Some Common EPIC How-To Questions for EPIC Answered! Part 2

credit-scoreThe pre-requisites for the approval of any loan are as follows:

a) You should adhere to KYC norms
b) You should satisfy income norms and have a decent debt to income ratio
c) A good credit score

What is a good credit score?

It depends on the situation. If you apply for a Personal Loan or a Credit Card, a score in the region of 750 and above is acceptable. At the same time, the criteria are different if you apply for a Loan Against Property or a Home Loan.

Why is it so?

Credit Cards and Personal Loans are unsecured loans. The banks do not have any security to fall back on in case of default by the borrower. Therefore, the risk perception is high. Hence, banks look for the creditworthiness of the borrower. The only way to do so is to check out the credit history. A good score is an indication that the borrower is a trustworthy one with a record of making regular repayments. The higher the score, the more is the creditworthiness of the borrower.

In case of Home Loans and Loan Against Property, the bank has adequate collateral to fall back on if there is default on the part of the borrower. The bank can possess the security and proceed for auction to recover their money. These are secured loans carrying a lower perception of risk. Hence, the banks have the liberty to relax the eligibility norms by way of reducing the threshold of the credit score requirement. Therefore, the banks consider a credit score of 600 and above as a good one while processing secured loans.

If you have a credit score of below 700, you should not worry because you are still eligible for a Loan Against Property. However, you should satisfy the other norms such as income and repayment capacity (debt to income ratio).

What is the concept of the Debt to Income Ratio?

The debt to income ratio is the proportion of the monthly commitments towards your obligation to your net income. Different banks have different perceptions of the debt to income ratio. It also depends on the loan you propose to take. Your income is also an important consideration.

This example will prove why it is so –

Ram has a net monthly income of Rs. 30,000, and his monthly debt commitments are Rs. 12,000. Under such circumstances, the debt to income ratio comes to 40%. His neighbour, Shyam has an income of Rs. 80,000 with his monthly debt commitments being Rs. 40,000. Shyam has a debt to income ratio of 50%. However, the vital point to note here is that Shyam has a higher disposable income than Ram in spite of having an adverse debt to income ratio.

Therefore, banks look at the debt to income ratio from various angles instead of sticking to the actual proportions. The ideal debt to income ratio should not exceed 40% to 50% in any case.

What are the options available to get LAP if you have a credit score below 700?

We have seen that banks are liberal with the credit score concept in case you apply for secured loans. They become rigid only when you apply for a Personal Loan or a Credit Card. In case of Loan against Property, a credit score of 600 to 650 is also acceptable.

The question now veers to Where to Get a Loan Against Property. You can access the website of loan service providers like MyMoneyMantra and look at the various LAP products of different banks. You should pay more attention towards the following factors.

a) Your income and your debt levels: It is because most of the banks stipulate your take-home-pay to be not less than 50% after catering to the proposed EMI (Equated Monthly Instalment) of the LAP.
b) The value of the property: Banks approve a maximum of 90% of the value of the property as LAP. In case you have a Home Loan outstanding against the same property, the method of calculation is different. Usually, banks set aside a margin of 25% for the Home Loan. The residual value of the property is available for the LAP. In such a case, banks generally approve 50% to 65% of this residual value of the property.
c) You have to create a new equitable mortgage even if the property is under mortgage to the same lending institution.
d) Compare the rates of interest of the LAP of different banks. Note that these rates are higher than the home loan interest rates. If you have a home loan outstanding and propose to offer the same property as collateral for the LAP, you have to approach your home loan lending institution alone.

In this way, you can search for the best Loan Against Property.

Also Read:  5 Rules to Follow When Purchasing a Loan Against Property

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