All You Need To Know About Credit Risk Ratings For Home Loans
If you are a home loan borrower, it is important to understand your personal credit reports and credit ratings. Credit risk ratings are very important, for both borrowers and lenders.
'Credit Risk Rating' is an evaluation of the credit risk of a prospective home loan borrower. Credit risk rating estimates a borrower's credit worthiness and ability to repay the loan, and predicts the likelihood of default.
Since people have become increasingly dependent on credit, it is good to understand the determination it takes to maintain a good credit rating.
A look at what credit risk ratings for home loans are:
How relevant are credit ratings?
When you take a home loan, you commit to repay it by making punctual monthly payments for a certain period. A credit score is assigned to the borrower by the credit rating agency to estimate the likelihood of repayment.
In the financial market, many credit rating agencies provide such credit score. Credit rating agencies have their own evaluation systems that are based on a few general factors. Credit scores range between scores that suggest that you are an extremely high-risk home loan applicant to scores that suggest that you are an extremely low risk applicant.
A standard credit score is assigned to home loan seekers with no credit history.
Your lender periodically sends your credit details to the credit rating agency that establishes your credit report. So, do not confuse the bank with the credit rating agency. These are two different entities.
Your credit report will give your lender a clear picture of how you have handled your debt in the past based on certain facts and the probability of how you may handle your future advances. It also tells the lender whether you are worthy of getting any form of credit in the future. Along with the other measures that they undertake, these credit scores are an important assessment tool used by banks and financial institutions to sanction and disburse home loans.
Factors that influence credit scores
- Total Number of Accounts: This includes all forms of credit---home loans, auto loans, education loans, credit cards and other lines of credit, running, closed as well as disputed. It is a myth that a high number of credit can affect the credit score adversely. Applicants with a high number of credit accounts generally have better scores, provided their repayment track is clean. It is, however, advisable not to unnecessarily open new lines of credit. Too many credit accounts can hamper your chances of getting loans/credit cards when you are actually in need of funds.
- Total number of enquiries: Every time you apply for a loan or credit card, and when lenders evaluate your application to decide whether to approve, a loan enquiry is created in your credit report. Too many enquiries can affect your credit score negatively. A high number of enquiries will also imply that you are not able to qualify for the credit. Thus, it is better not to apply for several lines of credit within a short span of time.
- The percentage of payments on time: If the percentage of punctual payments you make on your loan installments and credit cards is high, this affects your credit score positively. Paying credit card bills and installments on time is one of the best ways to maintain a good credit score. This also builds confidence in lenders while extending you new forms of credit, if you are in need.
- Number of disputed accounts: Needless to mention, disputed accounts can have a negative impact on your credit score. Disputed accounts include Non-Performing Assets (NPAs), Foreclosures, Unpaid/Due accounts, Bankruptcies and Special Mentioned Accounts (SMAs). Note that all these disputed accounts take good seven to ten years (or more) to clear from the credit report. So, you will be denied any new form of credit during this period because your credit score will clearly indicate that you have mishandled your credit in the past.
- Credit Card Limit in Use: The credit card utilisation rate (i.e. the total credit card balance divided by total credit card limit assigned) is what your credit card issuer reports to the credit agency. So, you can maintain a good credit score by paying off the credit card balance every month on time. Carrying over a balance from month to month is irrelevant in deciding the credit score. The credit card balances must be paid on time.