Can you get a home loan with a 500 credit score? Here's the truth

A credit score of 500 is considered as a poor score by leading credit bureaus such as CRIF High Mark, CIBIL, Equifax, Experian among others. Such a score significantly diminishes the likelihood of home loan clearance and approvals in seamless fashion.

Especially if you consider applying for a home loan with mainstream banks and housing finance companies. Most of the leading banks such as HDFC Bank, ICICI Bank, Axis Bank among others prefer applicants with a credit score of 650 or higher with scores above 750 considered ideal for easy and favourable loan terms.

Most of the leading bankers, investment professionals are of the opinion that one should be diligent about building his credit profile and reputation as lenders are extremely careful with lending money to borrowers who have a poor credit score and a weak credit profile.

Atul Monga, CEO & Co-Founder, BASIC Home Loan, on similar lines believes that “If your credit score is low, work on improving it by reducing your overall debt before applying for a new loan. Try to keep your credit utilisation ratio below 30%, and ensure that you pay your loan EMIs and credit card bills on time.

“Avoid making multiple loan or credit card enquiries within a short span, as frequent enquiries can further impact your credit score. Check your credit report regularly to identify and correct any errors, and to ensure all information is accurate and up to date, he added."

What are the challenges with a 500 credit score?

A credit score of 500 indicates a clear pattern of missed payments, defaults or high credit utilisation. It makes lenders view such applicants as high risk individuals. Due to the same, securing a home loan becomes extremely difficult and challenging. Even if approval is granted the terms may include:

• Higher interest rates: Financial institutions may impose interest rates exceeding 10%, compared to rates as low as 8.1% for those with excellent credit scores.
• Larger down payments: To mitigate and bring down the risk, lenders might mandate a substantial upfront payment.
• Additional collateral or guarantors: Applicants might even be required to provide extra security or involve a co-applicant.

Alternative options

Therefore, due a weak credit profile, traditional home loans may be out of reach, still home loan applicants with a 500 credit score can consider:

• Loan Against Property (LAP): This can be done by leveraging existing property, through the same one can secure funds, though interest rates may range between 9.05% and 13.50%.
• Working to improve credit score: Sincere and consistent repayments of existing debt obligations, reducing credit utilisation and avoiding new credit applications can boost your creditworthiness over time.

Four simple steps to improve creditworthiness

To boost the chances of future loan approvals you must:

• Make payments on time: Ensure all EMIs and credit card dues are paid punctually.
• Limit your credit utilisation: Focus on using less than 30% of available credit limits.
• Consistent credit report checks: Monitor credit reports for shortcomings, inaccuracies and rectify them promptly to boost creditworthiness. 
• Stay away from multiple loan applications: Frequent applications can lead to several hard inquiries. This can negatively impact the credit score.

Hence, it is clear that obtaining a favourable home loan with a poor credit score of 500 is extremely difficult. Still, with effort and improving your credit score in gradual fashion by making on time payments, not applying for new credit lines in a short period of time are some simple steps that can help you in managing your credit health in a diligent manner. One can also look to explore alternative financing options to meet their home loan requirements.

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