Home loan 101: Are NBFCs better for first-time borrowers?

I'm a first-time borrower planning to apply for a home loan. How do banks and non-banking finance companies (NBFCs) assess creditworthiness in such cases? Do NBFCs offer any advantages over traditional banks for first-time applicants? What key factors should I keep in mind before taking a housing loan?"

-Name withheld on request 

With home loans getting cheaper and government subsidies like PMAY (Pradhan Mantri Awas Yojana) in play, this is a good time to borrow—especially for first-time homebuyers. If you're new to credit, lenders assess your eligibility based on factors like age, educational background, current living conditions, employment stability, and overall asset creation. Your income-to-obligation ratio (a measure of how much of your income goes toward debt repayments) should ideally be below 50-60%.

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Self-employed individuals are treated at par with salaried borrowers by most lenders, though the documentation requirements may differ. In such cases, lenders might review business details, IT returns, bank statements, and even informal bills (kacha bills) to get a sense of your financial health.

Should you choose a bank or an NBFC?

Banks typically rely on credit scores, repayment history, job stability, and your debt-to-income ratio to evaluate applications. NBFCs, on the other hand, often have more flexible eligibility norms and may consider alternative methods of assessing creditworthiness—making them a popular choice for first-time borrowers or those with limited credit history. 

They also tend to process applications faster (2–3 days vs 7–10 days for banks), require less paperwork, and may approve borrowers with lower credit scores or surrogate income proofs.

What to keep in mind

Before applying, ensure your documentation is in order—KYC documents, income proofs, property papers, and employer verification letters, if applicable. Look beyond the interest rate when comparing loans. 

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Factor in processing fees (typically 0.5–1% of the loan amount), legal and technical evaluation charges, MODT registration, and insurance premiums. NBFCs sometimes waive some of these fees during festive offers or for online applications.

It’s a good idea to compare at least 3–4 home loan offers. Focus on the effective annual percentage rate (APR) rather than just the headline interest rate. Consider the loan tenure, repayment flexibility, and prepayment options. Some NBFCs offer competitive rates and easier terms for borrowers with strong overall profiles—even without an extensive credit history.

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Finally, use this first loan to build a solid credit track record. Timely EMI payments over the next 12–18 months can go a long way in boosting your credit score and unlocking better financial options down the road.

D Arulmany is managing director & CEO at Veritas Finance Ltd.