loan. If your score in not great, it makes sense to wait for some time and improve your score. It will help you save a lot of money in the long run.