Investing in assets or even buying a liability requires you to have a large amount of capital in hand. This usually seems impossible with a single source of income due to monthly expenses and other extra expenditures. This is when individuals choose to apply for a loan. No matter what kind of a loan you apply for, you must make sure that you have the capacity to repay the loan amount on time. The private lenders of even the financial institutions like banks confirm your repayment capacity by asking for certain documents as proof. These documents can primarily include your salary slips, bank statements, income tax returns, and credit score.

Your credit score plays an important role while the banks decide whether to grant the requested loan amount or reject your application. A credit score is a three-figure number that tells the lenders how often have you requested the loan amount and have you been repaying the loan amount on time. The financial institutions especially consider the credit score while the borrower is applying for a home loan. To get a home loan approved, a decent credit score is needed for a first-time homebuyer.

Check out the below mentioned major reasons why lenders consider your credit score: 

1. Communicates Your Credit Behaviour

The previous loans that you have taken which are or are not being paid currently tell the lenders how you handle your credit and repayments. Your credit score gets calculated depending on how many loans you have taken and how you are using a credit card. This gives an insight to the lenders on how much you value your credit and how punctual you are in repaying it. Paying your credit card bills and previous and current loans timely without defaulting allows the lenders to grant the loan easily. 

2. Your Repayment Capacity

While applying for a home loan, a borrower is required to prove their eligibility to have the loan amount granted. Lenders have a look at your income sources and consistent cash flow to check if you have the capacity to repay the loan amount. Lenders require you to comply with the minimum income requirement to ensure that you will be able to manage your monthly expenses along with repaying the loan. If you do not have multiple sources of income but have maintained a decent credit score, there are chances that the lenders will grant you the loan.  

How can you improve your credit score?

Thecredit score needed for a first-time home buyer should be a minimum of 750 points out of 900. Ensuring that you do not have any outstanding debts is a great way to manage your finances and maintain a decent credit score. Not having any outstanding loans to be repaid communicates that you are taking those minor or major loans but also paying them off on a monthly basis. This can help you get your loan passes quickly. Repaying your debts without defaulting or missing the EMIs builds the trust of lenders in your repayment capacity.

While applying for a home loan, it is beneficial to get in touch with a financial advisor who can efficiently guide you through the loan application procedure!

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